MANAMA: As a result of sharp decline in oil prices, Bahrain’s Government’s deficit widening to 8% of GDP in 2015, compared with our previous estimate of 4%, and compared with a surplus that averaged 1% of GDP over 2007-2013, according to Standard and Poor’s (S&P).
“The government’s ability to implement more deep-rooted expenditure cuts or introduce taxes in an effort to balance fiscal results on a recurring basis in a delicate political environment remains its main challenge, in our opinion,” S&P in a statement said.
The outlooks on both Bahrain and its central bank remain negative.
Following the sharp fall in international oil prices in recent months, we have significantly lowered our oil price assumptions for 2015-2018.
S&P said that given expenditure constraints, S&P now expect that Bahrain’s fiscal deficit will deteriorate markedly, averaging 5.5% of GDP over 2015-2017, versus 3.8% of GDP in December 2014 review. The the rating agency lowered its sovereign credit ratings on Bahrain to BBB-/A-3.
“The negative outlook reflects our view of Bahrain’s weakening fiscal profile and its uncertain policy response.”
On Feb. 9, 2015, Standard & Poor’s Ratings Services lowered its long- and short-term foreign and local currency sovereign credit ratings on the Kingdom of Bahrain to ‘BBB-/A-3’ from ‘BBB/A-2’.
At the same time, we lowered our long- and short-term foreign and local currency credit ratings on the Central Bank of Bahrain to ‘BBB-/A-3’ from ‘BBB/A-2’.
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 (see “Calendar Of 2015 EMEA Sovereign, Regional, And Local Government Rating Publication Dates,” published Dec. 30, 2014, on RatingsDirect). 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 the recent sharp drop in international oil prices.
Prices for crude oil in spot and futures markets have dropped more than 50% since June 2014, leading Standard & Poor’s to revise down its oil price assumptions significantly over 2015-2018. When we reviewed Bahrain in December 2014, we expected Brent oil prices to average $80 per barrel (/bbl) in 2015 and $83/bbl in 2015-2018. We now assume an average Brent oil price of $55/bbl in 2015 and $70/bbl in 2015-2018. Consequently, we have also revised our forecasts for Bahrain’s economic growth, fiscal position, and current account.
Over 2014, Bahrain derived approximately 65% of its fiscal revenues from crude oil receipts, which are part of the 84% of total revenues derived from the oil and gas industry. Bahrain’s fiscal break-even oil price, estimated at nearly $125/bbl of oil in 2014, was the highest of all Gulf Cooperation Council (GCC; Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and United Arab Emirates) members.
This compares with an average of $52/bbl between 2000 and 2010. We view this as an erosion of the longer-term sustainability of Bahrain’s fiscal position.
Recurrent expenditures increased to 90% of total expenditures in 2014 from 81% in 2009, and wages and salaries account for 42% of total expenditures, with subsidies representing another 30%. These increasingly burdensome social expenditures underpin Bahrain’s pronounced vulnerability to oil prices. The government’s debt burden has doubled since 2009 and stood at some 43% of GDP at the end of 2014. We estimate that the government will be in a net debt position of almost 20% of GDP by the end of 2015, from 10% of GDP in 2014 and a net asset position of 12% of GDP in 2010.
“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 government in place since the parliamentary elections on Nov. 29, 2014. We expect that the 2015-16 budget currently under parliamentary review will contain a number of expenditure measures, in particular a severe reduction in capital spending to about 2% of GDP, from a figure closer to 6% of GDP over the past few years. However, we believe that political sensitivities will result in smaller reductions in recurrent expenditures.
The fall in oil prices has also affected our analysis of Bahrain’s external accounts. We now expect the current account will fall into a slight deficit in 2015, given that approximately 80% of exports are linked to oil. Bahrain’s services balance is related to the profitability of the financial sector and could therefore deteriorate slightly under the impact from weaker oil prices.
“We expect that corresponding outflows from the financial account will decline as a result, albeit with a potential time-lag, as prices feed through the financial system. We continue to believe that Bahrain’s external stock position could be significantly overstated as a result of a historical statistical discrepancy relating to the size of the financial system, much of which has limited bearing on the domestic economy. While the exact external asset exposures of the wholesale banks (80% of the total system) are uncertain, the majority is to head offices, other banks, and securities. We treat these assets as liquid, in line with an international financial sector.
They also account for the very high stock of short-term external debt of 5x current account receipts.
“We continue to assume that regional financial support will be forthcoming when needed in both our fiscal and external assessment of Bahrain’s creditworthiness. However, beyond 2015, the terms and timing of such support remain less certain, in our opinion. Furthermore, we believe that increasing this dependency could reinforce policy complacency, with the potential to undermine Bahrain’s credit quality.