Bahrain Mirror: In their annual report on Bahrain, Moody's said that in the absence of significant revenue and expenditure reforms, and given the likely slow recovery in oil prices by 2019, Bahrain's fiscal deficits will stay wide and government debt will rise to 100 per cent of GDP by 2019.
Bahrain's Ba2 long-term issuer rating is supported by high levels of wealth, a comparatively diversified economy, and a strongly positive net international investment position, all of which provide a degree of shock-absorption capacity. Bahrain's credit profile also benefits from potential financial support from fellow Gulf Cooperation Council (GCC) governments, although there remains a lack of clarity about the form and timeliness of such support, reported the CPI Financial in an article.
Rating constraints include the sharp deterioration in government finances since 2009, which was further intensified by the oil price shock. Bahrain's fiscal accounts are highly sensitive to oil price swings given the very high share of oil-related government revenues and very high fiscal break-even oil price. The government's ability to continue managing its debt and deficit levels will determine the sovereign rating in coming years.
In the absence of significant revenue and expenditure reforms, and given the likely slow recovery in oil prices by 2019, Bahrain's fiscal deficits will stay wide and government debt will rise to 100 per cent of GDP by 2019.
The negative outlook on Bahrain's sovereign rating reflects increased downside risks to the rating, posed by heightened government and external liquidity risks. It also reflects uncertainty over how the government will respond to lower oil revenues. The negative outlook could return to stable upon evidence that a clear and credible fiscal and economic policy response was likely to stabilize government debt at levels below 90 per cent of GDP, and would be accompanied by a strengthening of fiscal and external buffers.
Key takeaways:
Bahrain's government has low fiscal flexibility owing to its very high breakeven oil price. As a result, general government debt rose to an estimated 59 per cent of GDP at the end of 2015.
In 2014, Bahrain's oil-related revenues represented 86 per cent of total government revenues. However, Moody's expects this share to drop significantly to less than 70 per cent of total revenues from 2016 onwards as oil prices decline.
Following an already very wide fiscal deficit at 13 per cent of GDP in 2015, Moody's expects it will widen to 16 per cent in 2016 and narrow only gradually over the following years.
The resulting sharp increase in government debt, coupled with the negative impact from the oil price shock on government revenues and nominal GDP will lower Bahrain's debt affordability metrics. The prospects for stabilising the debt ratio over the next five years look very challenging.
However, despite the challenges posed by low oil prices, we expect that Bahrain will be able to finance itself in the domestic and international market. In the past years, the government's funding costs, despite rising, remained at manageable levels because only a small portion of government debt was in the form of traded bonds. At four per cent of total government debt in 2014, external debt was very low in a global comparison, though we expect it to rise to around 40 per cent by 2017 as the government issues more international bonds.
Furthermore, increased sovereign issuance activity in the region raises competitive pressure. During the first quarter of 2016 the sovereign offerings in the region totaled $15.4 billion, while the corresponding figure in the previous year was $7.3 billion. This will likely lead to higher funding costs for the Bahraini government and poses significantly increased government liquidity risks."