Fitch Ratings this week downgraded Bahrain’s long-term foreign currency issuer default rating (IDR) to ‘BB+’ from ‘BBB-‘ and long-term local currency IDR to ‘BB+’ from ‘BBB’, becoming the latest agency to move its ratings on the Gulf nation into junk territory as oil prices remain weak.
Fitch said in a statement that lower oil prices are causing a ‘marked deterioration’ in Bahrain’s fiscal position.
’There is progress in fiscal consolidation, but not a clear path towards reaching a more sustainable position’, the ratings agency said.
Fitch said it expects general government debt to rise to nearly 80% of GDP in 2016 from around 62% of GDP in 2015, well above the ‘BBB’ and ‘BB’ medians of around 40%.
It added that debt service is an increasing burden on the state budget and Fitch expects it to rise to around 41% of revenue in 2016 and 55% in 2017, from 30% in 2015. Interest payments will be around 20% of budget revenue in 2016-2018 while debt issuance costs have risen.
Fitch also said it expects the general government budget deficit to widen to 15.4% of GDP in 2016, from 14.8% of GDP in 2015, under a baseline Brent oil price assumption of $35 per barrel for 2016.
Fitch estimates that Bahrain’s fiscal break-even Brent oil price is around $130 per barrel.
Oil and gas receipts (historically around 85% of budget revenues) fell approximately 40% in 2015 and Fitch expects them to fall a further 20% in 2016.
Fitch said its forecast for 2016 assumes steady progress towards implementation of the government’s revenue and cost-cutting initiatives, with non-oil revenue rising and expenditure falling.
‘The policy response has been insufficient to significantly ease the unfavourable fiscal and oil price dynamics’, Fitch added in its statement.
According to Ministry of Finance calculations, revenue measures with a full-year fiscal impact of around 1% of GDP have already been implemented in 2015 and early 2016 and measures worth a further 1% of GDP are planned.
Subsidy reduction measures could eventually generate savings of more than 5% of GDP per year while the implementation of a 5% rate of VAT in 2018, if agreed, could yield up to 1.6% of GDP in revenue, according to IMF calculations.
More measures to reduce current expenditure are in the pipeline but have not yet been quantified, Fitch said.
The agency said it expects real non-oil growth to remain steady at 4% in 2016-2018 as increased activity associated with state owned enterprise investments and GCC Development Fund projects offsets the dampening effect on demand of tighter fiscal policy.
Non-oil growth is also supported by macroeconomic stability, a strong local skills base, a cost advantage and a relatively well-developed environment for doing business, particularly in the financial sector, it added.
In conjunction with expected oil sector growth of around 0.5%, this will result in overall real GDP growth of around 3.3% in 2016-2018.
