BAHRAIN FACES BUDGET CRUNCH FOLLOWING SAUDI OIL

C O N F I D E N T I A L SECTION 01 OF 02 MANAMA 000280

SIPDIS

STATE FOR NEA/ARPI DBERNS
STATE PLEASE PASS USTR JBUNTIN
COMMERCE FOR ITA/MAC/ONE CLOUSTAUNAU AND THOFFMAN

E.O. 12958: DECL: 02/26/2015
TAGS: ECON EFIN EPET ENRG MARR PREL BA
SUBJECT: BAHRAIN FACES BUDGET CRUNCH FOLLOWING SAUDI OIL
GRANT CUTBACK

REF: MANAMA 0064

Classified By: AMBASSADOR WILLIAM T. MONROE
REASONS 1.4 (B) AND (D).


1. (C) Summary. Although often lumped together with its
richer GCC neighbors, Bahrain is in fact a modest oil
producer and is now facing an unexpected budget crunch -
despite continuing high international oil prices. Robust
spending on much-needed capital projects (deferred when oil
prices were low) combined with a 50,000 barrel per day (bpd)
cut in Saudi oil aid, resulted in a debt of $1.57 billion, or
16 percent of GDP, in 2004. 2005 looks no better. To
compensate, the government has reportedly approached Kuwait
for an increase in grant aid and a hefty loan, and has
reportedly also approached the UAE government. GOB officials
continue to hope that Saudi Arabia will restore the 50,000
bpd grant, and are counting on the U.S.-Bahrain FTA to boost
the economy in the short- to medium-term. End Summary.

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State of the Budget
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2. (C) The GOB establishes its budget biannually. Despite
expectations that the 2005-2006 budget would be ready January
2005, the GOB has yet to release it. Apparently the GOB is
having a difficult time balancing the budget due to the
decision by Saudi Arabia to end its 50,000 bpd oil grant in
mid-2004 (reftel). This resulted in a 20 percent cut in oil
revenues, or 14.6 percent of total government revenues, and
is affecting the 2005-2006 budget. In the past, oil revenues
accounted for some 73 percent of government revenue, based on
40,000 bpd of domestic production, 150,000 bpd from the
jointly held Bahrain-Saudi Arabia Abu Sa'afa oil field, and a
50,000 bpd grant from the Saudis.


3. (C) Based on an estimated $41 per barrel of oil,
Bahrain's government revenue for 2004 was roughly $4.37
billion. A 14.6 percent loss in government revenues, due to
the cut in the Saudi oil grant, is estimated at $638 million.
Although per capita GDP is relatively high ($16,900 in
purchasing power parity terms per the CIA World Factbook) and
the infrastructure is modern, a loss of $638 million was a
major shock for the relatively small Bahrain economy, roughly
equivalent to the value of new projects proposed during the
last budget cycle.


4. (C) The Kuwaiti Ambassador to Bahrain told the Ambassador
February 28 that the GOB recently requested a $700 million
loan from Kuwait to cover the budget deficit, and he thought
Kuwait will most likely offer a loan in the $300-350 million
range. The Kuwaiti Ambassador also noted Kuwait provides $50
million in budgetary support annually, a figure that may
increase to $75 million, as well as $15 million to fund
projects, mostly construction of schools. We understand that
a major focus of the King's and Prime Minister's recent trip
to the UAE was financial assistance.


5. (C) Despite the generosity of its neighbors, Bahrain's
high government recurrent expenditures (roughly 70-80 percent
of the total budget) coupled with the loss of the oil grant
will lead to greater accumulation of domestic debt, which
accounted for an estimated 16 percent of the GDP in 2004
($1.57 billion),a figure the IMF considers manageable. Any
past budget windfalls due to high oil prices have been used
to retire debt or maintain major infrastructure projects.

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Comment
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6. (C) Bahrain's small economy is highly dependent on its
supply of oil from Saudi Arabia and the revenues this
generates. Although it seems small, the shock of losing the
50,000 bpd Saudi oil grant has caused budgetary strain,
limiting the country's flexibility on supporting
non-essential programs. In a public statement, Speaker of
the Council of Representatives Khalifa Al Dhahrani stated a
tighter budget may affect government salaries, causing an
uproar in parliament and the press. The Bahrain military is
starting to feel the budgetary heat, as the Ministry of
Finance has restricted funding for new military purchases.
In a conversation with the Ambassador, Bateleco Chairman
Hassan Ali Juma said despite efforts to diversify, Bahrain is
still a single-product economy over-burdened with white
elephant projects and a welfare system that it can no longer
support. Rumors have surfaced suggesting that the GOB may be
considering a national tax to support social service
programs. Finance Minister Shaikh Ahmed bin Mohammed Al
Khalifa requested the Ambassador's support in promoting the
FTA as a best way to boost Bahrain's economy in the short- to
medium-term.
MONROE