Bahrain – Ratings Affirmed; Outlook Revised to Negative

(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 for the ratings has been revised to Negative from Stable.

Rating Rationale

The revision of the outlook reflects weakening public finances, including very high central government debt as well as increasing liquidity risks. The latter is due to the central government’s large gross financing needs and dependence on cross-border funding, rendering the sovereign’s access to the capital markets vulnerable to shifts in investor risk perception. The outlook revision also takes into consideration Bahrain’s external vulnerabilities, which are exacerbated by the modest and declining coverage ratio of foreign exchange reserves to short-term external debt on a remaining maturity basis.

The ratings are supported by continued current account surpluses, and the likelihood of financial support from Saudi Arabia and the GCC in case of need. The ratings also take into consideration Bahrain’s high GDP per capita and reasonable level of economic diversification, particularly compared to regional oil exporting peers. The ratings remain constrained by the very high level of government debt and interest expense, limited fiscal flexibility, and the country’s exposure to increasing geopolitical risk. Moreover, the sovereign’s credit metrics remain heavily influenced by the developments in the oil market, with the commodity accounting for an estimated 15% of GDP, 60% of fiscal revenues and 49% of exports in 2024.

Fiscal strength has declined to weak from moderately weak since our last review due to growing central government budget deficits, and insufficient fiscal consolidation and revenue mobilisation efforts. The central government budget deficit is expected to have widened to 5.9% of GDP in 2024, from 4.5% in 2023, reflecting increasing expenditures. CI notes that the increase in non-hydrocarbon revenues as a result of the doubling of the VAT rate to 10% failed to offset the increase in current expenditures. Moving forward, CI projects the central government budget deficit to increase further to an average of 6.5% of GDP in 2025-26, with non-hydrocarbon revenues benefiting from the introduction of a 15% domestic minimum top-up tax on multinational enterprises in January 2025. The government is also considering further measures to improve revenue mobilisation, including the introduction of an environmental tax on companies and a further VAT increase.

Central government debt remains very high and is expected to have increased to 126.7% of GDP in 2024, from 124.6% in 2023. Reflecting deteriorating debt dynamics, including the return to primary budget deficits, central government debt is expected to increase to around 130% of GDP in 2025. Reliance on external financing remains substantial, with over 60% of 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 2024). The domestic portion of the debt stock includes direct government borrowing from the Central Bank of Bahrain, which stood at BHD4.3bn (23.9% of GDP) in December 2024.

Government interest expense was very high at an estimated 27.5% of revenues in 2024 (26.2% in 2023), limiting fiscal flexibility and rendering the public finances vulnerable to changes in investor sentiment.

Refinancing risks are high, with gross government financing needs estimated to increase to an average of 22.9% of GDP in 2025-26 (compared to 22.6% in 2024). CI views that the government deposits in the banking system – which stood at 8.2% of GDP in 2024 – provide a moderately low coverage of gross financing needs. In 2024, the Bahraini government raised USD3.6bn through eurobonds, private placements and syndicated loans, compared to USD5.5bn in 2023. While we consider the government’s access to the capital markets as being largely adequate at present, high geopolitical tensions between the US and Iran, as well as increasing risk aversion, could complicate this access. CI notes that the external maturities for the Bahraini government are estimated at USD2.4bn in 2025.

CI still considers the likelihood of financial support from the GCC 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.

Risks to the fiscal outlook remain pronounced and include weaker-than-projected economic growth, rising spending pressure and lower-than-envisaged hydrocarbon revenues. Risks could also arise from high geopolitical risk factors, including the increasing tension between the US and Iran. The latter is deemed a high-impact event that would significantly affect economic performance and Bahrain’s public finances.

External strength is moderately weak, reflecting low international liquidity and very high external debt. Gross international reserves declined to USD4.6bn in December 2024, from USD4.8bn in 2023. Reserve coverage remains low, at only 10.3% of M2 and less than 130% of short-term external debt on a remaining maturity basis (excluding the foreign liabilities of the wholesale banks). The assets in the Future Generations Reserve Fund (of which 75% are deemed liquid) remain low, although they increased to around USD700mn (1.5% of GDP) in June 2024. Bahrain’s external financing needs – excluding the liabilities of the banking sector – are expected to have remained large. External debt – including the foreign liabilities of the wholesale banking sector – was very high at 496.3% of CARs in 2024. Net of these liabilities, external debt was still very high at 203.7% of GDP in 2024.

Notwithstanding the above, the current account recorded a surplus of 4.7% of GDP in 2024 (down from 6.4% in 2023) and is projected to register high – albeit declining – surpluses averaging 4.4% of GDP in 2025-26. This is based on CI’s assumption that a gradual increase in the volume of oil exports and high services receipts will partially offset a decline in hydrocarbon prices from their 2023-24 levels.

Economic growth is expected to pick up slightly in 2025, with real GDP increasing by 3.2%, compared to 2.7% in 2024. This is attributable to the gradual recovery in hydrocarbon activities, as well as robust growth in the non-hydrocarbon sectors. Notwithstanding the above, risks to the growth outlook stem from geopolitical risk factors, a weaker-than-projected demand for hydrocarbons, and renewed global trade shocks following the imposition of tariffs by the US on all its trading partners.

Rating Dynamics: Upside Scenario

The Outlook could be revised to Stable in the next 12 months if fiscal consolidation measures and higher-than-projected hydrocarbon prices lead to improving fiscal outcomes and/or the government reduces its refinancing risks with the assistance of GCC member states. 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 ratings could be lowered by more than one notch in the next 12 months should sovereign credit risk increase further due to a more pronounced deterioration in the public finances that results in higher-than-projected debt levels. The ratings could also be lowered by more than one notch if there is a significant increase in refinancing risks due to higher-than-projected risk perceptions in global markets, leading to limited capacity to raise funds, and/or a significant increase in regional tensions, jeopardising the sovereign’s macroeconomic stability and hydrocarbon exports.

Contact

Primary Analyst: Dina Ennab, Sovereign Analyst; E-mail: ...
Committee Chairperson: Rory Keelan, Senior Credit Analyst

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