Moody's revises Bahrain's outlook to stable on high oil prices and fiscal reform

The Gulf country's economy is projected to grow 3.3 per cent this year and 3 per cent in 2023, according to the IMF

The Bahrain World Trade Centre in Manama. The recent spike in oil prices has improved the outlook for the kingdom's public finances, Moody's says. Alamy

Moody's Investors Service revised the outlook on Bahrain to stable from negative as the country's economy benefits from high oil prices and the government continues its fiscal reforms.

The rating agency also affirmed Bahrain’s B2 long-term issuer and senior unsecured ratings, it said.

The change in outlook “reflects an easing of downside risks to Bahrain's ratings”.

“The large increase in oil prices since early 2021 and Moody's expectation that oil prices will remain elevated for the next few years improve the outlook for the sovereign's fiscal and external balances, reducing the rate of government debt accumulation and lowering government liquidity and external vulnerability pressures.”

The government's “renewed commitment to its medium-term fiscal adjustment programme, which increases the likelihood that additional financial assistance from the neighbouring GCC sovereigns will be forthcoming”, also supported the change in outlook, the agency said.

Bahrain rolled out a major economic reform plan last year that seeks to invest nearly $30 billion in strategic projects to fuel post-coronavirus growth, boost employment for citizens and attract $2.5bn in foreign direct investment by 2023.

The government also adopted cost rationalisation measures, including increasing VAT to 10 per cent to help the kingdom balance its budget by 2024. The doubling of the VAT rate will probably add 1.5 per cent to 2 per cent of gross domestic product to government revenue, Moody's said.

The recent spike in oil prices has also improved the outlook for Bahrain's public finances and the country's external position, the agency said.

Brent, the benchmark for two-thirds of the world's oil, is up more than 30 per cent since the start of the year after falling from a 14-year high when it nearly touched $140 per barrel last month, driven by the Russia-Ukraine conflict. The benchmark was trading at $106.79 at 10.21am UAE time on Friday.

High oil prices may help Bahrain to achieve a balanced fiscal budget sooner than expected, Sheikh Salman bin Khalifa Al Khalifa, Minister of Finance and National Economy, told The National last month.

“We are focused on reducing the deficit and stabilising debt levels … I'm optimistic about hitting the fiscal balance plan ahead of schedule. Higher oil is one part of that,” he said.

“The other reason is we are seeing economic growth coming back strongly. Non-oil revenue is an increasing part of our revenue mix, so [the] fact the growth is coming back strongly makes me optimistic.”

Bahrain's economy is projected to grow 3.3 per cent this year and 3 per cent in 2023, according to IMF estimates.

The government's fiscal deficit, including off-budget transactions, narrowed to less than 12 per cent of GDP in 2021, from nearly 18 per cent in 2020, Moody's said.

That figure is likely to decline to less than 4 per cent of GDP on average this year and next, based on the assumption that oil prices remain elevated at roughly $113 per barrel in 2022 and $97 per barrel in 2023, the rating agency said.

Hence, the government's debt burden will decline to less than 120 per cent of GDP this year and next, from nearly 130 per cent of GDP in 2020.

“The currently projected debt path is significantly lower than Moody's expectation a year ago, pointing to lower medium-term debt sustainability risks,” Moody's said.

Narrower fiscal deficits will also reduce the government's estimated gross borrowing requirement to about 26 per cent of GDP in 2022 and 2023, from more than 35 per cent in 2021 and 46 per cent in 2020.

Nearly 70 per cent of the total financing need for this year and next will be due to maturing domestic debt, which, in the past, has always been rolled over by domestic banks, according to Moody's.

“Together with improved appetite for Bahrain's government debt by international investors, implied by the narrowing of Bahrain's sovereign credit spreads to pre-pandemic levels, significantly lower funding needs in the next few years will ease government liquidity pressures compared to the past several years,” it said.

Moody's also expects Bahrain's external vulnerability pressures to ease further this year and next after a material decline last year, when the country recorded a current account surplus equivalent to 6.7 per cent of GDP, its first since 2014.

Bahrain will continue to maintain “robust” current account surpluses during the next two years, mainly due to higher oil prices but also because of a “significant rebound” in prices of aluminium, which accounted for more than 25 per cent of the country's merchandise exports in 2020, the agency said.

This will also support central bank foreign currency reserves, which rose to $4bn in January from a 30-year low of less than $800 million in April 2020.

“Furthermore, the government's renewed commitment to fiscal reforms increases the likelihood that further financial support from the GCC neighbours, beyond the currently committed $10bn package, would be forthcoming in a timely manner if and when needed,” Moody's said.

Saudi Arabia, the UAE and Kuwait agreed to offer Bahrain a $10bn fiscal support package in 2018 and a $7.5bn package of housing and infrastructure development grants in 2011.

As of the end of 2021, Moody's estimates that about $4bn of loans and $3.3bn of grants remained available for disbursement.

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