(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 LT Local Currency Rating (LT LCR) at ‘B+’. At the same time, CI Ratings has affirmed the sovereign’s Short-Term FCR (ST FCR) and ST LCR at ‘B’. The Outlook remains Stable.
Rating Rationale
Bahrain’s ratings reflect continued primary budget and current account surpluses, supported by still high hydrocarbon prices and the implementation of moderate fiscal consolidation measures that aim to rationalise public expenditure. The ratings continue to be supported by ongoing financial assistance from Saudi Arabia, Kuwait, and the UAE. GCC support serves both as a direct source of fiscal financing and as a key element in the preservation of investor confidence and capital market access. Bahrain’s ratings also take into account the country’s high GDP per capita and reasonable level of economic diversification, particularly compared to its regional oil exporting peers.
The ratings are constrained by the very high level of government debt and interest expense, limited fiscal flexibility, and delays in implementing reforms to improve revenue mobilisation and lower the sovereign’s vulnerability to volatile hydrocarbon prices. Bahrain’s external vulnerabilities, exacerbated by the country’s sizeable external financing requirements and modest – albeit improving – foreign exchange reserves, continue to weigh on the ratings. Bahrain’s credit metrics remain heavily influenced by developments in the oil market, with the commodity accounting for 16.4% of GDP, 66% of fiscal revenues, and 48.7% of exports in the first nine months of 2023.
Fiscal strength remains moderately weak. The central government budget deficit is expected to have increased to 4.4% of GDP in 2023, from 1.1% in 2022, with the fiscal impact of lower hydrocarbon production and prices and higher spending pressures outweighing an increase in non-hydrocarbon revenues. The latter was supported by robust non-hydrocarbon economic performance and the doubling of the VAT rate to 10% as part of reforms under the government’s Fiscal Balance Programme. Moving forward, CI projects the central government budget deficit to decline slightly to 3.6% of GDP by 2025, assuming an average oil price of USD77.5 per barrel and provided the government presses ahead with reforms and contains public spending. While CI expects the government to further rationalise current spending, delays in revenue mobilisation reforms are likely to persist, especially with regards to the country’s Electricity and Water Authority.
Reflecting the widening budget deficit, central government debt is expected to have increased to 118.5% of GDP in 2023, from 116.4% in 2022; it is however expected to decline slightly to 117.9% by 2025. Reliance on external financing remains substantial, with over 60% of the central government debt classified as external and mainly USD-denominated. The debt stock includes the outstanding zero-interest loans from the GCC Development Fund (estimated at 16% of GDP in 2023). The domestic portion of the debt stock includes direct government borrowing from the central bank, which stood at BHD3.5bn (20.7% of GDP) at year end-2023.
Government interest expense is very high at an estimated 22.7% of revenues in 2024 (24.7% in 2023), rendering the public finances vulnerable to changes in investor risk perceptions and tighter local and international monetary policies, as well as limiting fiscal flexibility.
Refinancing risks are moderate-to-high, with gross financing needs estimated to decrease to an average of 18.3% of GDP in 2024-25 (compared to 21.5% in 2023). CI expects the government’s financing needs to be partly met by the remaining disbursements of the GCC support package, which amounts to 5.7% of GDP and is expected to cover around 27.2% of the government’s gross financing needs in 2024. CI considers the likelihood of GCC financial support in case of need as a supporting factor for the ratings. This support could include low interest loans from sovereign wealth funds, development grants, and investment cooperation programmes. Bahrain’s access to international markets remains adequate, with the government recently issuing a USD1bn, 7-year sukuk at a fixed rate of 6% and a USD1bn, 12-year eurobond at a fixed rate of 7.5%.
Risks to the fiscal outlook remain pronounced and include weaker-than-projected economic growth and lower-than-envisaged hydrocarbon revenues. Risks could also arise from higher-than-projected energy and food subsidies, rising spending pressures, and delays in reform implementation.
Bahrain’s external strength is moderately weak – albeit improving. Reflecting high commodity and metal exports, as well as robust tourism receipts, the current account is expected to have registered a surplus of 6.4% of GDP in 2023, down from 15.4% in 2022. The current account is projected to record high – albeit declining – surpluses of 5.9% and 5.4% of GDP in 2024 and 2025, respectively. This is based on CI’s assumption that an increase in the volume of oil exports and high services receipts will partially offset a decline in hydrocarbon prices from their 2022 peaks. Official foreign reserves increased to USD5.0bn in December 2023, from USD4.2bn in December 2022. Notwithstanding this improvement, Bahrain’s reserve buffer remains modest, covering only 16.2% of M2 and less than three months of imports. The assets in the Future Generations Reserve Fund (of which 75% are deemed liquid) remain low, although they increased to USD680mn (1.5% of GDP) in June 2023. Bahrain’s external financing needs – excluding the liabilities of the banking sector – are expected to remain large.
Economic growth is expected to slightly pick up in 2024, with real GDP increasing by 3.6%, compared to 2.7% in 2023. This is attributable to the projected recovery in hydrocarbon activities, as well as robust growth in non-hydrocarbon sectors. The short- to medium-term economic outlook remains broadly favourable, with real GDP expected to expand by 3.2% in 2025, supported by robust net exports and GCC funded infrastructure investments, which will further strengthen non-oil activity.
Rating Outlook
The Stable Outlook indicates that the ratings are unlikely to change over the next 12 months. The outlook balances fiscal and external vulnerabilities and very high indebtedness against the government’s commitment to reforms, robust non-hydrocarbon growth, as well as the likelihood of financial support from the GCC.
Rating Dynamics: Upside Scenario
The Outlook could be revised to Positive in the next 12 months should fiscal consolidation measures and possibly high hydrocarbon prices support stronger fiscal outcomes than currently expected. The ratings could be upgraded if government debt dynamics are reversed, resulting in a significant decline in debt ratios and greater fiscal flexibility.
Rating Dynamics: Downside Scenario
The Outlook could be revised to Negative in the next 12 months, or the ratings lowered, 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: ...
Committee Chairperson: Morris Helal, 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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