Bahrain Outlook Revised To Stable From Positive On Low Oil Price Outlook; 'B+/B' Ratings Affirmed

  • Despite efforts to increase nonenergy receipts, Bahrain's revenue remains dependent on oil, and hence sensitive to energy price shocks, including this year's.
  • Recent revisions to our 2020 price projections for oil imply more elevated current account deficits for Bahrain, raising external vulnerabilities.
  • However, the provision of zero interest loans from neighboring sovereigns and the expectation of further timely support, if needed, provide the government with an important financing buffer.
  • We are revising our outlook on Bahrain to stable from positive and affirming our 'B+/B' long- and short-term sovereign credit ratings.

Rating Action

On March 26, 2020, S&P Global Ratings revised its outlook on Bahrain to stable from positive. At the same time, we affirmed out 'B+/B' long- and short-term foreign and local currency ratings.
As a "sovereign rating" (as defined in EU CRA Regulation 1060/2009 "EU CRA Regulation"), the ratings on Bahrain are subject to certain publication restrictions set out in Art 8a of the EU CRA Regulation, including publication in accordance with a pre-established calendar (see "Calendar Of 2020 EMEA Sovereign, Regional, And Local Government Rating Publication Dates," published Dec. 20, 2019, on RatingsDirect). Under the EU CRA Regulation, deviations from the announced calendar are allowed only in limited circumstances and must be accompanied by a detailed explanation of the reasons for the deviation. In this case, the reason for the deviation is weaker-than-expected fiscal performance. The next scheduled rating publication on the sovereign rating on Bahrain will be on May 29, 2020.

Outlook

The stable outlook reflects our expectations that Bahrain's neighbors will provide timely support, as needed, through the expected low oil price environment, allowing the government to continue implementing budget-deficit-reducing measures.
Upside scenario
Although not likely over the next year, we could raise the ratings over the forecast period if Bahrain's budgetary position improves significantly beyond our current expectations. We would also consider raising the ratings if GDP per capita trend growth strengthens.
Downside scenario
We could lower the ratings if external pressures intensify, for example, if the exchange-rate peg were to come under pressure due to a sharp increase in demand for foreign currency.

