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Jeddah - Yasmine El Tohamy - RIYADH: Bahrain’s commitment to fiscal consolidation has witnessed S&P Global Ratings reaffirm its “B+/B” credit standing with a stable outlook despite challenges in 2023. 

However, the agency added that the transfer and convertibility assessment on the Gulf state remains “BB-.” It also anticipated structural reforms aimed at strengthening the non-oil revenue base, albeit at a slower pace. 

In its report, S&P said that the stable outlook reflects the expectation that Bahrain will persist in implementing measures to reduce its budget deficit, possibly benefiting from additional support from other Gulf Cooperation Council sovereigns if necessary. 

Conversely, the ratings could improve if Bahrain’s fiscal situation exceeds expectations, leading to a reduction in net debt relative to gross domestic product, or if current account surpluses widen, bolstering the country’s external position, according to the study. 

However, potential downside risks include a significant increase in government debt or a sharp decline in foreign currency reserves, which could hinder debt servicing and monetary policy effectiveness. 

“We could lower the ratings if the government’s net debt and debt-servicing burden increased significantly beyond our assumptions, presenting funding challenges. We could also take a negative rating action if foreign currency reserves declined sharply, limiting the government’s ability to service its external debt and weighing on monetary policy effectiveness,” the report said. 

On the other hand, the rating agency outlined an optimistic scenario for Bahrain, stating that it might upgrade the country’s standing if the government surpasses expectations by substantially reducing net debt relative to GDP through improved budgetary performance. 

Additionally, the ratings could increase if the current account surpluses are expanded significantly and consistently enhance the island state’s external position. 

The agency noted that its assessment is based on the anticipation that the Bahraini government will fortify its financial stance up to 2027, notwithstanding the considerable deficit expansion in 2023. 

It added that the shortfall experienced last year was primarily influenced by elevated interest rates, a one-off lump sum social support program, and an upward adjustment in pensioners’ inflationary allowance that will continue into 2024. 

Considering this initial setback, S&P foresees broader fiscal deficits averaging 4.4 percent of GDP from 2024 to 2027, compared to 3.8 percent in its prior evaluation. 

“A decline in oil production due to ongoing maintenance at the Abu Safa oil field also affects our revenue assumptions. However, we believe the government will continue pursuing fiscal and structural reforms to strengthen its non-oil revenue base, allowing for continued, albeit slower, fiscal consolidation over our forecast horizon to 2027,” the agency said in its report. 

Moreover, S&P assumed that Bahrain would receive the remaining $2.8 billion of the $10.2 billion GCC support package pledged by Saudi Arabia, the UAE, and Kuwait in 2018, and there remains potential for additional financial support beyond the program’s expiration at year-end 2024 if needed. 

“These interest-free loans have historically covered about 50 percent of the government’s gross external financing needs, although we note disbursements are not tied to, and do not necessarily align with, Bahrain’s external debt repayments,” the agency said. 

It further highlighted that Bahrain encounters annual external debt redemptions ranging from $2.0 billion to $2.5 billion, equivalent to 5 percent of GDP, stemming from a mix of Eurobond and sukuk issuances. 

In February, S&P explained that Bahrain successfully raised $2 billion by issuing a seven-year, $1 billion sukuk at 6.0 percent and a 12-year, $1 billion conventional bond at 7.5 percent. 

“We understand the issuance was met by strong investor demand, supporting more favorable pricing dynamics. In our base-case, we assume Bahrain will maintain strong access to international capital market funding,” it added. 

It explained that the country’s relatively diverse economy, proximity to Saudi Arabia’s market, robust financial sector oversight, and educated workforce provide a foundation for resilience. However, stagnant GDP per capita levels, adjusted for population growth, suggest underlying challenges in achieving broad-based economic prosperity. 

“However, when GDP performance from 2017-2027 is adjusted for population levels, GDP per capita levels are largely flat, suggesting that labor supply, rather than productivity, remains the key growth spur. We view Bahrain as having a relatively wealthy economy and estimate GDP per capita at $27,58 in 2024,” it said.