Bahrain's $10bn fiscal stability package has boosted confidence, says central bank governor

Near zero long term loans place the kingdom in a better position to manage its fiscal deficit and debt

Bahrain. 051217.    HE Rasheed Mohammed Al Maraj, Governor - Central Bank of Bahrain at the 24th World Islamic Banking Conferance 4-6 Decenber 2017 Photo By Phil Weymouth for The National
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The $10bn (Dh36.7bn) financial support package extended to Bahrain by Gulf countries, has shored up investor confidence and is helping the kingdom manage its fiscal deficit and debt, the central bank governor said.

"The fiscal balance programme has had a tremendous impact on the level of confidence and it has sent a very positive signal to the markets. Our bond prices [have] tightened 50 to 60 basis points [since the announcement]," Rasheed Al Maraj, told reporters on Tuesday in Bahrain.

"All in all, we have good a programme that will lay a solid foundation for us to deal with the budget deficits and the public debt in a very professional and practical way," he noted, adding that the Bahrain’s aim is to maintain a reasonable growth and to minimise any negative impact on its economy.

In October, Bahrain, part of the six-member GCC economic bloc, received a pledge of $10bn from the UAE, Saudi Arabia and Kuwait to financially support its reforms package that aims to eliminate the kingdom's budget deficit by 2022.

The programme, drawn up after a thorough review of Bahrain’s spending, aims to achieve annual savings of 800 million Bahraini dinars (Dh7.8bn). The package is based on six pillars which include controlling public expenditure, a voluntary retirement scheme for public sector employees, streamlining distribution of cash subsidies to citizens and increasing non-oil revenues.

The financial package, comprised of long-term low interest rate loans, will not financially burden the kingdom's economy, Mr Al Maraj, said.

"These are long term loans with almost zero per cent interest rate," he said. "Effectively, this is not going to be a burden on us during the period of implementation [of the fiscal stability programme]," he said without saying how much of the funds the kingdom has already received.

Bahrain, which along with Oman, are the only two Arabian Gulf states that have a non-investment grade rating from Standard & Poor's. The kingdom, like other regional countries, turned to debt capital markets to bridge the fiscal gap in the wake of a three-year oil price slump.

Brent, which fell below $30 a barrel in the first quarter of 2016 has since recovered to above $65 a barrel in the last week, which has helped Bahrain finances. Mr Al Maraj said the kingdom’s plans for further fund raising this year, or next, will depend on its budget.

“The timing of going to the market will depended on this year or next year’s budget cycle and we will decide [on a potential bond] depending on the outcome of the budget once it gets approved by the parliament,” he explained.

Mr Al Maraj was upbeat about the profitability and credit growth of Bahrain’s banking system. The kingdom’s banks, which reported double digit profit growth last year are expected to follow the same path in 2019.

The central bank is actively encouraging financial institutions to merge and he expects more consolidation in to happen in the future, the governor said.

“This has been the policy of the central bank to encourage to consolidate and create bigger banks...we are expecting more to come in the near future,” Mr Al Maraj said.

The regulator has already given an initial green-light to Kuwait Finance House’s bid to takeover Ahli United Bank and is awaiting the results of due diligence.

Banks in the GCC are merging to create larger financial institutions to gain scale and be better placed to cope with challenging market conditions.

In the UAE, Abu Dhabi Commercial Bank, Union National Bank and Al Hilal Bank, are in the process of merging, while Saudi British Bank and Alawwal Bank are combining their balance sheets.