Fitch lowers Bahrain’s rating due to lower oil prices and COVID-19 impact

Fitch Bahrain ratingFitch Ratings has downgraded Bahrain's long term foreign currency issuer default rating (IDR) to 'B+' from 'BB-', reflecting the double impact of lower oil prices and the COVID-19 on the country

“We forecast the state budget deficit to widen to 15.5% of GDP in 2020 from 4.6% of GDP in 2019, with hydrocarbon revenue (around 70% of total revenue in 2019) almost halving in line with lower average oil prices,’ noted Fitch in a statement.

According to Fitch, the state budget deficit will narrow to 5.3% of GDP in 2022 and the primary deficit reach close to balance, as oil prices stage a mild recovery (averaging close to US$50/b in 2021-22), economic growth gradually recovers and the government pursues fiscal reforms.

“We expect that the government will display commitment to gradually improving fiscal performance in the 2021-2022 budget (to be passed before the end of the year). However, there is considerable uncertainty about how the medium-term fiscal plan will be adjusted in light of the pandemic impact (the FBP assumed average oil prices of US$60/b in 2019-2023), with detail on specific measures pending.”

The increase in the 2020 budget deficit, combined with a 12% reduction in nominal GDP, will propel government debt/GDP to 130% in 2020 (relative to our previous forecast of 105% before the oil prices slide).

The government will need to go beyond the fiscal measures initially outlined in the FBP to place government debt/GDP on a firm downward path. The government could also attempt to monetise state assets, notably parts of Mumtalakat Holding Company. Mumtalakat has a portfolio of assets with a balance sheet value of around 40% of GDP. A large oil discovery in 2018 could bring some fiscal respite, from 2023 at the earliest, but no final investment decision has been taken yet.

The Central Bank of Bahrain’s (CBB) FX reserves have come under pressure in 2020, falling to US$1bn in April amid low oil prices, the initial pandemic impact and bond repayment before partially recovering to US$1.9bn in June (around one month of current external payments).

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