Bahrain – Ratings Affirmed with a Stable Outlook

(MENAFN- Capital Intelligence Ltd) 2 October 2026

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 remains Stable.

Rating Drivers

The affirmation of the ratings reflects CI’s expectation that Bahrain will continue to be supported by Saudi Arabia and other GCC countries, and that such assistance will mitigate risks associated with very high government and external financing needs and limited foreign reserve adequacy. The ratings are supported by Bahrain’s high GDP per capita and reasonable level of economic diversification, particularly compared to regional oil exporting peers. CI notes that the long maturity structure of central government external debt is also considered a supporting factor for the ratings.

The ratings remain constrained by high refinancing risks due to the government’s large gross financing needs and, consequently, Bahrain’s vulnerability to shifts in international investor sentiment and global liquidity conditions, as well as to possible changes in the willingness and capacity of other sovereigns to extend timely support. The ratings also take into consideration the heavy influence of developments in the oil market on fiscal revenues and exports, as well as very limited fiscal flexibility and the country’s exposure to very high geopolitical risk.

Bahrain has a strong track record of receiving timely financial assistance, including support packages and development financing from the GCC Development Fund. In 2011, the GCC Development Fund committed USD7.5bn over 10 years to finance infrastructure and housing projects. In 2018, Saudi Arabia, the UAE and Kuwait disbursed a USD7.6bn fiscal balance programme to support the Kingdom through an earlier debt challenge. The IMF subsequently noted that the regional support had alleviated Bahrain’s near-term financing constraints and contributed to a decline in borrowing costs. The strength of this support was demonstrated again during the 2026 regional conflict. In April 2026, the central banks of Bahrain and the UAE signed a five-year currency swap agreement worth USD5.3bn (11% of GDP). Support also extends beyond direct financing to structural economic linkages. Bahrain receives revenues associated with the Saudi-operated Abu Saafa oil field, reinforcing the broader economic and financial interdependence between the two countries. Against this backdrop, CI considers Bahrain’s financial stability – and particularly the credibility of the dinar’s peg to the US dollar – to be a shared regional interest for the GCC. The track record of support suggests that additional GCC assistance would likely be forthcoming were Bahrain to face severe debt servicing or balance of payments challenges.

Fiscal strength is very weak and continues to deteriorate. This reflects a widening central government budget deficit and very high debt levels. Consequently, fiscal flexibility is limited and financing risks are elevated. These weaknesses are compounded by insufficient progress in fiscal consolidation and revenue mobilisation.

The central government budget deficit is projected to widen to 11.4% of GDP in 2026, from 9.6% in 2025, driven by declining hydrocarbon revenues and higher expenditure. CI expects the deficit to remain very high, averaging 9.3% of GDP in 2027-28, reflecting higher current spending, including subsidies and interest payments, as well as increased capital expenditure related to infrastructure damage. The fiscal benefit of higher oil prices, which CI currently assumes will average USD100/barrel in 2026, is likely to be largely offset by continued conflict-related disruption to hydrocarbon production, while growth in non-hydrocarbon revenues is expected to remain modest.

Central government debt dynamics remain unfavourable. Central government debt is projected to increase to 156.6% of GDP in 2026, from 142.5% in 2025, reflecting persistent primary deficits and denominator factors. Debt is expected to rise further in 2027-28, albeit at a slower pace as the government resumes gradual fiscal consolidation. Measured against revenues, the debt burden is extremely high, at a projected 1,059.2% in 2026. The debt stock includes outstanding zero-interest loans from the GCC Development Fund. Domestic debt also includes direct government borrowing from the Central Bank of Bahrain (CBB), with CBB claims on government increasing in August 2026 to BHD5.5bn (equivalent to 30.2% of GDP), from BHD4.1bn (or 22.5% of GDP) in December 2025.

The burden of government debt on the budget is also very high, with interest payments projected to average 30.7% of revenues in 2026-28, up from 27.1% in 2025. The increase reflects both the growth in the debt stock and higher borrowing costs amid elevated risk premia. Gross government financing needs are estimated to remain very high, averaging 28% of GDP in 2026-28, compared with 27% in 2025. Liquidity buffers are also modest, with government deposits in the banking system equivalent to 10.5% of GDP in July 2026, leaving limited room to absorb prolonged financing or external shocks.

CI notes that government financing conditions remain sensitive to geopolitical developments and investor sentiment. In June 2026, the government successfully issued a USD1bn, 10-year international bond at a fixed coupon of 7.125%. CI considers the long average maturity of the central government’s external debt, estimated at 11.6 years, a positive rating factor. The remaining external maturities of around USD2.7bn in 2027 are considered manageable under CI’s baseline scenario that assumes likely direct and indirect support from the GCC.

External strength is moderately weak, reflecting very low international liquidity and very high external debt. Gross international reserves decreased to USD3.9bn in July 2026, from USD5.3bn in December 2025, with the latter covering only 12.4% of M2 in 2026. Bahrain’s international liquidity indicator remains low, with liquid external assets of the banking system and gross official assets together covering around 113% of gross external financing needs in 2026. The current account, which CI had previously projected to record a smaller surplus of 2% of GDP in 2026, is now expected to register a deficit of around 1% of GDP, reflecting still severely constrained exports through the Strait of Hormuz.

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 – are expected to remain very high at 687% of current account receipts in 2026. 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 still subject to a high degree of uncertainty given the evolving regional situation. CI’s baseline scenario assumes a protracted regional conflict of varying intensity and continued spillovers across multiple fronts. For Bahrain, intermittent attacks on energy infrastructure and commercial shipping, together with severely restricted traffic through the Strait of Hormuz through end-2026 and only partial normalisation in H1 27, are expected to keep hydrocarbon exports materially below pre-conflict levels and to constrain external trade. Elevated oil prices are expected to provide some support to the central government budget, but weaker export volumes and higher transportation and financing costs will continue to weigh on Bahrain’s external and fiscal positions.

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 weaknesses in the standalone public and external finances will be balanced by the availability of external financing and GCC support.

Rating Dynamics: Upside Scenario

Although unlikely at present, 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 reduced likelihood of GCC support and 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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