Arab News, Mon, May 27, 2024 | Dhu al-Qadah 19, 1445
S&P reaffirms Bahrain’s credit rating amid fiscal challenges; outlook stable
Bahrain:
Bahrain’s commitment to fiscal consolidation has witnessed S&P Global Ratings
reaffirm its “B+/B” credit standing with a stable outlook despite challenges in
2023.
However, the agency added that the transfer and
convertibility assessment on the Gulf state remains “BB-.” It also anticipated
structural reforms aimed at strengthening the non-oil revenue base, albeit at a
slower pace.
In its report, S&P said that the stable outlook
reflects the expectation that Bahrain will persist in implementing measures to
reduce its budget deficit, possibly benefiting from additional support from
other Gulf Cooperation Council sovereigns if necessary.
Conversely, the ratings could improve if Bahrain’s
fiscal situation exceeds expectations, leading to a reduction in net debt
relative to gross domestic product, or if current account surpluses widen,
bolstering the country’s external position, according to the study.
However, potential downside risks include a
significant increase in government debt or a sharp decline in foreign currency
reserves, which could hinder debt servicing and monetary policy effectiveness.
“We could lower the ratings if the government’s
net debt and debt-servicing burden increased significantly beyond our
assumptions, presenting funding challenges. We could also take a negative rating
action if foreign currency reserves declined sharply, limiting the government’s
ability to service its external debt and weighing on monetary policy
effectiveness,” the report said.
On the other hand, the rating agency outlined an
optimistic scenario for Bahrain, stating that it might upgrade the country’s
standing if the government surpasses expectations by substantially reducing net
debt relative to GDP through improved budgetary performance.
Additionally, the ratings could increase if the
current account surpluses are expanded significantly and consistently enhance
the island state’s external position.
The agency noted that its assessment is based on
the anticipation that the Bahraini government will fortify its financial stance
up to 2027, notwithstanding the considerable deficit expansion in 2023.
It added that the shortfall experienced last year
was primarily influenced by elevated interest rates, a one-off lump sum social
support program, and an upward adjustment in pensioners’ inflationary allowance
that will continue into 2024.
Considering this initial setback, S&P foresees
broader fiscal deficits averaging 4.4 percent of GDP from 2024 to 2027, compared
to 3.8 percent in its prior evaluation.
“A decline in oil production due to ongoing
maintenance at the Abu Safa oil field also affects our revenue assumptions.
However, we believe the government will continue pursuing fiscal and structural
reforms to strengthen its non-oil revenue base, allowing for continued, albeit
slower, fiscal consolidation over our forecast horizon to 2027,” the agency said
in its report.
Moreover, S&P assumed that Bahrain would receive
the remaining $2.8 billion of the $10.2 billion GCC support package pledged by
Saudi Arabia, the UAE, and Kuwait in 2018, and there remains potential for
additional financial support beyond the program’s expiration at year-end 2024 if
needed.
“These interest-free loans have historically
covered about 50 percent of the government’s gross external financing needs,
although we note disbursements are not tied to, and do not necessarily align
with, Bahrain’s external debt repayments,” the agency said.
It further highlighted that Bahrain encounters
annual external debt redemptions ranging from $2.0 billion to $2.5 billion,
equivalent to 5 percent of GDP, stemming from a mix of Eurobond and sukuk
issuances.
In February, S&P explained that Bahrain
successfully raised $2 billion by issuing a seven-year, $1 billion sukuk at 6.0
percent and a 12-year, $1 billion conventional bond at 7.5 percent.
“We understand the issuance was met by strong
investor demand, supporting more favorable pricing dynamics. In our base-case,
we assume Bahrain will maintain strong access to international capital market
funding,” it added.
It explained that the country’s relatively diverse
economy, proximity to Saudi Arabia’s market, robust financial sector oversight,
and educated workforce provide a foundation for resilience. However, stagnant
GDP per capita levels, adjusted for population growth, suggest underlying
challenges in achieving broad-based economic prosperity.
“However, when GDP performance from 2017-2027 is
adjusted for population levels, GDP per capita levels are largely flat,
suggesting that labor supply, rather than productivity, remains the key growth
spur. We view Bahrain as having a relatively wealthy economy and estimate GDP
per capita at $27,58 in 2024,” it said.