Bahrain's outlook revised down to negative

Fitch Ratings has revised down Bahrain’s outlook from stable to negative due to decline in oil prices.

It cut outlooks on Bahrain's long-term foreign and local currency Issuer Default Ratings (IDR) to negative from stable and affirmed the IDRs at 'BBB' and 'BBB+', respectively.

“The fall in oil prices has exacerbated the already challenging fiscal situation. Fitch estimates Bahrain's fiscal breakeven oil price to be around $130 a barrel, compared with a forecast for Brent to average $83 a barrel in 2015. Fiscal flexibility is constrained by the very low share of non-oil revenue of just 14 per cent of total revenues. Wages and subsidies together account for 70 per cent of total budget spending,” the international ratings said in a statement.

The 2015 budget has been delayed until at least March due to November's elections.

Fitch claimed it had few details on the fiscal strategy that would be adopted or specific measures that may be proposed.

Fitch's forecasts assume a cut-back in capital spending, some moderation in current spending growth, and incremental measures to raise non-oil revenue and reduce subsidies by better targeting.

However, these measures are unlikely to make major inroads in the deficit, which is forecast to increase by 2ppts to 7.7 per cent of GDP in 2015 on a general government basis, including estimated extra-budgetary spending.

The state budget deficit is forecast to rise from an estimated 3.7 per cent of GDP in 2014 to 6.2 per cent in 2015, it said.

Government debt has continued to rise, to reach a forecast 47.2 per cent of GDP at the end of 2014 and 52 per cent in 2015.

The ratio has moved further ahead of the 'BBB' median of 39.2 per cent. Moreover, Fitch's forecasts show the ratio continuing to rise in the medium term, even assuming some fiscal adjustment measures in the delayed 2015 budget.

Domestic bank deposits drawn down

Financing flexibility is good, Fitch said, adding that the government has domestic bank deposits of an estimated 14.4 per cent of GDP which were drawn down during the last oil price fall in 2009 and were also used in 2014.

Fitch assumes further drawdown during the forecast period.

The domestic capital market is quite deep: a single two-year development bond issued in September financed the whole of this year's estimated budget deficit of 5.6 per cent of GDP. Bahrain has also become a regular eurobond issuer, most recently raising $1.25bn at 30-year maturity in August.

Fitch said growth has accelerated this year, with both oil and non-oil activity surprising to the upside.

Oil sector growth averaged 6 per cent in the first nine months of 2014, while non-oil growth rose to 5.2 per cent in Q3 2014.

The latter is largely due to the increased activity triggered by GCC-funded infrastructure projects, particularly in housing.

Of the $4.4bn of projects approved to-date out of a total $10bn promised over 10 years, work has now commenced on 28 per cent of them. This is a substantial increase from six months ago when virtually no projects had commenced.

GCC-funded projects are off budget and will not be affected by any fiscal consolidation effort. Fitch's forecasts of 4.3 per cent overall GDP growth this year and next are higher than six months ago.

Bahrain's external position is stronger than its 'BBB' rated peers.

Rating sensitivities

The main factors that individually, or collectively, could lead to a downgrade include:

- Difficulty in reining in fiscal deficits, resulting in a continuing rise in the government debt burden.

- Sustained oil price weakness that would exacerbate an already challenging medium term debt trajectory

The main factors that, individually or collectively, could lead to a stabilisation of the rating Outlook include:

- Significant fiscal measures which reduce the budget deficit and are consistent with the stabilisation of the debt-to-GDP ratio in the medium term.

- A recovery in oil prices that improves public finances.

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