The government of Bahrain is planning to announce the details of a multi-billion dollar GCC-funded stimulus package in May as part of its plans to kickstart the economy after two months of disruption from protests.

The plan is expected to include a mixture of both capital expenditure on new projects and targeted debt repayments intended to help improve Bahrain’s sovereign rating, which has been downgraded by two notches as a result of the unrest of the past few months.

Change in five-year CDs, first quarter 2011
Country 1 January (bps) 31 March (bps) Change (%)
Bahrain 183.9 320.1 74.1
Saudi Arabia 75.4 125.4 66.4
Tunisia (Proxy) 119.7 171.2 43
Egypt 238 339.5 42.6
CDS=Credit default swaps; bps=Basis points. Source: CMA Vision

The GCC has already announced a $10bn aid package for Bahrain over the next 10 years. The impending announcement is expected to give further details on the deployment of this cash. Sources close to the Bahrain government say the stimulus package will be predominately funded by Saudi Arabia, with a large portion of the money to be dispersed in the next two years.

The Finance Ministry is understood to have several people in Riyadh working with the Saudi Finance Ministry to agree specific spending measures, a precondition for the funds to be passed on to Bahrain.

Planned expenditures are expected to include housing schemes, a project to redevelop Bahrain airport and a new Bahrain Petroleum Company (Bapco) refinery.

“We are being told by the Finance Ministry and the Economic Development Board (EDB) that a large stimulus package will hit the streets in May. As part of that we expect to see a lot of infrastructure spending, social housing spending, and efforts by the government to create more jobs,” says a senior executive in Bahrain.

“The government is aware of the need to kickstart the economy in the second half, that is crucial,” says another source close to the Finance Ministry.

“They are still working on exactly how the GCC money will be spent, but it wants to announce something very soon,” he says.

In a statement issued to MEED, the Finance Ministry said it believed Bahrain’s economy had not been unduly affected by the political unrest. The statement said that Bahrain’s “targeted growth rate of 4.5 per cent was still attainable and that the economy was on the right track”.

The government is aware of the need to kickstart the economy in the second half, that is crucial,” says another source close to the Finance Ministry.

“A major positive factor in this regard is the imminent promulgation of the state budget for the fiscal years 2011-12, which includes a set of approved projects in vital sectors, such as housing, healthcare, education and infrastructure, with significant project expenditure allocations of BD1.105bn ($2.9bn),” the statement added.

Sources in Bahrain also suggest that the GCC money, to be deployed through the Gulf Development Programme, could be topped up to exceed $10bn.

The aid package is vital for Bahrain, where the economy has come to a halt as a result of the protests and ensuing crackdown. The country had been close to appointing banks for a $1bn bond issue earlier this year, but dropped those plans as a result of the ratings downgrade and a sharp rise in the country’s credit default swap spread, a measure of the cost of insuring debt against default.

The government is aware of the need to kickstart the economy in the second half, that is crucial,” says another source close to the Finance Ministry.

Proceeds from the bond issue were earmarked for infrastructure spending. Now that it is not happening, Bahrain needed to find the money from somewhere else. “The government is still looking at a bond issue, but it will not go ahead until Bahrain’s CDS [credit default swap rate] has gone down further,” says a banker in Bahrain. CDS rates are a measure of the cost of insuring debt against default, and often used as a tool to price new bond issues. Bahrain’s CDS rates have jumped to 180 basis points at the beginning of the year, before hitting more than 300 basis points as tensions rose in late February.

The government needs to act quickly to kickstart the economy. The UK’s HSBC has revised its forecast for Bahrain gross domestic product growth down to zero.

“I expect growth in Bahrain to be very weak in 2011 and to remain weak in 2012,” says Simon Williams, chief economist for the Middle East at HSBC. “The other concern for Bahrain is the driver of growth will shift from an exports orientated service sector supported by foreign direct investment, to being heavily reliant on government spending.”

“I think when the aid programme is fully announced, it will look even larger than the initial numbers suggested,” he adds.