Bahrain’s credit rating ‘stable’ at B+/B amid economic challenges: S&P

S&P Global Ratings has affirmed Bahrain’s ‘B+/B’ long- and short-term foreign and local currency sovereign credit ratings, maintaining a stable outlook on May 26.

This assessment reflects confidence in Bahrain’s ongoing fiscal consolidation efforts, despite recent economic challenges, noted the ratings agency.

S&P added that the stable outlook for Bahrain indicates expectations that the government will persist in its measures to reduce the budget deficit. Additional support from other Gulf Cooperation Council (GCC) sovereigns, if necessary, is also anticipated.

It added in its report that the ratings could be downgraded if Bahrain’s net debt and debt-servicing burdens increase significantly beyond current assumptions, leading to funding challenges.

A sharp decline in foreign currency reserves could also negatively impact the ratings by limiting the government’s ability to service external debt and affecting monetary policy effectiveness.

Conversely, the ratings could be raised if Bahrain’s budgetary position improves significantly, resulting in a steady reduction in net debt to GDP. Widening current account surpluses could also bolster Bahrain’s external position, supporting a potential upgrade.

Currently, Bahrain faces external debt redemptions of approximately $2bn to $2.5bn which comprises of 5 per cent of its annual GDP. In February 2024, Bahrain raised $2bn through the issuance of a seven-year bond and a 12-year conventional bond, both met with strong investor demand.

Economic and fiscal overview

• Fiscal consolidation: Despite a sharp widening of the deficit in 2023 due to a higher interest rate environment, a one-off social support program, and an adjustment in pensioners’ allowances, Bahrain is expected to consolidate its fiscal position through 2027. Fiscal deficits are projected to average 4.4 per cent of GDP over 2024-2027, up from 3.8 per cent in the previous review.
• Oil production and revenue: A decline in oil production, due to ongoing maintenance at the Abu Safa oil field, affects revenue assumptions. However, the government is expected to continue fiscal and structural reforms to enhance its non-oil revenue base, allowing for gradual fiscal consolidation.
• GCC support: Bahrain is expected to receive the remaining $2.8bn of the $10.2bn GCC support package pledged by Saudi Arabia, the UAE, and Kuwait in 2018. There is also potential for additional financial support beyond the programme’s expiration at the end of 2024. These interest-free loans have historically covered about 50 per cent of Bahrain’s gross external financing needs.

Bahrain’s economic outlook

The Bahraini government is implementing a multiyear economic recovery plan with over $30bn in strategic investments aimed at boosting economic growth outside the oil sector. Measures have been implemented to increase non-oil revenues and contain expenditures.

Continued political, economic, and financial support from the GCC is expected, increasingly in the form of investments rather than direct government support.

Bahrain‘s economy benefits from its proximity to Saudi Arabia, strong regulatory oversight of the financial sector, a relatively well-educated workforce, and a lower-cost environment compared to other GCC countries.

However, GDP per capita growth remains largely flat when adjusted for population levels, indicating that labor supply rather than productivity is the main driver of growth.

S&P’s affirmation of Bahrain’s credit ratings and stable outlook highlights the country’s ongoing fiscal reforms and support from GCC allies.

While economic challenges persist, particularly in the oil sector, strategic investments and fiscal measures are expected to underpin Bahrain’s economic stability and growth prospects through 2027.

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