Government revenues are highly correlated with the price of oil, which is out of our control.
After having a great time between Y2K and 2008, from 2009+ oil prices fell and took our government revenues down with it.
We didn't reduce our public expenditure, so there was a shortfall - we began plugging this hole with public debt.
In 2014, oil prices fell again, so we borrowed even more and now we have over BD 10 billion worth of debt, almost equal to 100% of our annual GDP.
Just look at the charts.
I’m sure you’ve all seen the recent financial headlines about Bahrain – if not, basically a lot of international investors have been selling their holdings of Bahraini government bonds because they think we have too much debt (we do) so things are getting a bit too risky and we might not be able to repay them. In March 2018, we actually tried to borrow 30 year bonds but had to cancel because it would have been too expensive and had to settle for 7.5 years only. Anyway, this recent selloff led to other international players selling dinars in foreign exchange markets, which put pressure on our currency peg (which I won’t get into), but just highlighted the risk we’re in. In response, Saudi, Kuwait and the UAE announced that they’d announce a support program to keep us afloat.
So a friend of mine asked me, what, in a nutshell, is the problem with our economy? And I figured that we all probably have a vague sense of the issues but could use a clearer understanding of how we got here. So I looked into it, made a couple of charts (I love charts) which I think help put the recent news in context, and made some very quick pointers. Nothing is really out of the obvious, and I'm only looking at public finances, but still - it's useful information I think.
Before we get into anything else, the first thing I want to mention is that 70-80% of all government revenue come from sales of oil & gas. You should also notice is how highly correlated government revenues (green) are with oil prices (light grey). That’s because our oil output is pretty stable (at around 200,000 barrels per day) so the only other variable is price i.e. oil prices go up -> revenue goes up, and if prices go down -> revenue goes down. We have no control over international oil prices obviously, so, from a revenue perspective, it’s pretty much twiddling our thumbs and hoping for the best.
Ok, now looking at the past ~15 years, I’ve split it into 3 periods, which, from an economic sense, can be fairly technically described as:
1. From 2001, oil prices rose from $28 to peak at $142 in July 2008 (that peak doesn’t show in the chart because they’re annualized averages). The money rolled in so we got busy spending and Bahrain’s economy boomed. Most of the spending was on salaries, projects (not sure what this really refers to), grants and subsidies. The public sector hired more people, raised salaries, invested in all those fancy real estate projects, it was all lavish and lovely. For example, if you were working in the banking sector then (I only started working in 2008 so missed out on the fun) you were in serious luck. The bonuses that were paid out were just facetious. Anyway, since we had surpluses every year (green > red), we could also build up a cash buffer, and our debt hovered at fairly low levels. It was a good time.
2. But all good things don’t last forever. With the global recession in late 2008, oil prices crashed before gradually picking back up over the next few years. Instead of cutting our costs though, the government continued to spend more, especially during 2011-12 as they tried to deal with all the unrest – in the space of two years, manpower expenses jumped by almost 40% (mainly at the Ministries of Defence, Interior and Education – go figure). The Ministry of Housing also doubled its project spending. There were other costs too - for example, if you guys remember in 2014, Gulf Air needed a bailout which cost a few hundred million dinars. Costs were increasing and we had recurring budget deficits, which both aren’t great, but they weren’t totally unmanageable. Remember, the other GCC countries (UAE, Qatar (lol), Saudi and Kuwait) also pledged a $10 billion “Marshall Plan” over ten years to fund projects in Bahrain, which would keep our economy going. So if we could get it together, we could deal with the situation.
3. We did not deal with the situation. Oil tumbled again in 2014, dragging our revenues back down with it. The problem, though, was that now our spending was at a much higher level – BD 3.5 billion, double what it was in 2007. The deficits were now bigger, and we kept piling on the debt to be able to pay for them. In 2016, the deficit was over BD 1,500,000,000 - that's a lot. You can see the expenditures flatten now - to reduce spending, the government began to cut subsidies on petrol, electricity, water, and beef and chicken (which I do agree with), but overall costs were still much higher than what we could afford. If you look below, you can see that debt was 12% of GDP in 2005 – last year it reached 80% and the International Monetary Fund (IMF) thinks it’ll be over 100% by next year.
So now, what does this all mean? Well, two main things: The more you borrow, the more interest you pay, naturally. In 2017, we paid almost half a billion dinars just on interest – that’s 22% of all public revenue for the year. Imagine spending almost a quarter of your own salary on interest - not even repaying any of it, just interest.
Secondly, all the various bonds are in “bullet” form (i.e. you pay all the principle back on its maturity date). We clearly don’t have the money to repay them, so whenever a bond reaches maturity, we have to issue a new bond to repay the old one. A few months ago, we tried to issue a 30-year bond to cover some upcoming payments, but investors thought we were too risk and demanded high interest rates – we ended up scrapping it and only taking a 7.5 year bond. Our risk of refinancing is increasing, which means it is more likely that we’ll default. This increased risk of default is a big deal – the riskier we are, the higher the interest we have to pay, which eats away at government revenue, which makes us less able to repay, which makes us riskier etc.
Going forward, we need to reduce government spending and increase revenues. We can’t continue to rely on bailouts from other GCC countries. The IMF recently recommended that “revenue measures —including consideration of a corporate income tax—would be welcome. Consideration should also be given to better targeting subsidies and addressing the large wage bill. Reforms to strengthen the fiscal framework, including by operationalizing the debt management office, would be crucial.” And while I do think that reforms are inevitable, there is some flexibility on how they're designed, who they target, how they are implemented etc. I think that the richest should bear the biggest burden, but usually, the rich are the ones who have the most influence on these policies. In any case, fun times ahead.
Note: If you want the sources, you can find most of the data either from the CBB Statistical Bulletins or from the MOF State Budgets.