Bahrain received its first downgrade in over two years from Fitch Ratings, which said it will likely “require further Gulf backing” in the medium term as the government’s finances remain under strain.
“This may be contingent on Bahrain enacting further fiscal reforms given that Gulf creditors are themselves facing the need for fiscal consolidation,” Fitch analysts including Toby Iles said in a report.
Fitch on Friday cut Bahrain’s sovereign rating one step to B+, leaving it four levels below investment grade and on par with Egypt, Bolivia and Jamaica. The outlook is stable.
Bahrain, the smallest among economies of the six Gulf Cooperation Council members, is vulnerable despite a $10 billion bailout package secured from its regional allies in 2018. Lower oil prices and the global coronavirus pandemic have combined to stretch its finances.
The government sold $2 billion in dollar bonds in May, boosting foreign reserves that dropped to just 290 million dinars ($769 million) a month earlier, the lowest in decades. The stockpile recovered to 674.9 million dinars in May, according to the latest central bank data.
“The extent of the shock has worsened Bahrain’s credit profile and aggravated risks to medium-term debt sustainability,” Fitch’s analysts said.Fitch forecasts the state budget deficit will widen to 15.5 per cent of gross domestic product in 2020 from 4.6 per cent in 2019
The rise in this year’s budget shortfall, combined with a 12 per cent drop in nominal GDP, will push the ratio of government debt to economic output to 130 per cent in 2020; Fitch had predicted Bahrain’s debt to GDP at 105 per cent before oil prices declined.
Even with the deficit projected to narrow, the rating company sees government debt/GDP falling only to 128 per cent in 2022.
The total debt stock includes 14.4 per cent of GDP of long-term interest-free loans from the GCC and 8.5 per cent of GDP of government liabilities to the central bank; Fitch said Bahrain’s government includes the former, but not the latter.
Excluding those items, Fitch estimates government debt at 107 per cent of GDP in 2020.
“The downgrade reflects the combined impact of lower oil prices and the coronavirus pandemic on Bahrain, which is causing marked increases in the budget deficit and government debt, pressure on already low FX reserves and sharp GDP contraction,” Fitch said.