Hong Kong: Fitch Ratings has downgraded Bahrain’s long-term foreign currency issuer default rating (IDR) to BB+ from BBB-and long-term local currency IDR to BB+ from BBB. The outlooks are stable.
The issue ratings on Bahrain’s senior unsecured Foreign and local currency bonds have also been downgraded to BB+ from BBB- and BBB, respectively. The country ceiling has been affirmed at BBB+ and the short-term foreign currency IDR has been downgraded to B from F3.
Fitch replaces it’s earlier the version published on 28 June 2016 to include an additional relevant criteria report (Sovereign Rating Criteria) dated 12 August 2014. The inclusion of the additional criteria reflects the committee decision to use the criteria dated 12 August 2014 to rate the Long-Term Local Currency (LTLC) IDR of Bahrain in this review, ahead of the planned roll-out of the new criteria for all LTLC IDRs as part of a portfolio review completed in July 2016. Given the need to consider relativities across the portfolio, we were not able to apply the updated criteria in isolation in this individual country review.
Downgrade, according to Fitch, is largely due lower oil prices which are causing a marked deterioration in Bahrain’s fiscal position.
There is progress in fiscal consolidation, but not a clear path towards reaching a more sustainable position. Fitch expects general government debt to rise to nearly 80% of GDP in 2016 from around 62% of GDP in 2015, well above the ‘BBB’ and ‘BB’ medians of around 40%. Debt service is an increasing burden on the state budget and Fitch expects it to rise to around 41% of revenue in 2016 and 55% in 2017, from 30% in 2015. Interest payments will be around 20% of budget revenue in 2016-2018. Debt issuance costs have risen.
Fitch expects the general government budget deficit to widen to 15.4% of GDP in 2016, from 14.8% of GDP in 2015, under a baseline Brent oil price assumption of USD35/bbl for 2016 (rising to USD55/bbl in 2018). Fitch estimates that Bahrain’s fiscal break-even Brent oil price is around USD130/bbl. The deficit is more than three times the BBB and BB medians. Oil and gas receipts (historically around 85% of budget revenues) fell approximately 40% in 2015 and Fitch expects them to fall a further 20% in 2016. Fitch’s forecast for 2016 assumes steady progress towards implementation of the government’s revenue and cost-cutting initiatives, with non-oil revenue rising and expenditure falling.
The policy response has been insufficient to significantly ease the unfavourable fiscal and oil price dynamics. According to Ministry of Finance calculations, revenue measures with a full-year fiscal impact of around 1% of GDP have already been implemented in 2015 and early 2016 and measures worth a further 1% of GDP are planned. Subsidy reduction measures could eventually generate savings of more than 5% of GDP per year. Implementation of a 5% rate of VAT in 2018, if agreed, could yield up to 1.6% of GDP in revenue, according to IMF calculations. Even assuming full implementation of these measures and a Brent oil price of USD55/bbl, the general government deficit would still be 7.3% of GDP in 2018. More measures to reduce current expenditure are in the pipeline but have not yet been quantified.