Bahrain – Sovereign Ratings Affirmed with a Stable Outlook

(MENAFN- Capital Intelligence Ltd) Rating Action

Capital Intelligence Ratings (CI Ratings or CI) today announced that it has affirmed Bahrain’s Long-Term Foreign Currency Rating (LT FCR) and Long-Term Local Currency Rating (LT LCR) at ‘B+’. At the same time, CI Ratings has affirmed the sovereign’s Short-Term Foreign Currency Rating (ST FCR) and Short-Term Local Currency Rating (ST LCR) at ‘B’. The Outlook remains Stable.

Rating Rationale

The ratings take into account the easing of budgetary pressures linked to high hydrocarbon prices, but continue to be constrained by the very high level of government debt, limited fiscal flexibility, and the sovereign’s vulnerability to volatility in hydrocarbon prices. The ratings also reflect Bahrain’s external vulnerabilities, with sizeable external financing requirements and modest – albeit improving – foreign exchange reserves. Bahrain’s credit metrics remain heavily influenced by developments in the oil market, with the commodity expected to account for 18% of GDP, 66% of fiscal revenues, and 52% of exports in 2022.

Bahrain’s ratings continue to be supported by ongoing financial assistance from Saudi Arabia, Kuwait and the UAE. GCC support serves as both a direct source of fiscal financing and as a key element in the preservation of investor confidence and capital market access. The ratings are also supported by the country’s high GDP per capita and reasonable level of economic diversification, particularly compared to its regional oil exporting peers.

Fiscal pressures have eased this year, reflecting high international hydrocarbon and commodity prices. The central government budget deficit is expected to decline significantly to 3.4% of GDP in 2022, compared to 11.1% in 2021, and is projected to average 5.8% in 2023-24 (assuming an average oil price of USD85/barrel). Supported by favourable hydrocarbon prices, the government resumed its reform agenda in the early part of the year, doubling VAT to 10% from 5% in January 2022. Progress towards fiscal consolidation has since slowed with the introduction of measures aimed at alleviating the impact of rising inflation on citizens. These include price caps on essential goods and services, cash transfers to vulnerable groups, and the postponement of reforms to water and electricity tariffs.

Central government debt is expected to decline to 119.5% of GDP in 2022, from 128.5% in 2021, reflecting the improvement in the budget deficit. However, reliance on external financing remains substantial, with over 70% of the central government debt stock classified as external and mainly USD-denominated. The debt stock includes the outstanding zero interest loans from the GCC development Fund (estimated at USD6.9bn at June 2022) and government borrowing from the Central Bank of Bahrain, which stood at BHD2.6bn (15.9% of GDP) in June 2022.

Government interest expense remains very high, at an estimated 17.9% of revenues in 2022 (22.6% in 2021), rendering the public finances vulnerable to changes in risk perceptions and higher interest rates, as well as reducing fiscal flexibility.

Refinancing risks are moderate-to-high, with gross financing needs estimated to increase slightly to an average of 14.5% of GDP in 2023-24 (compared to 13.8% in 2022). CI expects the government’s financing needs to be partly met by the remaining disbursements of the GCC support package to the tune of USD2.0bn throughout the forecast horizon.

Risks to the fiscal outlook remain pronounced and include weaker than projected economic growth and lower than envisaged hydrocarbon revenues should the war in Ukraine adversely affect global demand for hydrocarbons more than initially expected in our baseline scenario. Risks could also arise from higher than projected food subsidies and/or rapidly increasing borrowing costs from local and international markets in the context of tighter global monetary policy and elevated risk aversion.

Bahrain’s external strength remains moderately weak, although currently improving. Reflecting higher hydrocarbon and aluminium exports, as well as recovering tourism receipts, the current account is expected to post a surplus of 8.6% of GDP in 2022, compared to 6.7% in 2021. The current account surplus is projected to average 3.9% of GDP in 2023-24 in view of lower hydrocarbon exports and the persistently high cost of imports. Official foreign reserves have increased and are expected to reach USD6.2bn in December 2022, from USD3.9bn in 2021. Notwithstanding the improvement, Bahrain’s reserve buffer remains modest, covering only 14.5% of M2 and less than three months of imports.

Bahrain’s external financing needs – excluding the liabilities of the banking sector – are expected to remain large, reaching 59% of GDP in 2022; this includes USD2bn in sovereign eurobonds which matured in Q3 22.

The Bahraini economy continued to grow in 2022, with real GDP expanding by 6.2% in the first half of the year. This growth is attributable to an 8.8% increase in non-hydrocarbon sectors. Hydrocarbon production contracted by 3.4% during H1 22 due to seasonal maintenance of the Abu Saafa oil field – Bahrain’s major oil field – preventing the country from increasing its production and benefiting fully from favourable hydrocarbon prices. As a result, CI expects real GDP to grow by 3.4% in 2022. The short- to medium-term outlook remains broadly favourable, with real GDP growth expected to average 3.0% in 2023-24, supported by robust net exports and GCC funded infrastructural investments. Notwithstanding these developments, risks to the growth outlook remain pronounced due to the adverse spillover effects from the war in Ukraine on the global economy and demand for hydrocarbons.

Rating Outlook

The Stable Outlook indicates that the ratings will remain unchanged in the next 12 months. The outlook balances fiscal and external vulnerabilities and very high indebtedness against higher hydrocarbon revenues, commitment to reforms, and the likelihood of financial support from the GCC.

Rating Dynamics: Upside Scenario

Although unlikely at present, the Outlook could be revised to Positive if the government introduces more meaningful measures to strengthen the public finances, leading to a faster than projected decline in public debt – with high hydrocarbon prices possible being an additional supporting factor.

Rating Dynamics: Downside Scenario

The Outlook could be revised to Negative in the next 12 months should sovereign credit risk increase due to a significant deterioration in the public finances and higher than projected debt levels, and/or if increasing risk perceptions in international markets contribute to refinancing challenges.

Contact

Primary Analyst: Dina Ennab, Sovereign Analyst; E-mail: dina.ennab@ciratings.com
Committee Chairperson: Rory Keelan, Senior Credit Analyst

About the Ratings

The credit ratings have been issued by Capital Intelligence Ratings Ltd, P.O. Box 53585, Limassol 3303, Cyprus.

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