Bahrain plans hefty budget outlays in 2011-2012

Bahrain plans to spend BHD5.3bn ($14.1bn) over the next two years and oil prices need to rise to $97-$100 per barrel to balance its budget, the finance ministry said on Thursday.

Such a spending level would be greater than analysts' expectations and proportionately exceed the $5.8bn outlays initially foreseen for the 2010 budget.

Facing a rising subsidies bill and dragged down by its struggling banking sector, the small non OPEC energy producer has the weakest fiscal position among Gulf Arab nations.

The island kingdom's finance ministry expects revenues of $11.67bn based on an oil price estimate of $80 per barrel for its two year draft budget for 2011 and 2012, it said in a statement.

Finance Minister Sheikh Ahmed bin Mohammed al Khalifa was cited in the Gulf Daily News on Thursday as saying that the government will cover the expected deficit through loans and Islamic bonds, or sukuk.

The 2011 budget deficit is set at $988.5m, well below an original plan of $3.4bn for 2010, which analysts now believe will be sharply undershot due to the conservative oil price estimates it was based on. The shortfall is set to rise to $1.16bn in 2012.

This year's deficit is roughly in line with the actual outcome of 2009, although rollover costs from the previous year boosted it to around 10 percent of gross domestic product, the first budget shortfall since at least 2005.

"It seems to be expansionary, it surprises to some degree. I would have expected it to be a bit more conservative," said Giyas Gokkent, chief economist at the National Bank of Abu Dhabi.

Benchmark US crude prices moved just below $90 a barrel on Thursday.

The ministry said that about half of spending will be on subsidies, including for gas and electricity.

Bahrain plans to expand spending on social services such as housing and health but also faces a soaring subsidies bill due to a growing population and an influx of foreign workers.

But Gokkent said that expansion of government spending is also driven by higher project expenditures.

Bahrain plans to triple its oil output of about 32,000 barrels per day in the long term.

The government's draft budget still needs to be approved by Bahrain's parliament, which has limited powers.

The country issued some $3.3bn worth of bonds and treasury bills last year, according to Reuters data.

As a result, Bahrain's debt to GDP ratio has risen to about 27.3 percent at the end of June 2010, from 8.5 percent in 2008, which is still low by international standards.

Ratings agencies have recently taken mixed actions on Bahrain. Moody's downgraded Bahrain's government debt ratings by one notch to A3 in August, partly because it viewed the government's ability to broaden its revenue base as limited.

But rating agencies Fitch and Standard & Poor's both affirmed their ratings of Bahrain in December.