Singapore, April 22, 2022 -- Moody's Investors Service ("Moody's") has today changed the outlook on the Government of Bahrain to stable from negative and has affirmed its B2 long-term issuer and senior unsecured ratings.
The change of outlook to stable 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. Furthermore, the stable outlook takes into account the government's renewed commitment to its medium-term fiscal adjustment program, which increases the likelihood that additional financial assistance from the neighboring Gulf Cooperation Council (GCC) sovereigns will be forthcoming in a timely manner if and when needed.
The affirmation of the B2 ratings captures Moody's view that Bahrain's debt and debt affordability metrics remain very weak, and its government liquidity and external vulnerability risks high. These credit weaknesses are mitigated by the financial, economic and political support from the Government of Saudi Arabia (A1 stable), the Government of Kuwait (A1 stable) and the Government of the United Arab Emirates (Aa2 stable). Bahrain's B2 ratings are also supported by its relatively high income per capita and a relatively well-diversified economy compared to most other GCC sovereigns, which provide a degree of shock absorption and economic resilience.
The rating affirmation at B2 also applies to the backed senior unsecured foreign currency rating of the drawdowns from the sukuk (trust certificate) issuance program of the CBB International Sukuk Programme, a special purpose vehicle whose debt is in Moody's view ultimately an obligation of the Government of Bahrain.
Bahrain's local currency (LC) and foreign currency (FC) country ceilings remain unchanged. The LC country ceiling at Ba3, two notches above the sovereign issuer rating, incorporates high external imbalances and heavy reliance on a single revenue source mitigated by predictable institutions and moderate political risk. The FC country ceiling at B1, one notch below the LC ceiling, reflects relatively modest transfer and convertibility risks, notwithstanding a track record of weak fiscal policy effectiveness and a high level of external indebtedness.
RATIONALE FOR THE CHANGE OF OUTLOOK TO STABLE FROM NEGATIVE
HIGHER OIL PRICES REDUCE MEDIUM-TERM DEBT SUSTAINABILITY RISKSÂ…
The rebound in oil demand and prices since early 2021, and the most recent price increases due to the spike in geopolitical risks, have improved the outlook for Bahrain's public finances and the country's external position. Moody's estimates that the government fiscal deficit (including off-budget transactions) narrowed to less than 12% of GDP in 2021 from nearly 18% of GDP in 2020 and will likely decline to less than 4% of GDP, on average, during 2022-23 based on the assumption that oil prices will remain elevated in the next few years, averaging $113/barrel in 2022 and $97/barrel in 2023.
Consequently, Moody's expects that Bahrain's government debt burden will decline to less than 120% of GDP in 2022-23 from nearly 130% of GDP in 2020. Although government debt will likely rise back to around the 2020 level by 2025 as the geopolitical risk premium eventually dissipates and oil prices gradually return to Moody's medium-term forecast range of $50-70/barrel, the currently projected debt path is significantly lower than Moody's expectation a year ago, pointing to lower medium-term debt sustainability risks.
AND EASE GOVERNMENT LIQUIDITY AND EXTERNAL PRESSURES
Narrower fiscal deficits that Moody's projects for 2022-23 will reduce the government's estimated gross borrowing requirement to around 26% of GDP from more than 35% of GDP in 2021 and 46% of GDP in 2020. Nearly 70% of the total financing need (or 18% of GDP in 2022-23) will be due to maturing domestic debt, which in the past has always been rolled over by domestic banks. 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. Nevertheless, government liquidity risks will remain structurally high due to the very high sensitivity to declines in oil prices of Bahrain's financing needs and its ease of access to finance.