Rationale

On March 19, 2020, S&P Global Ratings materially lowered its oil price assumptions for 2020. This follows an earlier significant downward revision of its price assumptions on March 9, 2020. Prices for crude oil in spot and futures markets are more than 55% lower than levels observed during the summer of 2019 when prices increased due to rising geopolitical tensions. When we last reviewed Bahrain (see "Bahrain Outlook Revised To Positive On Improving Fiscal Prospects; 'B+/B' Ratings Affirmed," published Nov. 29, 2019), we expected Brent oil prices to average $60 per barrel (/bbl) in 2020 and to gradually decline to $55/bbl from 2021. We now assume an average Brent oil price of $30/bbl in 2020, $50 in 2021, and $55/bbl from 2022 (see "S&P Global Ratings Cuts WTI And Brent Crude Oil Price Assumptions Amid Continued Near-Term Pressure," published March 19, 2020).
Oil prices plummeted following OPEC's failure to agree on further production cuts during meetings on March 6. OPEC+ did not agree to a proposed reduction of 1.5 million barrels per day (mmbbl/d) to address an expected significant drop in global demand partly due to the spread of COVID-19. The proposed reduction was in addition to the current 2.1 mmbbl/d production decrease set to expire at the end of March. Shortly after the meetings, Saudi Arabia announced that it was immediately slashing its official selling price and would increase its production to over 12 mmbbl/d in April after the current production cut expires. These actions possibly signal that, despite a collapse in global demand and shrinking physical markets, Russia and OPEC have engaged in a price war to try and maintain market share and market relevance. Oil markets are now heading into a period of a severe supply-demand imbalance in second-quarter 2020. In line with our economic outlook (see "Economic Research: COVID-19 Macroeconomic Update: The Global Recession Is Here And Now," published March 17, 2020), we anticipate a recovery in both GDP and oil demand through second-half 2020 and into 2021 as the most severe effects from the COVID-19 pandemic moderate.
The stable outlook primarily reflects our view that, despite ongoing reforms aimed at reducing the fiscal deficit, expenditure flexibility remains low and revenue is dependent on oil prices, leaving the government vulnerable to oil price shocks. In addition, the expected increase in the current account deficit could decrease foreign-exchange reserves, weakening Bahrain's external resilience. These factors are offset by our expectation of extraordinary support, if needed, and the ongoing support provided by other Gulf Cooperation Council (GCC) sovereigns, which should enable Bahrain to continue implementing fiscal reforms.
We forecast a fiscal deficit of 9.9% of GDP in 2020, compared with our previous expectation of a 5.1% deficit. We expect the deficit to average 6.3% over 2020-2023, still an improvement compared with the 12% average deficit over 2015-2017. Revenue remains dependent on oil, although the government has worked to increase nonoil revenue by introducing an excise tax in 2018 and a value-added tax (VAT) in 2019. VAT collections in 2019 were equivalent to 1.7% of GDP, on par with collections in the United Arab Emirates and Saudi Arabia. Further government initiatives, such as revisions to government fees, should strengthen nonoil revenue in the next few years.
Despite the oil price shock, we do not believe the government will make large cuts to expenditure, highlighting its low level of flexibility. In addition, although we expect the government will continue implementing reforms under its fiscal balance program, in our view, the low oil price environment could delay expenditure-reducing measures, especially those that are more politically sensitive. After a reduction in the public-sector workforce of about 18%, the government plans to decrease expenditure through a centralized procurement structure, reducing transfers by balancing the Electricity and Water Authority's budget, and reforming subsidies. Expenditure fell about 3% in 2019 compared with 2018.
Government interest payments are an increasing expenditure item, expected to comprise almost 21% of total expenditure in 2020, up from about 6.5% in 2014. However, interest-free loans from the GCC support package, currently about 10% of total government debt, should help slow interest-burden growth. GCC support funds carry a zero coupon interest rate, have a seven-year grace period, and a 30-year maturity period.
The stable outlook also reflects rising risks to the external position, because wider current account deficits could deplete foreign-exchange reserves at an accelerated pace.
At about 3.6x current account receipts plus useable reserves, Bahrain´s gross external financing needs are among the highest of all rated sovereigns. This reflects high financial sector external debt estimated at about 175% of GDP, from both the retail and domestically-registered wholesale banks, including about 35% of GDP in potentially flight-prone nonresident deposits. Partially offsetting this is the financial sector's external claims, estimated at 2.3x GDP, although we note that these assets are likely less liquid and have a higher maturity in comparison with the banking system's funding base.
We consider that the Central Bank of Bahrain (CBB) has limited credibility regarding its ability to maintain its exchange-rate arrangement, since reserves do not cover the monetary base. However, support from other GCC sovereigns bolstered the reserve position in 2019 and we expect these deposits to stay, helping improve Bahrain's external resilience and maintain confidence in the exchange-rate peg. Bahrain's gross international reserves increased to about $3.5 billion in January 2020, compared with about $1.9 billion at year-end 2018, largely due to GCC financial support. This was an improvement over the past few years, when the level of gross international reserves had been low and volatile. We note that the CBB receives daily foreign currency inflows from oil sales (through the national oil companies).
We estimate 2020 real economic growth at 1.5%, a deceleration compared with 2.1% in 2019 and below the historical average. Lower oil prices will weigh on consumer demand and key sectors such as tourism. Over the forecast period, we expect real growth to average about 2%, supported by ongoing infrastructure projects. Bahrain's relatively diversified economy still benefits from its proximity to the large market of Saudi Arabia, strong regulatory oversight of the financial sector, relatively well-educated work force, and low-cost environment.
In 2019, the government enacted its strongest fiscal measures since the collapse of oil prices in 2015, including the VAT and a voluntary retirement scheme, showing an improvement in the predictability of its policy-making. Further reforms could be difficult to enact, in our view, as we anticipate that Bahrain's political and domestic tensions will continue, constraining the government's policy choices. In our opinion, there are still risks from the entrenched polarization between the Shia and Sunni communities, and internal communal divisions.

