October 5, 2018 / 1:49 PM / 2 months ago

MIDEAST DEBT-Gulf averts Bahrain debt crisis with $10 bln aid package

* Shift to public, long-term aid from quiet, short-term support

* Reform plan resembles successful Saudi scheme in some ways

* Deficit would essentially disappear by 2022

* Public debt ratio to GDP would start falling next year

* Questions remain over details, implementation

By Andrew Torchia

DUBAI, Oct 5 (Reuters) - Rich Gulf nations have largely removed the risk of a debt crisis in Bahrain — and strengthened their own reputation for economic management — with a $10 billion aid package tied to fiscal reforms, analysts and fund managers said on Friday.

Saudi Arabia, the United Arab Emirates and Kuwait said late on Thursday they would extend the aid to help fill Bahrain’s funding requirements. A source said it would be in the form of a long-term, interest-free loan provided in stages.

Meanwhile, Bahrain released a 33-page plan to fix its debt-burdened finances and essentially abolish its budget deficit by 2022. One target is to raise tariffs until the Electricity and Water Authority, which runs a 189 million dinar ($500 million) deficit, balances revenues and expenditure.

It is by far the clearest and most comprehensive plan to put Bahrain on a sustainable financial footing since oil prices plunged in 2014, creating big fiscal and external deficits.

The package marks a new approach by the rich Gulf states. They had been quietly supporting Bahrain with unpublicised, relatively small infusions of cash, such as purchases of private bond placements.

The public announcement of a long-term aid programme alongside specific reforms is likely to go much further towards reassuring investors that Bahrain will not be allowed to fail.

“It’s a broad series of reforms — tax, subsidies and other steps — and it’s spread over several years. This sends a positive signal to the market,” said Abu Dhabi Commercial Bank chief economist Monica Malik.

She said the aid meant Bahrain would remain able to borrow from the international market — something which was called into doubt in March, when Manama scrapped plans to sell U.S. dollar bonds because investors demanded high yields.

The yield on Bahrain’s dollar bond due 2023 edged down 6 basis points to a seven-month low of 5.64 percent on Friday.

It had dropped over 2 percentage points in the last few months in anticipation of the aid, so some traders said it might have little further room to fall for now.

REFORMS

Excluding the aid, Bahrain had estimated its borrowing needs at $20 billion over five years; it plans to use the aid to reduce that by $10 billion, while deficit-cutting reforms will further reduce the need to borrow, official sources said.

In some ways, Bahrain’s reforms resemble plans published by Saudi Arabia in the last few years to eliminate its own fiscal deficit, which succeeded in restoring investor confidence.

The scheme charts a numerical path towards balancing the budget, with the deficit projected to shrink to 0.1 percent of gross domestic product in 2022 from 9.9 percent.

It projects Bahrain’s public debt as a ratio of GDP will start falling back next year, to 82 percent in 2022, instead of rising to 104 percent that year.

Bahrain will create new bodies to oversee government spending and borrowing, including a debt management office.

The plan promises to cut public spending with six task forces, introduce voluntary retirement for state employees, and mount an efficiency drive.

There are few details of how spending cuts will be achieved, which may reflect officials’ need for room to manoeuvre depending on the reaction of parliament and the public. The spending cuts could slow economic growth considerably.

“Longer-term real questions remain about delivery of reforms - there needs to be a wholesale rethink of the Bahrain model and why they continue to run large twin deficits with mounting indebtedness,” said Timothy Ash, senior emerging markets sovereign strategist at BlueBay Asset Management.

As the aid was announced, parliament’s House of Representatives scheduled an extraordinary session for Sunday. A similar session is likely to be held by parliament’s upper house later next week, lawmakers told Reuters.

Parliament is expected to expedite bills introducing 5 percent value-added tax and changing the pension system. It is unclear if subsidy reform will also be proposed, lawmakers said. (Additional reporting by Aziz El Yaakoubi and Davide Barbuscia)

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