Moody's also expects Bahrain's external vulnerability pressures to ease further during 2022-23 after an already material decline in 2021, when the country recorded its first current account surplus since 2014 (equivalent to 6.7% of GDP), following a very large deficit of 9.3% of GDP in 2020. Moody's projects that Bahrain will maintain robust current account surpluses during the next two years, mainly due to higher oil prices but also due to an equally significant rebound in prices of aluminum, which accounted for more than 25% of Bahrain's merchandise exports in 2020. Moody's expects that current account surpluses will lead to a further rebuilding of central bank foreign-currency reserves, which rose to $4 billion in January 2022 from the 30-year low of less than $800 million in April 2020, although their coverage of imports of goods and services (only around 2 months, even if oil imports are excluded) still indicates exceptionally thin buffers against external shocks, given Bahrain's long-standing commitment to the exchange rate peg to the dollar.
RENEWED COMMITMENT TO FISCAL CONSOLIDATION FURTHER REDUCES DOWNSIDE RISKS
Although the government's original Fiscal Balance Program (FBP), announced in 2018, went off track during 2020-21, the government recommitted in October 2021 to stabilizing public finances by announcing an updated version of the program. The updated FBP contains several new fiscal adjustment measures and aims to eliminate the state budget deficit (excluding off-budget spending) by 2024, two years later than the original plan.
The announced fiscal adjustment initiatives under the FBP have the potential to reduce the structural vulnerability of Bahrain's public finances to declines in global oil demand and prices if fully implemented, although the updated program does not address chronic off-budget spending. Moody's estimates that off-budget transactions added on average an equivalent of around 4% of GDP to the net financing need each year during the past ten years and therefore represent a downside risk to the government's ability to achieve a fiscal balance that would stabilize the debt burden in the medium term.
Although, based on the past track record, Moody's does not expect the government to fully implement spending reductions in line with the FBP targets, the revenue measures that have already been implemented will reduce the structural non-oil fiscal balance. In particular, the doubling of the value added tax rate to 10% from the start of this year will likely add 1.5-2% of GDP to government revenue.
Furthermore, the government's renewed commitment to fiscal reforms increases the likelihood that further financial support from the GCC neighbors, beyond the currently committed $10 billion package, would be forthcoming in a timely manner if and when needed.
RATIONALE FOR AFFIRMING THE B2 LONG-TERM ISSUER RATING
The B2 issuer rating reflects the credit support afforded by the continuing financial, economic and political support committed to Bahrain by the three higher-rated neighboring GCC sovereigns, including through the track record of disbursements from the $10 billion package of highly-concessional loans agreed in 2018 and the $7.5 billion package of housing and infrastructure development grants announced in 2011. As of the end of 2021, Moody's estimates that around $4 billion of loans and $3.3 billion of grants remained available for disbursement.
This support partly mitigates Bahrain's very weak fiscal and debt metrics and its high government liquidity and external vulnerability risks. The support has been instrumental in preserving Bahrain's access to international capital markets, where the government raised around 70% of all long-term external financing during 2020-21. In addition, Moody's estimates that interest-free GCC loans will reduce Bahrain's interest bill and the fiscal deficit by around 1% of GDP compared to what it would have been if the financing had been secured at market rates.
Bahrain's B2 issuer rating is also supported by high income per capita and a relatively diverse economy compared to the rest of the GCC, which are a source of economic resilience and strengthen Bahrain's shock absorption capacity. The B2 issuer rating also takes into account Bahrain's large, well-capitalized and liquid domestic banking system, which supports a large portion of government liquidity needs through the annual rollover of domestic debt equivalent to nearly 20% of GDP in 2021 (including short-term T-bills).
In the longer term, increased hydrocarbon production from the new very large oil and gas reservoir discovery in the Khaleej Al-Bahrain Basin, which was announced in April 2018, could structurally improve Bahrain's fiscal and external balances. However, there remains a high degree of uncertainty about how significantly and how durably could Bahrain's hydrocarbon production be increased from these new discoveries, when taking into account that at least a portion of the increase will likely be offset by declining output from the existing, mature on-shore field.
