S&P Global Ratings has revised its outlook on Bahrain to stable from positive on expectation of extraordinary support from other GCC sovereigns, which it stated, was likely to enable the kingdom to continue implementing fiscal reforms.
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Despite efforts to increase non-energy receipts, Bahrain’s revenue remains dependent on oil, and hence sensitive to energy price shocks, including this year, the ratings agency stated in its report.
Recent revisions to our 2020 price projections for oil imply more elevated current account deficits for Bahrain, raising external vulnerabilities, the report added.
However, the provision of zero interest loans from neighbouring sovereigns and the expectation of further timely support, if needed, provide the government with an important financing buffer.
“We are revising our outlook on Bahrain to stable from positive and affirming our ‘B+/B’ long and short-term sovereign credit ratings,” said the S&P Global Ratings in its report.
According to S&P Global Ratings, the stable outlook reflects its expectations that Bahrain’s neighbours will provide timely support, as needed, through the expected low oil price environment, allowing the government to continue implementing budget-deficit-reducing measures.
Revenue remains dependent on oil, although the government has worked to increase non-oil revenue by introducing an excise tax in 2018 and a value-added tax (VAT) in 2019.
VAT collections in 2019 were equivalent to 1.7 per cent of GDP, on par with collections in the UAE and Saudi Arabia. Further government initiatives, such as revisions to government fees, should strengthen non-oil revenue in the next few years, it said.
Despite the oil price shock, the ratings agency does not believe the government will make large cuts to expenditure, highlighting its low level of flexibility.
In addition, it expects the government to continue implementing reforms under its fiscal balance programme.
S&P sees the low oil price environment delaying expenditure-reducing measures, especially those that are more politically sensitive.
In addition, the expected increase in the current account deficit could decrease foreign-exchange reserves, weakening Bahrain’s external resilience. The agency has forecast a fiscal deficit of 9.9pc of GDP in 2020, compared with its previous expectation of a 5.1pc deficit.
It expects the deficit to average 6.3pc over 2020-2023, still an improvement compared with the 12pc average deficit over 2015-2017, said S&P in its review.
Although not likely over the next year, the agency could raise the ratings over the forecast period if Bahrain’s budgetary position improves significantly beyond current expectations.
It would also consider raising the ratings if GDP per capita trend growth strengthens.
According to the ratings agency, oil markets are now heading into a period of a severe supply-demand imbalance in second-quarter 2020.
S&P anticipates a recovery in both GDP and oil demand through second-half of 2020 and into 2021 as the most severe effects from the Covid-19 pandemic moderate.
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