Bahrain – Ratings Lowered; Outlook Revised to Stable

(MENAFN- Capital Intelligence Ltd) 3 April 2026

Rating Action

Capital Intelligence Ratings (CI Ratings or CI) today announced that it has lowered Bahrain’s Long-Term Foreign Currency Rating (LT FCR) and LT Local Currency Rating (LT LCR) to ‘B’ from ‘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 Stable from Negative.

Rating Drivers

The downgrade reflects the ongoing deterioration in the public finances, with the budget deficit and government debt burden already at very high levels and expected to increase further this year. Fiscal consolidation efforts have so far been limited, and pressure on the public finances is increasing owing to the US-Israel war with Iran. The downgrade also reflects rising refinancing risks due to the government’s large gross financing needs and dependence on cross-border funding, which exposes the sovereign to shifts in investor sentiment and global liquidity conditions. The ratings also take into consideration Bahrain’s external vulnerabilities, which are exacerbated by very high external debt and limited international liquidity buffers.

The ratings are supported by the likelihood of financial support from Saudi Arabia and the GCC in case of need and continued – albeit declining – current account surpluses. The ratings are also supported by Bahrain’s high GDP per capita and reasonable level of economic diversification, particularly compared to regional oil exporting peers. The ratings remain constrained by very limited fiscal flexibility and the country’s exposure to very high geopolitical risk. The sovereign’s credit metrics are heavily influenced by developments in the oil market, with the commodity accounting for an estimated 15% of GDP, 60% of fiscal revenues and 47% of exports in 2025.

Fiscal strength is weak, reflecting a widening central government deficit and insufficient progress in fiscal consolidation and revenue mobilisation. The central government budget deficit is estimated to have increased to 7.7% of GDP in 2025 (from 4.1% in 2024), driven by rising expenditures and declining hydrocarbon revenues. CI expects the budget deficit to increase further to 10.6% of GDP in 2026 due to higher current spending – including on subsidies and interest payments – as well as increased capital expenditure related to infrastructure damage. The fiscal impact of higher oil prices – which we currently assume will average USD80/barrel this year – is likely to be largely offset by the war-related disruption to hydrocarbon production, while growth in non-hydrocarbon revenues is expected to be modest.

CI’s baseline scenario assumes that military hostilities will be contained and subside by the end of April 2026, allowing for a gradual recovery in production and economic activity in the second half of the year. However, the near-term impact on the public finances is significant, and budgetary pressures are likely to endure to counter weaker economic performance and higher security risks.

Central government debt remains very high and is projected to increase further to 150.7% of GDP in 2026, from 142.5% in 2025, reflecting persistent primary budget deficits. Central government debt is expected to rise further in 2027, albeit at a slower pace, as the government resumes gradual fiscal consolidation efforts. Measured against revenues, central government debt is very high and is expected to have reached 843.5% in 2025. 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 24.1% of GDP in 2025. The debt structure continues to expose the government to refinancing risks given the size of the external debt stock and reliance on international capital markets. Domestic debt is largely held by the banking sector, reinforcing sovereign-bank linkages.

Interest expense on central government debt is a key constraint to fiscal flexibility and is projected to remain very high, averaging 37.7% of revenues in 2026-27 (34.3% in 2025). This reflects both the very high debt stock and increased borrowing costs, particularly in the context of heightened risk premia.
Refinancing risks are high, with gross government financing needs estimated to average 28.2% of GDP in 2026-27 (25.6% in 2025). Liquidity buffers are modest, with government deposits in the banking system equivalent to 10.1% of GDP in December 2025. While the Bahraini government has maintained access to international capital markets, future access remains sensitive to geopolitical uncertainties and investor sentiment. In January 2026, the government successfully issued a dual tranche USD2.1bn eurobond (8- and 12-year maturities), largely to refinance a maturing USD1.1bn eurobond. Remaining external maturities of around USD1.8bn in 2026 and USD2.7bn in 2027 appear manageable under our baseline scenario, but refinancing conditions remain vulnerable to market volatility.

CI still considers the likelihood of further financial support from the GCC partners in case of need as a major supporting factor for the ratings. Bahrain has a strong track record of receiving timely financial assistance, including support packages and development financing. Such support remains an important mitigating factor against liquidity and refinancing risks, although it does not fully offset underlying fiscal weaknesses.

External strength is moderately weak, reflecting low international liquidity and very high external debt. Gross international reserves increased to USD5.3bn in December 2025, from USD4.6bn in 2024, with the former covering only 13.5% of M2 in 2026. Bahrain’s international liquidity indicator remains low, with liquid external assets of the banking system and gross official assets covering around 113% of gross external financing needs in 2026. The current account recorded a surplus of 6.0% of GDP in 2025 (up from 4.8% in 2024) and is projected to register declining surplus of 2.0% of GDP in 2026. This is based on CI’s assumption that exports of goods and services will gradually normalise in H2 26.

Gross external financing needs are very high at around 150% of GDP in 2026. This is attributable to the large size of the wholesale and retail banking sector. The assets in the Future Generations Reserve Fund (of which 75% are deemed liquid) remain low and are deemed insufficient to absorb large external shocks. Gross external debt – including the foreign liabilities of the wholesale banking sector – was very high at 459.5% of current account receipts in 2025. Gross external debt – excluding the foreign liabilities of the banking sector – was still very high at 226.9% of GDP in 2025.

CI notes that the abovementioned forecasts are subject to a high degree of uncertainty given the regional situation. Escalating military conflict between the US-Israel and Iran represents the materialisation of a high-impact event risk for Bahrain, reflecting its geographic proximity as well as the sovereign’s high dependence on hydrocarbon production and exports through regional trade routes. The conflict has already resulted in direct disruptions to oil production, refining and export capacity following the temporary suspension of production in Abu Saafa oil field and Bapco’s oil refinery in Al Muharraq, as well as increased pressure on logistics and trade flows due to constraints on maritime routes via the Strait of Hormuz and air traffic. These effects are compounded by indirect spillovers, including weaker investor confidence, rising shipping and insurance costs, and reduced activity in key non-hydrocarbon sectors such as tourism, aluminium production and transport.

A more prolonged or severe escalation than assumed in CI’s baseline scenario would materially weaken Bahrain’s macroeconomic profile, particularly through sustained disruptions to hydrocarbon output, higher import costs and tighter external financing conditions. Given the sovereign’s limited buffers, elevated government and external debt burdens, and large gross financing needs, such shocks could translate into markedly worse fiscal and external performance outcomes and much higher refinancing risks than currently envisaged.

Rating Outlook

The Stable Outlook indicates that the ratings are likely to remain unchanged over the next 12 months and is underpinned by our baseline assumption that the regional conflict will be short-lived and that weaknesses in the public and external finances will be balanced by the availability of external financing and GCC support.
 
Rating Dynamics: Upside Scenario

The ratings could be upgraded in the next 12 months in the event of a durable improvement in fiscal performance underpinned by fiscal consolidation measures and supported by a more favourable regional security environment and, possibly, higher-than-projected hydrocarbon prices. The ratings could also 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 one notch in the next 12 months in the event of a more pronounced deterioration in the public finances than currently envisaged. The ratings could also be lowered 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. A more prolonged or severe disruption to hydrocarbon production or exports than assumed in the baseline scenario could also negatively affect the ratings.

Contact

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


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