Standard & Poor’s Ratings Services affirmed its long- and short-term foreign and local currency sovereign credit ratings on the Kingdom of Bahrain at BBB-/A-3.
“We also affirmed our long- and short-term foreign and local currency credit ratings on the Central Bank of Bahrain at ‘BBB-/A-3’. The outlooks on both Bahrain and its central bank remain negative,” S&P in a statement said.
“We expect that Bahrain’s fiscal metrics will be adversely affected over 2015-2018 by a pronounced reduction in revenues relating to the fall in oil prices. At our last review, we lowered our ratings on Bahrain by one notch to ‘BBB-/A-3’ from ‘BBB/A-2′ to reflect this deterioration, along with uncertainties over the authorities’ response to these challenges. Since then, there have been some policy developments that, in our opinion, should help to alleviate these fiscal pressures, mainly in the form of prospective consolidation measures that the government will phase in over the remainder of 2015 and into 2016. However, we understand that these measures will not be included in the formal budget, which in draft form envisages a fiscal deficit of approximately 12.8% of GDP (versus 3.6% of GDP in 2014). Instead, these consolidation efforts will be extra-Parliamentary and therefore in addition to the budget.
“However, we see uncertainties over the scope and implementation time-line of consolidation measures. Carrying out measures that both reduce and re-direct social expenditures that were initially designed to placate Bahrain’s polarized society is politically sensitive and could face delays.
“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 $123 per barrel (/bbl) of oil in 2014, was the highest of all members of the Gulf Cooperation Council (GCC; Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and United Arab Emirates). This compares with an average of $52/bbl between 2000 and 2010. We view this as an erosion of the longer-term sustainability of the government’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%. Recurrent expenditures total 87% of total expenditures in the draft 2015 budget, indicating that there is little formal consolidation planned. These increasingly burdensome social expenditures underpin Bahrain’s marked vulnerability to oil prices,” it added.
“However, we understand that debate among the key stakeholders in Bahrain, including the Ministry of Finance, the central bank, and the Shura Council is increasingly focused on countering this continued fiscal deterioration and counting debt burden. Tabled consolidation measures have an estimated value of just under Bahrain dinar (BHD) 400 million per year, or just more than 3% of GDP. Key among these measures is plans to reduce subsidies to expatriates and corporates over periods of three and four years, respectively, and to reallocate transfers to poorer sections of society. We think these proposals indicate that there will be a policy response to clear fiscal challenges. At the same time, however, we expect that this response will generate objections, particularly since the topic of subsidies is sensitive given the delicate political environment,” it added.