Standard & Poor’s Ratings Services on Friday in a statement affirmed its long- and short-term foreign and local currency sovereign credit ratings on the Kingdom of Bahrain at BBB/A-2. The outlook is stable.
The S&P also affirmed the BBB/A-2 ratings on the Central Bank of Bahrain.
“Our ratings on Bahrain are supported by the country’s relatively stable growth prospects; our view that it will likely receive Gulf Cooperation Council (GCC) development funds; and our expectation that oil prices in 2014-2017 will average out at about $103 per barrel, which will support public finances,” S&P in a statement said.
“The ratings are constrained by our view of Bahrain’s unresolved domestic political tensions, which hamper economic policy effectiveness, and its fiscal dependency on sustained high oil prices. The ratings are also limited by stagnating real GDP per capita growth–we forecast this ratio will increase on average by less than 1% per year between 2014 and 2017. This is low compared with peers at similar wealth levels.
“In 2013, real GDP growth improved because Bahrain resolved its oil production difficulties. In future, we expect that headline real GDP growth will slow slightly, but remain at around 4%. Underlying this growth, we expect public sector capital projects and private sector consumption to increase gradually, alongside broadly static investment growth. However, we anticipate that wealth levels will rise only slowly because of estimated population growth. We consider the government is likely to increase subsidies as a result.
“The island’s political tensions continue, in our view. Although we believe the government has established a post-crisis status quo, this still includes occasional street protests, entrenched polarization between the Shia and Sunni communities, internal communal divisions, and the relegation of economic policymaking. We understand that various government opposition groups could boycott the parliamentary elections scheduled for the fourth quarter of 2014. The ongoing discussions about whether or not opposition groups will participate indicates that political consensus remains elusive and the process of reconciliation is uncertain.
“In our view, broad economic growth and the socioeconomic targeting of the GCC development funds could assist in the gradual normalization of the political process. The development funds available during 2014-2017 will channel about $4 billion of grants, mainly into housing, infrastructure, and electricity and water projects.
“Bahrain’s fiscal vulnerability to oil prices remains extremely high. Oil and gas revenues accounted for approximately 88% of total fiscal revenues in 2013. Because the average oil price is expected to be $110 per barrel in 2014, general government revenues should help offset the budgeted 10% increase in expenditures. We expect key expenditure increases in wages and subsidies (6% and 27%, respectively) will cause the deficit to widen slightly to 3% of GDP in 2014 from 2.1% in 2013. While we anticipate that the government’s fiscal position will remain under control, should these expenditure pressures continue in future years, they will constrain flexibility in the government’s budget. However, GCC-sponsored projects should alleviate capital expenditure.
“We base our prospective deficit assumptions on oil prices gradually declining to $95 per barrel by 2017. Even if substantial liquid assets give the government short-term expenditure flexibility, we expect to see greater medium- and long-term fiscal consolidation, in addition to the measures taken thus far.
“Since 2008, government debt has risen significantly. By the end of 2013, central government debt was just over 40% of GDP–nearly 43% more than the 2010 level. At the general government level, Bahrain had a net asset position of 12% of GDP in 2010, which we expect will have moved to a net debtor position of 6% of GDP in 2014. The general government position is stronger than the central government position because of consistent surpluses at the social security level.
“Although debt has continued to increase in nominal terms, we expect its ratio as a proportion of GDP to remain stable over the forecast period. This stabilization is partly because of prefunding over 2013 and partly because of our expectation that the pace of debt increase will remain below headline economic growth. However, we anticipate that the government’s net indebtedness will increase as the proceeds of 2013’s issuance are used for 2014 debt service.
“We expect the current account to remain in surplus, although we forecast that it will decline in line with our oil price assumptions given the expected static services balance. The services balance is related to the profitability of the financial sector. However, Bahrain’s external stock position could be significantly overstated because it is clouded by statistical discrepancies and the size of the financial system, much of which has limited bearing on the domestic economy.