Singapore: Bahrain’s fiscal deficit will likely remain relatively high at 4.2% in 2014, after reaching 4.3% of GDP in 2013, says Moody’s.
As a result of these recurrent fiscal deficits, the stock of government debt increased to 43.5% of GDP in 2013 from 21.4% in 2009. Moreover, the government is increasingly relying on external sources to finance its deficits through international bond issuances.
In addition, the country remains vulnerable to domestic political tensions and contagion from regional geopolitical instability.
“High income levels, a reasonably well-diversified economy and a strong external balance sheet continue to support Bahrain’s (Baa2 negative) sovereign credit profile, but deteriorating government finances and a very high reliance on oil revenues — against limited oil reserves — together with political risks are key credit weaknesses,” Moody’s Investors Service in a report said published on Monday.
Moody’s conclusions were contained in its just-released credit analysis “Bahrain, Government of”, which looks at the country’s credit profile in terms of Economic Strength (assessed as “moderate (+)”); Institutional Strength (“high (-)”); Fiscal Strength (“moderate”); and Susceptibility to Event Risk (“high (+)”).
These represent the four main analytic factors in Moody’s Sovereign Bond Rating Methodology. The analysis constitutes an annual update to investors and is not a rating action. Bahrain is rated Baa2 with a negative outlook.
Bahrain’s high per capita income of nearly $50,000 on purchasing power parity basis in 2013 and a strong non-oil sector continue to underpin the country’s economy.
According to Moody’s, Bahrain’s vulnerability to external economic and financial shocks is cushioned by its strong external position as reflected in a solid net international investment position of 77% of GDP in 2013, and current account surpluses have averaged 7.8% of GDP over the last 10 years.
Bahrain’s relatively low external breakeven oil price, which the IMF projects to be $65.5 per barrel in 2015, also supports its external position and Moody’s expects a sustained period of low oil prices to have a manageable impact.
Moody’s forecasts 3.5% real GDP growth for 2015, down from an estimated 4% in 2014. Several large, multi-year investment projects are likely to support growth in the coming years.
Bahrain’s oil production has only limited scope for increases, and the authorities are planning refinery upgrades, an aluminium smelter capacity extension, and the construction of power plants. Social housing projects, which have been funded through the Gulf Cooperation Council Development Program, are also set to launch in the coming years.
However, a prolonged period of low oil prices could negatively affect public investment spending, because oil and gas revenues account for more than 86% of total government revenues.
Moody’s also notes that Bahrain faces continued pressures to further increase government spending. Current spending has increased largely due to higher spending on welfare, social security and subsidies. As a result, Bahrain has the highest fiscal breakeven oil price in the GCC, at $125.4 in 2014, according to the IMF.