Originally written on 20th May 2013
1. GDP 2012 –
2.7% p.a. (Historically, from 2000 until 2012, Bahrain GDP Annual Growth
Rate averaged 4.61 Percent)
2. Current account
to GDP – 15.4%
3. Government Debt
to GDP – 31.6% (Historically, from 2000-2012, Bahrain Government Debt To GDP
averaged 19.84 Percent)
4. Yield on Bahrain
(2020) government USD bond – 4.12% p.a. (USD 10yr T-Bond 1.95%)
5. 5 years CDS
spread –c.2.05% p.a.
Bahrain
faces a steep challenge relative to its other oil rich neighbors in the GCC
over the medium terms in putting its fiscal health on a more sustainable path.
In a nutshell concerns over Bahrain’s fiscal health have their provenance in
two sources
1. Generous state
subsidies (including those on fuel, electricity, water, selected food items)
2. High dependence on
Bahrain’s limited hydrocarbon production to support fiscal spending and
generous subsidies
The
political unrest which began in early 2011 and continues to this day-albeit
having stabilized progressively-have put further pressure on state coffers to
increase spending in order to both simulate a stagnant private sector, as well
as, create employment on urgent basis. Secondly, subsidies tend to be sticky
with steps to control / cutting back remaining highly unpopular with the
constituencies, reform in that direction though urgently needed will be
extremely challenging politically given the already stressed relationship
between the government and a large majority of its countrymen.
Bahrain’s
current break-even oil price at $115 is already above the market price and
perhaps the highest among all oil exporters in the world.(breakeven price is
the price of oil, keeping export volumes constant, would be required to fully
fund budgeted state expenditure without resorting to borrowing or liquidation
of past reserves). To me that would imply that the country will continue to run
fiscal deficits persistently since my subjective judgment is for that
expenditure on other hand will be extremely difficult to cut back and near term
oil prices have probabilistically more downside risk rather than upside.
Given
the small size of the economy and flagging private sector growth, a
incrementally rising debt to GDP ratio will not be quite appeasing for both
existing investors as well as prospective investors in Govt. of Bahrain paper.
I consider the prospect for credit premium on Bahraini debt and CDS to increase
over the next 2-3 year horizon from current levels than to decrease. Once the
exigency to control ballooning government debt becomes a consensus opinion, a
downward revision in Bahraini dinar-USD exchange rate (devaluation of the BHD)
cannot be ruled out either.
On
the positive side, Bahrain remain geo-politically important to contain Iran’s
influence in the Arabian peninsula and has historically shared very strong
relationship with regions big boy Saudi Arabia. A GCC bailout or soft financial
assistance (as the current $10bn 10 assistance) is also a quite likely scenario
in case of sudden distress. That would make investing in short term Bahrain
government debt (after the yields have spiked in tune with new information) a
attractive proposition in future if the country goes through a financial panic
in coming years.
Key
economic statistics of Bahrain
1. GDP 2012 –
2.7% p.a. (Historically, from 2000 until 2012, Bahrain GDP Annual Growth
Rate averaged 4.61 Percent)
2. Current account
to GDP – 15.4%
3. Government Debt
to GDP – 31.6% (Historically, from 2000-2012, Bahrain Government Debt To GDP
averaged 19.84 Percent)
4. Yield on Bahrain
(2020) government USD bond – 4.12% p.a. (USD 10yr T-Bond 1.95%)
5. 5 years CDS
spread –c.2.05% p.a.
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