Hong Kong: The Kingdom of Bahrain’s strong banking sector is well-placed and capable of extending more credit to the economy and the government, enjoying profitability, high levels of capitalisation and liquidity, and low non-performing loan levels.
Fitch Ratings in its latest report, says the wholesale banks’ foreign assets support Bahrain’s net external creditor position (46% of GDP), well above that of the median ‘BB’ country. Higher policy rates and yields on government bonds have not translated into higher private sector borrowing costs, with many domestic entities being able to borrow below the sovereign curve.
Governance indicators as measured by the World Bank are stronger than the BB medians, despite Political Stability and Voice and Accountability scores that are worse than for 85% of all countries rated by Fitch. Tensions continue between the government and the predominantly Shia opposition and sporadic low-level violence continues. Social pressures and the lack of a sustainable political solution hamper implementation of the fiscal reforms necessary to tackle the worsening debt trajectory.
Fitch expects real non-oil growth to remain steady at 4% in 2016-2018 as increased activity associated with state owned enterprise investments and GCC Development Fund projects offsets the dampening effect on demand of tighter fiscal policy. Non-oil growth is also supported by macroeconomic stability, a strong local skills base, a cost advantage and a relatively well-developed environment for doing business, particularly in the financial sector. In conjunction with expected oil sector growth of around 0.5%, this will result in overall real GDP growth of around 3.3% in 2016-2018. Real GDP expanded by 2.9% in 2015, with hydrocarbons sector contracting by 0.9% and output in the non-oil sector rising by 3.9%.
Fitch assumes that Brent crude will average USD35/bbl in 2016, USD45/bbl in 2017 and USD55/bbl in 2018.
Fitch assumes that Bahrain will continue to derive fiscal savings and growth support from the implementation of GCC development projects financed by Kuwait, Saudi Arabia, and the UAE. Lower oil prices are not assumed to impact the flow of funds from these countries.
Fitch assumes no change to the rule of the royal family and the current order of succession.
Fitch assumes that regional conflicts will not directly impact Bahrain or its ability to trade.
Fitch assumes no change to the peg of the Bahraini dinar to the US dollar.