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Bahrain ratings stable, says S&P Global Ratings

MANAMA, March 28, 2020

S&P Global Ratings has revised its outlook on Bahrain to stable from positive on expectation of extraordinary support from other GCC sovereigns, which it stated, was likely to enable the kingdom to continue implementing fiscal reforms.
 
Despite efforts to increase nonenergy receipts, Bahrain's revenue remains dependent on oil, and hence sensitive to energy price shocks, including this year, the top rating agency stated in its report.
 
Recent revisions to our 2020 price projections for oil imply more elevated current account deficits for Bahrain, raising external vulnerabilities, the report added.
 
However, the provision of zero interest loans from neighboring sovereigns and the expectation of further timely support, if needed, provide the government with an important financing buffer.
 
"We are revising our outlook on Bahrain to stable from positive and affirming our 'B+/B' longand short-term sovereign credit ratings," said the S&P Global Ratings in its report. 
 
On March 26, 2020, the top ratings agency had revised its outlook on Bahrain to stable from positive. At the same time, it affirmed out 'B+/B' long- and short-term foreign and local currency ratings.
 
As a "sovereign rating" (as defined in EU CRA Regulation 1060/2009 "EU CRA Regulation"), the ratings on Bahrain are subject to certain publication restrictions set out in Art 8a of the EU CRA Regulation, including publication in accordance with a pre-established calendar, it stated.
 
Under the EU CRA Regulation, deviations from the announced calendar are allowed only in limited circumstances and must be accompanied by a detailed explanation of the reasons for the deviation. 
 
In this case, the reason for the deviation is weaker-than-expected fiscal performance. The next scheduled rating publication on the sovereign rating on Bahrain will be on May 29, 2020.
 
According to S&P Global Ratings, the stable outlook reflects its expectations that Bahrain's neighbors will provide timely support, as needed, through the expected low oil price environment, allowing the government to continue implementing budget-deficit-reducing measures.
 
Although not likely over the next year, we could raise the ratings over the forecast period if Bahrain's budgetary position improves significantly beyond our current expectations. We would also consider raising the ratings if GDP per capita trend growth strengthens, it added.
 
According to the ratings agency, oil markets are now heading into a period of a severe supply-demand imbalance in second-quarter 2020. In line with our recent economic outlook (Economic Research: COVID-19 Macroeconomic Update: The Global Recession Is Here And Now), we anticipate a recovery in both GDP and oil demand through second-half of 2020 and into 2021 as the most severe effects from the
COVID-19 pandemic moderate.
 
The stable outlook primarily reflects our view that, despite ongoing reforms aimed at reducing the fiscal deficit, expenditure flexibility remains low and revenue is dependent on oil prices, leaving the government vulnerable to oil price shocks. 
 
In addition, the expected increase in the current account deficit could decrease foreign-exchange reserves, weakening Bahrain's external resilience. 
 
These factors are offset by our expectation of extraordinary support, if needed, and the
ongoing support provided by other GCC sovereigns, which should enable Bahrain to continue implementing fiscal reforms.
 
We forecast a fiscal deficit of 9.9% of GDP in 2020, compared with our previous expectation of a 5.1% deficit. We expect the deficit to average 6.3% over 2020-2023, still an improvement compared with the 12% average deficit over 2015-2017, said the S&P Global Ratings in its review.
 
Revenue remains dependent on oil, although the government has worked to increase nonoil revenue by introducing an excise tax in 2018 and a value-added tax (VAT) in 2019. 
 
VAT collections in 2019 were equivalent to 1.7% of GDP, on par with collections in the UAE and Saudi Arabia. Further government initiatives, such as revisions to government fees, should strengthen nonoil revenue in the next few years, it stated.
 
Despite the oil price shock, we do not believe the government will make large cuts to expenditure, highlighting its low level of flexibility, said the top ratings agency. 
 
In addition, although we expect the government will continue implementing reforms under its fiscal balance program, in our view, the low oil price environment could delay expenditure-reducing measures, especially those that are more politically sensitive, it added.-TradeArabia News Service
 



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