Standard & Poor’s Ratings Services revised its outlook on the Kingdom of Bahrain to negative from stable and affirmed its BBB/A-2 long- and short-term foreign and local currency sovereign credit ratings.
At the same time, it added, we revised our outlook on the Central Bank of Bahrain to negative from stable and affirmed our BBB/A-2 long- and short-term counterparty credit ratings on the bank.
“The negative outlook reflects our view of Bahrain’s weakening fiscal profile and its uncertain policy response. We could lower the ratings over the next year if our current fiscal deficit assumptions are materially exceeded, or if measures to combat falling government revenues do not aim for a structural improvement in Bahrain’s public finances that would in turn reduce its reliance on oil revenue ad contain expenditures. We could also lower the ratings if GCC development funds are not forthcoming as expected, causing our fiscal deficit assumptions to be materially exceeded or growth to be substantially lower than we currently expect,” S&P in a statement added.
“We could revise the outlook to stable if the government embarks on a credible path to fiscal sustainability,” it added.
“We think a period of lower oil prices will exacerbate existing structural weaknesses in Bahrain’s public finances. If the resulting squeeze on government revenues does not translate into reform that improves the sustainability of Bahrain’s fiscal position, this could put pressure on the ratings. However, our growth expectations for Bahrain remain stable, linked to forthcoming disbursements from the Gulf Cooperation Council (GCC) Development Fund and to Bahrain’s relatively diversified economic base that government policy has encouraged. These factors support the ratings,” S&P in a statement said.
“Through end-September 2014, Bahrain derived 65% of its fiscal revenues from crude oil receipts, which are part of the 84% of total revenues stemming from the oil and gas industry. At the time of our last review of Bahrain in June 2014, we assumed that oil prices would average $103 per barrel over 2014-2017.
“We have now revised this assumption down by more than $20 per barrel. Absent corrective measures, the lower oil price will result in an approximate 10% decline in 2015 government revenues (against those estimated in 2014).
“Importantly, the longer-term sustainability of Bahrain’s fiscal position has, in our opinion, continued to erode, with recurrent expenditures increasing to 90% of total expenditures this year, from 81% in 2009. Wages and salaries now account for 42% of total expenditures, with subsidies representing another 30%. As a result, Bahrain’s fiscal breakeven has increased to approximately
$120 per barrel, from an average of $52 per barrel between 2000 and 2010, further illustrating both its pronounced vulnerability to oil prices and increasingly burdensome social expenditures. The government’s debt burden has doubled since 2009 and stands at some 42% of GDP. We estimate that the government is now in a net debt position of almost 10% of GDP.
“We view the implementation of tangible and sustainable reform that reduces Bahrain’s fiscal dependency on volatile oil prices as a key challenge for the new government in place since the Nov. 29, 2014, parliamentary elections. Our fiscal projections show Bahrain’s deficit widening to 4% of GDP in 2015, compared with our estimated 2.7% in 2014, and after a surplus that averaged 1% of GDP over 2007-2013. Central to these estimates is our assumption that the government will vastly reduce its capital expenditures, by about 70% of the $2.2 billion budgeted in 2014. We believe this is feasible in the short term because the GCC Development Fund, with approximately $10 billion in funding committed over a 10-year period, has started to disburse funds that will likely offset these cuts. The fund has disbursed an estimated $150 million (0.4% of GDP) to date this year, and we expect it will disburse a further $750 million (2.1% of GDP) in 2015. Still, although we think the new government will adopt these measures, or similar ones, in the 2015 budget, its ability to implement more deep-rooted expenditure cuts under current lower oil prices or introduce taxes in an effort to balance fiscal results on a recurring basis in the delicate political environment remains untested.
“We also think that the successful disbursement of GCC funds will replace government expenditures as a key growth contributor, and real GDP growth will slow only moderately to average just above 3% over 2014-2017 as a result. These funds are intended to promote private sector activity (albeit with little local bank financing) and improve Bahrain’s infrastructure. Projects underway include housing, new roads, and schools.