Key Statistics

Table 1

Bahrain Selected Indicators
2014201520162017201820192020202120222023
Economic indicators (%)
Nominal GDP (bil. LC)13121213141515151616
Nominal GDP (bil. $)33313235383939404244
GDP per capita (000s $)25.422.722.623.625.125.124.224.524.825.2
Real GDP growth4.42.53.64.31.82.11.52.02.42.4
Real GDP per capita growth(0.5)(1.7)(0.3)(1.1)1.6(0.9)(1.5)(1.0)(0.6)(0.6)
Real investment growth5.9(8.5)10.810.69.52.04.22.36.06.0
Investment/GDP26.825.529.232.936.437.040.538.838.639.9
Savings/GDP31.423.124.528.929.932.631.232.634.035.2
Exports/GDP96.183.174.275.879.677.166.168.469.669.0
Real exports growth(4.1)(0.8)(2.8)3.73.32.01.51.81.51.5
Unemployment rate3.83.54.34.24.04.04.04.04.04.0
External indicators (%)
Current account balance/GDP4.6(2.4)(4.6)(4.1)(6.5)(4.4)(9.4)(6.2)(4.6)(4.6)
Current account balance/CARs4.5(2.7)(5.7)(5.0)(7.5)(5.3)(12.9)(8.3)(6.1)(6.2)
CARs/GDP102.489.880.881.786.083.672.774.775.774.9
Trade balance/GDP11.12.7(2.5)(1.6)(2.8)(2.5)(5.1)(3.4)(2.6)(2.6)
Net FDI/GDP5.7(10.1)3.53.43.72.22.22.22.22.2
Net portfolio equity inflow/GDP(1.9)2.8(3.3)0.8(2.6)(1.0)(1.0)(1.0)(1.0)(1.0)
Gross external financing needs/CARs plus usable reserves249.2306.1360.4337.4304.8324.1365.5361.8347.5338.6
Narrow net external debt/CARs(46.1)(51.3)(47.9)(53.4)(38.5)(35.9)(31.8)(26.1)(23.1)(20.4)
Narrow net external debt/CAPs(48.3)(49.9)(45.3)(50.8)(35.8)(34.1)(28.2)(24.1)(21.8)(19.2)
Net external liabilities/CARs(92.0)(116.7)(119.1)(103.8)(83.2)(79.9)(82.7)(72.0)(65.0)(59.8)
Net external liabilities/CAPs(96.2)(113.6)(112.7)(98.9)(77.4)(75.9)(73.3)(66.5)(61.3)(56.3)
Short-term external debt by remaining maturity/CARs158.3208.8233.1208.4176.8196.8233.0221.5213.1209.1
Usable reserves/CAPs (months)0.20.2(0.7)(0.8)(0.8)(0.8)(0.6)(1.0)(0.9)(0.8)
Usable reserves (mil. $)492(1,554)(2,062)(2,180)(2,215)(1,503)(2,655)(2,590)(2,260)(2,151)
Fiscal indicators (general government; %)
Balance/GDP(3.4)(13.0)(13.5)(10.0)(6.3)(4.7)(9.9)(6.4)(4.5)(4.5)
Change in net debt/GDP1.420.712.411.712.97.410.97.45.55.5
Primary balance/GDP(1.6)(10.7)(10.5)(6.4)(2.0)(0.3)(5.1)(1.4)0.70.6
Revenue/GDP27.717.515.716.519.619.814.216.817.617.4
Expenditures/GDP31.130.529.126.525.924.424.123.222.121.9
Interest/revenues6.513.219.121.822.322.333.730.029.429.4
Debt/GDP41.264.675.081.989.293.6105.0108.3109.2110.1
Debt/revenues148.7369.2478.9496.3454.8474.0738.3644.8619.5632.5
Net debt/GDP12.834.445.653.162.968.479.784.085.987.8
Liquid assets/GDP28.430.229.428.826.225.225.324.423.322.3
Monetary indicators (%)
CPI growth2.61.82.81.42.11.01.02.42.42.4
GDP deflator growth(1.7)(9.3)0.25.54.31.0(2.0)2.02.02.0
Exchange rate, year-end (LC/$)0.380.380.380.380.380.380.380.380.380.38
Banks' claims on resident non-gov't sector growth(0.9)8.92.97.710.77.07.07.07.07.0
Banks' claims on resident non-gov't sector/GDP55.264.764.162.765.467.973.075.176.978.8
Foreign currency share of claims by banks on residentsN/AN/AN/AN/AN/AN/AN/AN/AN/AN/A
Foreign currency share of residents' bank deposits40.743.345.145.148.548.548.548.548.548.5
Real effective exchange rate growth1.67.73.0(0.0)(0.8)2.2N/AN/AN/AN/A
Sources: GCC Statistical Center (economic indicators), Central Bank of Bahrain and IMF (monetary indicators); Ministry of Finance and National Economy (fiscal and debt indicators); Central Bank of Bahrain (external indicators)
Adjustments: Usable reserves adjusted by subtracting monetary base from reported international reserves. General government debt numbers adjusted by subtracting Social Insurance Organisation (SIO) holdings of central government bonds. General government assets adjusted by adding SIO and Future Generations Fund liquid assets.
Definitions: Savings is defined as investment plus the current account surplus (deficit). Investment is defined as expenditure on capital goods, including plant, equipment, and housing, plus the change in inventories. Banks are other depository corporations other than the central bank, whose liabilities are included in the national definition of broad money. Gross external financing needs are defined as current account payments plus short-term external debt at the end of the prior year plus nonresident deposits at the end of the prior year plus long-term external debt maturing within the year. Narrow net external debt is defined as the stock of foreign and local currency public- and private- sector borrowings from nonresidents minus official reserves minus public-sector liquid assets held by nonresidents minus financial-sector loans to, deposits with, or investments in nonresident entities. A negative number indicates net external lending. N/A--Not applicable. LC--Local currency. CARs--Current account receipts. FDI--Foreign direct investment. CAPs--Current account payments. e--Estimate. f--Forecast. The data and ratios above result from S&P Global Ratings' own calculations, drawing on national as well as international sources, reflecting S&P Global Ratings' independent view on the timeliness, coverage, accuracy, credibility, and usability of available information.

