Bahrain hikes public spending despite rising deficits to buy peace

Bahrain is spending beyond its means to tackle continued political unrest. The tiny island kingdom’s state spending is expected to jump 11% this year to 3.62 billion dinars ($9.6 billion), including 174.2 million dinars in additional expenditure for populist measures like increased food subsidies and higher pensions for retirees. Even in 2012, Bahrain had increased its planned expenditure by 19% to placate protestors who were demanding political reforms.  The protestors, who mainly belong to the majority Shia population, are demanding greater freedoms and rights from the Sunni royal family. The largesse comes even as International Monetary Fund and Moody’s warned Bahrain that its rising budget deficits could soon get out of hand. The IMF expects Bahrain’s fiscal deficit to widen from 2.6% of GDP in 2012 to 4.2% this year, and then keep rising sharply to 8.6% in 2018. The biggest threat for Bahrain could come from a sustained decline in oil prices, since the government relies on crude sales for more than 85% of its revenue. The IMF pointed out that Bahrain needed crude prices to stay around $118 per barrel to balance its budget. Brent crude, which is used to price majority of international oil sales, has averaged $108 a barrel so far this year. Moody’s also cited Bahrain’s reliance on high oil prices when it placed the country on review for possible downgrade in June. The rating agency said Bahrain’s sovereign debt could be downgraded from Baa1 to a lower investment grade. Moody’s also warned that the rise in government expenditure and fall in oil price could make Bahrain’s long-term debt unsustainable. A more immediate concern for Bahrain is the sharp rise in the country’s borrowing costs. Yields have risen to their highest levels since August 2012, and have threatened a proposed Eurobond issue.