Bahrain Mirror: Fitch Rating said in a statement reported by Reuters that the financial support for Bahrain, being prepared by the GCC, will ease near-term external financing pressures, but a more durable improvement in Bahrain's financial position will depend both on the scale and nature of GCC support and on Bahrain's ability to implement fiscal reform.

"We expected further material support from the GCC, given Bahrain's small size and strategic importance," Fitch stated.

As for the expected nature of support, Fitch said "We think support is likely to include dollar deposits at the Central Bank of Bahrain (CBB) to improve Bahrain's weak foreign exchange position ahead of a USD750 million sukuk maturing in November."

An influx of USD3 billion-USD3.5 billion would put reserves back to around two months of CXP (their average in 2000-2015), although coverage would likely worsen again without fundamental fiscal improvements, in Fitch's view.

Additional options for support could include Saudi Arabia allowing Bahrain a larger share of production from the offshore Abu Safa'a oil field. Bahrain currently receives half of the output (150,000 b/d), but has received more in the past, including 100% of output in some years. An extra 75,000 b/d (taking its allocation to 75%) in 2018-19 would imply extra revenue of at least USD1.5 billion in 2018 and 2019, potentially cutting the budget deficit and bringing public debt/GDP below 75%.

Another conduit could be a top-up of the GCC Development Fund, inaugurated in 2011. Bahrain's USD7.5 billion allocation has enabled it to reduce capital spending in the budget and has supported robust GDP growth.

The full impact will depend on the exact nature of GCC support, but without a stronger fiscal reform program, Bahrain's public finances would likely come under renewed pressure at some point. While GCC support does not typically come with explicit conditionality, we believe that Bahrain's partners will push for fiscal reform measures to contain the need for further support. This could involve introducing VAT in a certain timeframe, for example.

Fitch expected that government debt/GDP will edge down in 2018 to 80%, given higher oil prices, but then rise to 89% in 2020 and continue rising thereafter, as oil prices drop back. Debt maturities also pick up from 2020, averaging around USD1.5 billion annually in 2020-2023.

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