Hong Kong: Fitch Ratings has affirmed Bahrain’s Long-Term Foreign and Local Currency Issuer Default Ratings (IDRs) at ‘BB+’ with a Stable Outlook. The Country Ceiling has been affirmed at ‘BBB+’ and the Short-Term Foreign and Local Currency IDRs at ‘B’. The issue ratings on Bahrain’s senior unsecured foreign and local currency long-term bonds have been affirmed at ‘BB+’. The ratings on the sukuk trust certificates issued by CBB International Sukuk Company 5 have also been affirmed at ‘BB+’. The issue ratings on Bahrain’s senior unsecured local currency short-term bonds have been affirmed at ‘B’.
Bahrain’s ratings are supported by high GDP per capita and human development indicators (relative to the BB median), a developed financial sector and the boost to external financing flexibility from strong GCC support. The strengths are balanced by double-digit fiscal deficits, high and rising debt, a highly oil-dependent government budget and domestic political tensions that hamper fiscal adjustment.
Fitch expects the fiscal deficit to fall only moderately to 12.3% of GDP in 2017 (assuming Brent averages USD45/bbl), from an estimated 13.6% of GDP in 2016 and 15.4% of GDP in 2015. The estimated fiscal breakeven Brent oil price of USD84/bbl for 2017 is well above expected oil prices in the medium term. Continued deficits will push debt to 84% of GDP in 2018 from 75% of GDP in 2016 (well in excess of the BB median of 51% of GDP). Fitch’s deficit numbers include estimated extra-budgetary spending of 2.6% of GDP, and the 2016 fiscal outturns are still preliminary.
Subsidy reform, spending restraint and growing non-oil revenue underpin the adjustment effort. Gradual increases in domestic gas and fuel prices partly offset the negative effect of oil price weakness on hydrocarbon revenue, which Fitch expects to rise 13.4% in 2017 after a fall of only 10% in 2016. Fitch expects spending to grow at a rate below non-oil GDP growth, after a broad-based cut of 8.2% in 2016. The biggest spending cuts were to subsidies and transfers (24%, reflecting the start of utility price reforms), and capital spending (31%). Notably, the nominal wage bill also fell (by 3.1%), for the first time in recent history. The government is increasing non-hydrocarbon revenue by adjusting various fees. Our forecast has it rising by 14.4% in 2017 after 5.8% in 2016. These measures will continue in 2018, supplemented by the introduction of VAT.
Bahrain will finance its deficits through a mixture of foreign and local debt. In our forecast, the government’s foreign borrowing reaches roughly USD3.2billion in 2017 and USD2.2billion in 2018, after USD2.9billion in 2016. Fitch assumes domestic borrowing will be less than a third of these amounts, in line with 2016. A debt management strategy is still in the early stages of development, but the government wishes to limit domestic borrowing.
The government would have recourse to other means of financing in a stress scenario. Its deposits in domestic banks (around 14.2% of GDP in 2016) mostly reflect the assets of the Social Insurance Organisation, which could increase its holdings of government debt. Government-owned Mumtalakat Holding Company has an illiquid portfolio of mostly domestic assets with a balance sheet value of around 30% of GDP.