Ratings agency moves Bahrain outlook to negative

• Lower oil prices blamed
• Limited funding from Gulf allies
• Significant debt burden

A major ratings agency has downgraded its outlook on Bahrain to negative, warning that fiscal reforms may be insufficient to lower the kingdom’s debt-to-GDP ratio and that foreign currency reserves remain weak.

Lower oil prices and reduced crude production due to maintenance work at Bahrain’s Abu Safah oil field, which it shares with Saudi Arabia, potential higher borrowing costs and increased social spending will keep fiscal deficits elevated, S&P Global Ratings wrote in a report this week.

A fiscal deficit occurs when a government spends more than it receives in income, usually funding the shortfall through borrowing. Bahrain’s fiscal deficit will rise to 7 percent of GDP this year from 5.2 percent in 2024, S&P estimated.

Bahrain sovereign ratings

This widening shortfall is partly due to lower oil prices, which will average $65 per barrel, S&P forecast, down from $80 in 2024. Oil provides 60 percent of state revenue and 16-18 percent of GDP, S&P estimated.

Bahrain’s economy will average 2.3 percent annual growth from 2025 to 2027, which S&P described as “muted”.

A negative outlook means the agency may lower its Bahrain ratings in the next 6-12 months unless the government can ease its debt burden “which has been higher than anticipated in recent years”.

Bahrain oil breakeven prices

Other factors that may lead to S&P to reduce Bahrain’s B+/B long- and short-term foreign and local currency sovereign credit ratings include deterioration in the country’s foreign reserves and the failure of its Gulf allies to provide additional funding.

In 2018, Saudi Arabia, Kuwait and UAE pledged $10.2 billion to Bahrain, in addition to $7.5 billion the country received from a GCC body in 2011.

Conversely, S&P said it would raise its outlook if Bahrain enacts reforms that “materially increase the revenue base and narrow fiscal deficits” and if foreign currency reserves improve.

S&P forecast Bahrain’s fiscal deficit will narrow to 4.4 percent of GDP in 2028 as crude production increases following the completion of maintenance and non-oil revenue also rises. Oil production is currently only about 200,000 barrels per day.

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Bahrain has introduced a 15 percent tax on multinational companies and will implement similar corporate income tax on local companies. This follows the introduction of value added tax in 2019, initially at 5 percent and doubled to 10 percent in 2022.

Despite these measures, Bahrain’s finances will worsen from an already weak position. Its debt-to-GDP will rise to 144 percent in 2028 from 130 percent in 2024 and 112 percent in 2021.

Annual debt repayments now represent about 29 percent of state revenue, S&P estimated.

Bahrain lending, debt and account balance

Bahrain’s foreign currency reserves will fall to about $3 billion this year, while it has $3.6 billion in foreign currency debt maturing over the next 12 months.

“We anticipate Bahrain will seek to refinance these maturities to avoid a significant drop in foreign currency reserves,” S&P wrote. “The government’s foreign currency reserve account has historically been restored via external issuance and fiscal support from other GCC sovereigns.”