Bahrain gets S&P ratings boost on fiscal reforms, high oil prices
MANAMA, November 26, 2022
S&P Global Ratings today (November 26) revised its outlook on Bahrain to positive from stable, while affirming its 'B+/B' long- and short-term foreign and local currency sovereign credit ratings. The transfer and convertibility assessment on Bahrain remains 'BB-'.
The upgrade is on expectation that the government will continue implementing fiscal reforms to reduce the budget deficit that will place debt to GDP on a more sustainable path, stated the top rating agency.
In its review, S&P said Bahrain's economy is benefiting from the surge in regional activity tied to elevated oil prices.
In second-quarter 2022, real GDP expanded 6.9% year on year, the highest pace of quarterly growth since 2011, thus reflecting the sustained recovery of regional tourism, transportation, and hospitality amid higher oil prices.
Partially offsetting this was a 2.2% real contraction in the hydrocarbon sector year on year, owing to continued maintenance at the onshore Bahrain field.
Notwithstanding Bahrain's dependence on oil for its fiscal and external revenue, the contribution of hydrocarbons to GDP is much smaller at about 17%. This reflects a structural mismatch, which the government's FBP is attempting to correct by raising taxes from non-oil revenue, it stated.
"We expect the Bahraini economy will expand 4.8% in 2022 before decelerating to about 2.5% over 2023-2025 on the back of gradually declining commodity prices, slowing global growth, and tightening global financing conditions," it added.
In our view, the government's willingness and ability to pursue budgetary reforms under the FBP has strengthened fiscal policymaking in recent years, stated the report.
In first-half 2022, Bahrain posted a record current account surplus of about 17% of GDP, supported by high oil and aluminum prices. S&P has forecast an external surplus of about 7.1% of GDP over 2022-2024, in line with the upward revision to its oil and aluminum price assumptions, before reverting to historical deficits of 5.4% of GDP in 2025 as commodity prices moderate.
"We assume an average brent oil price of $100 per barrel (/bbl) for 2022, $90/bbl for 2023, $80/bbl for 2024, and $55/bbl from 2025," stated the ratings agency, citing its data.
S&P Global Ratings pointed out that the positive outlook indicated that it expects the government to continue implementing fiscal reforms to reduce the budget deficit and benefit from additional support from other GCC sovereigns, if needed.
"We could raise the ratings over the next 12 months if the government's budgetary position improves beyond our expectations, contributing to a sustained reduction in net debt to GDP alongside strong and sustained current account surpluses that would support Bahrain's external position," it stated.
Further support for an upgrade could come from an acceleration in productivity-led per capita economic growth, it added.
On its future outlook, S&P said: "We could revise the outlook to stable if the government's net debt and debt-servicing burden increase beyond our current assumptions despite fiscal consolidation measures. We could also revise the outlook to stable if foreign currency reserves decline sharply, limiting the government's ability to service its external debt and weighing on monetary policy effectiveness."
The positive outlook on Bahrain reflects the government's ongoing implementation of the updated Fiscal Balance Program (FBP) via expenditure cuts and revenue-enhancing initiatives, including the doubling of the value-added tax (VAT) rate to 10% from 5% on January 1, 2022.
Preliminary fiscal data point to a minor balanced-budget position underpinned by an 120% increase in nominal tax revenue year on year, surpassing projected annual inflation of about 4%, it stated.
At the same time, Institutional and economic profile: Bahrain's economy and budget remain sensitive to oil price volatility, it added.
According S&P Global, Bahraini government remains committed to its multi-year economic recovery plan targeting more than $30 billion of strategic investments to boost non-oil growth.
"We expect the GCC will continue to extend political, economic, and financial support to Bahrain, if needed. We note improvements in policymaking since the adoption of the FBP in late 2018," it stated.
Bahrain's relatively diverse economy benefits from proximity to the large Saudi Arabian market, strong regulatory oversight of the financial sector, a relatively well-educated work force, and low-cost environment. However, when GDP performance from 2014-2025 is adjusted for population levels, real growth is flat, suggesting that labor supply, rather than capital investment or innovation, is a key growth spur.
The top ratings agency estimates GDP per capita at about $27,300 in 2022. "Bahrain is a small non-Opec oil producer whose obligations under the Opec+ agreement do not restrict its production. Approximately 75% of Bahrain's total oil production of about 200,000 barrels per day comes from the Abu Safa oil field shared with Saudi Arabia, with the remainder sourced from the onshore Bahrain field," it stated.
Bahrain does not currently export gas, but its recent discovery of two new gas fields, Al Joubah and Al Jawf, could add further upside to S&P Global's growth projections.
In addition to hydrocarbons, exports of energy-intensive metals, particularly raw aluminum and aluminum wire, remain an important source of foreign currency earnings, it added.-TradeArabia News Service
