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More debt ahead for Bahrain’s struggling economy

Bahrain's economy contracted 2.11% in the first quarter from a year earlier, hurt by the decline in the non-oil economy as COVID-19 restrictions were in place most of the quarter, government data showed

The non-oil economy contracted 2.97% Bahrain has the highest oil breakeven price in the GCC and far above current levels around $75 The IMF expects Bahrain’s reserves to average $2.5bn into 2022, covering only 1.2 months of imports

Bahrain’s economy contracted 2.11% in the first quarter from a year earlier, hurt by the decline in the non-oil economy as COVID-19 restrictions were in place most of the quarter, government data showed.

The non-oil economy contracted 2.97%, with the hotels and restaurants segment declining by 20.44%. The oil sector grew 2.04% in the quarter.

Gross domestic product contracted 0.10% from the previous three months, the data showed.

Bahrain’s kingdom needs crude prices above $88 a barrel to balance its budget this year, according to the International Monetary Fund.

Bahrain is preparing to tap international debt markets in the coming months to finance a deficit. 

Bahrain has the highest oil breakeven price in the GCC and far above current levels around $75. It’s preparing to tap international debt markets in the coming months to finance a deficit that’s widened in the aftermath of the pandemic.

“Ambitious reform is needed to address Bahrain’s large fiscal imbalances and there doesn’t seem to be the political will behind this currently,” said Scott Livermore, chief Middle East economist for Oxford Economics in Dubai. “The general consensus seems to be that Bahrain will need further Gulf backing in the medium term.”

Bahrain was bailed out via a $10 billion Gulf aid package in 2018 but found itself back in trouble as a program to readjust its fiscal balance with measures such as subsidy cuts and a new value-added tax faltered when COVID-19 hit.

Bahrain’s Finance Minister Sheikh Salman bin Khalifa al Khalifa told Bloomberg last year that his priority was to restore economic growth rather than further boost revenue.

“We really want to see the recovery take hold before we take any additional steps in that regard,” he said.

The IMF expects Bahrain’s reserves to average $2.5bn into 2022, covering only 1.2 months of imports. Its budget deficit is projected at around 9% of economic output this year, more than double Oman’s 2.4% shortfall, according to the IMF.

Both Moody’s Investors Service and S&P Global Ratings recently lowered Bahrain’s outlook to negative citing weaker fiscal metrics and increased risks to the government’s ability to service external debt and maintain confidence in its currency peg against the dollar.

The cost of insuring Bahrain’s debt against non-payment remains low. Five-year credit default swaps are lower than they were in 2018 after neighbors pledged help.  

The country’s still benefiting from previous aid rounds.

About $5.6 bn of the GCC Development Fund program has been utilized to date, with around $500 million of projects awarded in the first three months of 2021.

“The main gist with Bahrain is that without support, no one would invest in Bahraini dollar sovereign debt at these levels,” said Richard Briggs, a London-based money manager at GAM Holdings. “It all relies on support.”

According to the Q1-2021 Bahrain Economic Quarterly Report published by the Finance and National Economy Ministry, the largest non-oil sectors in terms of the percentage of contribution to nominal GDP are Financial Corporations (17.9%), manufacturing (17.9%), and government services (13.3%).