Moody’s has revised Bahrain’s outlook to Negative from Stable and affirmed the medium-term ratings at B2 (equivalent to B on the generic scale). The outlook change is driven by a larger than expected deterioration in the government’s fiscal and debt metrics, and the ongoing uncertainty about the size and timing of further support to Bahrain from its fellow Gulf Cooperation Council (GCC) peers.
Moody’s states that the sharp decline in oil prices and the economic downturn caused by the COVID-19 virus pandemic, along with high off-budget spending, have led to a sharper-than-expected widening of the fiscal-deficit-to-GDP ratio from 9% in 2019 to an estimated 18% in 2020 (including net off-budget expenditure). This, along with contracting GDP, has pushed the debt-to-GDP ratio up from 102% in 2019 to 130% in 2020 (including central bank borrowing).
Moody’s expects Bahrain’s fiscal accounts to benefit from the recovery in 2021, but the shortfall to remain elevated and the debt-to-GDP ratio to rise towards 140% by 2023.
The virus pandemic derailed the Fiscal Balance Programme from its projected course to balance the budget by 2022. The rating agency considers it challenging for Bahrain to ensure a deficit reduction sufficient enough to place the debt-to-GDP ratio on a downward path as it would take around three years for the non-oil sector to fully reverse the adverse trend of the recent past. Bahrain is exposed to the hard-hit trade and transport sectors.
Although Moody’s expects GCC support to continue, the timing and magnitude of such financial aid is unclear to date. The large deterioration in the country’s fiscal position and ensuing financing needs have not yet yielded any support announcement. This raises Bahrain’s susceptibility to swings in investor sentiment as the country becomes more reliant on global credit markets for funding. Exposure to volatile investor sentiment is particularly relevant as Bahrain’s foreign-exchange buffers are thin, at no more than two months of imports in February 2021.
Outlook
Monolith has a slightly higher rating than Moody’s for Bahrain on our internal scale (equivalent to B+ on the generic scale) but shares the same outlook (Negative), and we are aligned with the consensus rating of B+. S&P Global Ratings and Fitch both have a B+ rating on Bahrain with a Stable outlook.
Although our Negative outlook on Bahrain reflects thin foreign reserve buffers, rising fiscal vulnerabilities, and elevated indebtedness ratios, which further complicate fiscal adjustment in the post-pandemic phase, we believe that the country will receive timely and sufficient support from Saudi Arabia, the United Arab Emirates, and Kuwait for various historical, economic, and political reasons. We have higher oil price assumptions for 2021–22 than Moody’s. We do not consider the risk outlook for Bahrain to warrant a further rating downgrade for the time being, but continue to closely track developments, especially fiscal and foreign-reserves-related data.