Ratings Score Snapshot

Table 2


Bahrain Ratings Score Snapshot
Key rating factorsScoreExplanation
Institutional assessment5Future policy responses are difficult to predict because of highly centralized decision-making and an uncertain succession process, with power concentrated with the ruling family. Policy choices likely weaken the capability and willingness to maintain sustainable public finances. Frayed civil society with entrenched polarization between the Shia and Sunni communities, and internal communal divisions. Relatively weak transparency owing to availability and timeliness of data.
Economic assessment4Based on GDP per capita (US$) as per Selected Indicators in Table 1. Weighted-average real GDP per capita trend growth over a 10-year period is negative 0.6%, which is well below sovereigns in the same GDP category.
External assessment4Based on narrow net external debt and gross external financing needs/(current account receipts + useable reserves) as per Selected Indicators in Table 1. There is a risk of marked deterioration in the cost of or access to external financing, given the economy's sizable external financing needs and the low level of international reserves at the central bank.
Fiscal assessment: flexibility and performance6Based on the change in net general government debt (% of GDP) as per Selected Indicators in Table 1. The sovereign has a volatile revenue base, since more than 75% of general government revenue is based on hydrocarbon production.
Fiscal assessment: debt burden6Based on net general government debt (% of GDP) and general government interest expenditure (% of general government revenue) as per Selected Indicators in Table 1 Over 40% of gross government debt is denominated in foreign currency.
Monetary assessment4Bahrain’s exchange-rate regime is a conventional peg with the U.S. dollar. The Central Bank of Bahrain operates independently but is less secure than peers at better assessments. The consumer price index is as per Selected Indicators in Table 1.
Indicative ratingb+As per Table 1 of "Sovereign Rating Methodology.
Notches of supplemental adjustments and flexibility0Gross external financing needs are significantly weaker than the weakest level in Table 4 of the Sovereign Rating Methodology, as per Selected Indicators in Table 1. We expect other Gulf Cooperation Council sovereigns to provide extraordinary support to Bahrain in a time of need. This is positive for creditworthiness and not fully captured in the indicative rating level.
Final rating
Foreign currencyB+
Notches of uplift0Default risks do not apply differently to foreign- and local-currency debt.
Local currencyB+
S&P Global Ratings' analysis of sovereign creditworthiness rests on its assessment and scoring of five key rating factors: (i) institutional assessment; (ii) economic assessment; (iii) external assessment; (iv) the average of fiscal flexibility and performance, and debt burden; and (v) monetary assessment. Each of the factors is assessed on a continuum spanning from 1 (strongest) to 6 (weakest). S&P Global Ratings' "Sovereign Rating Methodology," published on Dec. 18, 2017, details how we derive and combine the scores and then derive the sovereign foreign currency rating. In accordance with S&P Global Ratings' sovereign ratings methodology, a change in score does not in all cases lead to a change in the rating, nor is a change in the rating necessarily predicated on changes in one or more of the scores. In determining the final rating the committee can make use of the flexibility afforded by §15 and §§126-128 of the rating methodology.
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