CI affirms Bahrain at âBB+â with a stable outlook
Capital Intelligence Ratings (CI) has affirmed Bahrain’s Long-Term Foreign and Local Currency Sovereign Ratings at ‘BB+’ and its Short-Term Foreign and Local Currency Sovereign Ratings at ‘B’. At the same time, the outlook for Bahrain’s ratings was affirmed at stable.
According to CI, the ratings reflect the continued deterioration in the public finances, including rapidly rising debt and limited prospects under current policies and oil price expectations for a durable reversal of government debt dynamics over the medium term. Bahrain’s credit metrics continue to be affected by oil market developments, with the commodity accounting for around 20 per cent of GDP, 75 per cent of fiscal revenues, and 60 per cent of exports, according to the latest official figures for 2015.
Bahrain’s ratings are supported by several factors, including the comparatively high level of GDP per capita, the diversified nature of the economy relative to regional peers, and currently stable growth prospects for non-hydrocarbon sectors. The ratings also take into account the likelihood that other members of the Gulf Cooperation Council (GCC), in particular Saudi Arabia, would provide financial and other forms of support to Bahrain in the event of financial stress.
The outlook for the ratings is stable. This means that Bahrain’s ratings are likely to remain unchanged in the next 12-24 months, provided that key credit metrics evolve as envisioned in CI’s baseline scenario.
The stable outlook primarily balances the weakening public finances and external balances against the relatively diversified nature of the Bahraini economy, robust service sector, and likelihood of financial assistance from neighbouring countries in times of financial distress.
Real GDP growth eased to about 2.2 per cent in 2016 from 3.2 per cent in the previous year, with non-hydrocarbon activity remaining reasonably resilient. CI Ratings expects the economy to expand by an average of two per cent in 2017-2018, mainly driven by continued infrastructure spending and domestic consumption. Disbursements from the GCC development fund have picked up, with new agreements recently signed with Saudi Arabia. Recent data also point to growth in non-oil sectors, such as manufacturing, construction, and transportation.
The budget deficit is estimated to have widened to a record high 17.9 per cent of GDP in 2016, compared to 13.3 per cent of GDP in 2015, and 3.6 per cent in 2014, reflecting the impact of low oil prices on revenues. CI expects the budget to continue posting large deficits in 2017-18, assuming an average oil price of $55 per barrel.
CI notes that the Bahraini government is introducing limited fiscal consolidation measures—including price increases on fuel, fee increases on tobacco and alcohol, and reductions in administrative costs—but considers announced measures to be insufficient to return the fiscal position to a healthy level given oil price assumptions.
Gross central government debt is also expected to continue its rapid increase in view of the sheer size of the budget deficit. The government debt to GDP ratio is expected by CI to have exceeded 80 per cent in 2016. On current trends, CI expects the government’s net asset position (the excess of financial assets over debt) to be fully eroded in the next two years, further reducing fiscal flexibility.
Bahrain’s external accounts are also weakening, with the current account balance expected to have posted a deficit of 6.7 per cent of GDP in 2016, compared to a deficit of 3.2 per cent in 2015, due to sluggish hydrocarbon exports. The country’s foreign reserves—including the contribution from recent international bonds totalling $2 billion—declined to about $3 billion (two months of imports) at the end of 2016.
Despite the decline, reserve coverage of external debt falling due within a year remains adequate, albeit at around 2 times short-term external debt compared to more than four times in 2014. CI notes that the gradual erosion of foreign reserves could increase pressure on the exchange rate peg with the US dollar and weaken investor appetite for sovereign debt, thereby increasing external refinancing risk.
In gross terms, external debt remains high at around 4.7 times the country’s GDP as of December 2016. The seemingly high debt ratios reflect Bahrain’s standing as a regional financial centre, with most of the external debt stock accounted for by the foreign liabilities of foreign banks. Public external debt is more moderate, reaching 22 per cent of GDP in 2016. Foreign asset holdings are relatively high, and both the public and banking sectors are currently net external creditors.