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Investing.com -- Fitch Ratings has revised its outlook on Bahrain’s Long-Term Foreign-Currency Issuer Default Rating (IDR) from Stable to Negative, while affirming the IDR at ’B+’. The revision is driven by sustained wide deficits, a high and increasing interest burden, rising debt-to-GDP ratio, delays to planned reforms, and a challenging environment for achieving sufficient debt consolidation.
The ’B+’ rating reflects Bahrain’s weak public finances, with a debt-to-GDP ratio more than double the ’B’ category median, high fiscal dependence on oil revenue, and low levels of foreign exchange reserves. However, the rating is supported by strong backing from Bahrain’s Gulf Cooperation Council (GCC) partners, notably Saudi Arabia and the United Arab Emirates.
Fitch projects Bahrain’s government debt to rise from 130% of GDP in 2024 to 136% in 2026, a continued upward trajectory over the medium term. This compares to a debt level of 96% in 2019, when Fitch downgraded Bahrain to ’B+’, and a forecast 2026 median for ’B’ category sovereigns of 54%.
The Fitch-adjusted general government budget deficit is expected to remain wide at close to 9% of GDP in 2025 and 2026, after an estimated 9.5% in 2024. This is despite improvements to the non-oil primary deficit, which is projected to narrow to 14.5% of non-oil GDP in 2026 from 16.9% in 2024 and 21% in 2021.
Negotiations on the 2025 and 2026 budgets between the government and parliament are ongoing. In the absence of a budget, spending is capped at 1/12th of 2024 spending per month, without inflation adjustment. Fitch assumes a budget will be in place by mid-2025 with a limited real decline in primary spending, partly driven by some reforms to subsidies delivering moderate savings by gradually moving to a means-tested cash transfers system.
Hydrocarbon revenue is expected to increase slightly in 2025 despite lower forecasted oil prices (USD 70 per barrel vs USD 80 in 2024), due to higher revenues at the Bapco energies refinery following the completion of its large investment projects and ramping up of refinery output to 380,000 barrels per day by the third quarter of 2025.
Non-oil revenue to non-oil GDP is projected to rise to 8.8% in 2025 and 9.0% in 2026, from an average of 8% in 2022-24 and 4% in 2018. The increase will largely be driven by the tax on multinational companies (DMTT) introduced in January 2025.
Fitch projects interest costs to rise due to growing debt stock, contributing to keeping the deficit at a high level. Interest is projected to account for 33% of revenue in 2025, up from 22% in 2019, and well above the forecast median for ’B’ category sovereigns of 15%.
Bahrain’s funding mix includes international market debt, private placements and loans, including low-cost funding from GCC government-related entities. It also includes local-currency market debt and direct central bank funding. GCC zero interest loans account for 11% of the debt stock.
Bahrain is expected to remain dependent on GCC funding and market access to preserve the foreign exchange peg and stem pressure on foreign exchange reserves. The Central Bank of Bahrain’s international reserves are forecasted to remain broadly unchanged from the USD 4.8 billion in 2024.
Bahrain has an ESG Relevance Score (RS) of ’5’/’5[+]’ respectively for Political Stability and Rights and for the Rule of Law, Institutional and Regulatory Quality and Control of Corruption, reflecting the high weight that the World Bank Governance Indicators (WBGI) have in Fitch’s proprietary Sovereign Rating Model.
Fitch could downgrade Bahrain’s rating if there is insufficient progress towards achieving stabilization of government debt-to-GDP in the medium term, or signs of weakening GCC support. Conversely, confidence that government debt-to-GDP will stabilize over the medium term and that further structural improvement of public finances will be implemented could lead to a revision of the Outlook to Stable. Prospects of significant debt reduction could lead to an upgrade.
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