ENVIRONMENTAL, SOCIAL AND GOVERNANCE CONSIDERATIONS
Bahrain's ESG Credit Impact Score is highly negative (CIS-4), reflecting highly negative exposure to environmental risks, moderately negative social risks and moderate institutions and governance strength. Governance captures weaknesses in policy effectiveness, that will likely hamper the sovereign's ability to respond to negative environmental and social trends.
Bahrain's highly negative exposure to environmental risks, reflected in its E-4 issuer profile score, mainly relates to carbon transition due to its economic and fiscal dependence on the hydrocarbon sector, which is only partly mitigated by low hydrocarbon extraction costs. Bahrain is also one of the world's most arid states and rapid economic and population growth in recent decades have increased challenges surrounding water sustainability and exposure to physical climate risk. While the majority of Bahrain's water is produced by energy-intensive desalination plants, which are also vulnerable to attacks and oil spills, the country has access to cheap energy that mitigates some of this risk. Bahrain, being an island state in the Gulf, is also exposed to longer-term risks associated with rising sea levels.
Exposure to social risks is moderate (S-3 issuer profile score). The main source of pressure arises from the labor market due to the current and expected rapid population and labor force growth over the coming decades and high expectations of the native population for the provision of services and employment by the government. The effectiveness of labor market nationalization policies in controlling the unemployment rate among citizens will remain the key policy challenge and an important driver of social risks in the foreseeable future, although a relatively large share of expatriates in the overall labor force partly mitigates these risks.
Bahrain's weak track record of fiscal policy effectiveness is captured by a moderately negative G-3 issuer profile and presents the key impediment to the sovereign's ability to adjust to adverse social and environmental trends and future shocks. This is, in part, balanced by the strength of civil society and the track record of monetary policy effectiveness.
GDP per capita (PPP basis, US$): 50,567 (2020 Actual) (also known as Per Capita Income)
Real GDP growth (% change): -4.9% (2020 Actual) (also known as GDP Growth)
Inflation Rate (CPI, % change Dec/Dec): -1.6% (2020 Actual)
Gen. Gov. Financial Balance/GDP: -17.9% (2020 Actual) (also known as Fiscal Balance)
Current Account Balance/GDP: -9.3% (2020 Actual) (also known as External Balance)
External debt/GDP: [not available]
Economic resiliency: baa3
Default history: No default events (on bonds or loans) have been recorded since 1983.
On 19 April 2022, a rating committee was called to discuss the rating of the Bahrain, Government of. The main points raised during the discussion were: The issuer's economic fundamentals, including its economic strength, have not materially changed. The issuer's institutions and governance strength, have not materially changed. The issuer's fiscal or financial strength, including its debt profile, has not materially changed. The issuer's susceptibility to event risks has not materially changed.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
A faster downward trend in the government debt burden than Moody's currently expects would exert upward pressure on the ratings, in particular if stronger debt metrics resulted from the implementation of additional fiscal adjustment measures, making the fiscal improvement durable and independent of oil price fluctuations. Positive momentum would also be supported by further and durable rebuilding of central bank foreign-currency buffers, beyond the period of favorable commodity prices, that would materially reduce Bahrain's external vulnerability risks.
Signs that support for Bahrain from its GCC neighbors may be eroding would put downward pressure on the ratings, in particular if they pointed to a loss of investor confidence and, in turn, a diminished capacity of the sovereign to access international capital markets at sustainable rates and maturities. Such erosion would likely reflect a weakening of Bahrain's commitment to advancing non-oil fiscal consolidation measures and would manifest in rising government liquidity and external vulnerability pressures, possibly quite rapidly and especially in an event of another large external shock.
The principal methodology used in these ratings was Sovereign Ratings Methodology published in November 2019 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1158631. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.
The weighting of all rating factors is described in the methodology used in this credit rating action, if applicable.
The local market analyst for this rating is Alexander Perjessy, +971 (423) 795-48.
For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.
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Sovereign Risk Group
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Moody's Investors Service Singapore Pte. Ltd.
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Singapore Land Tower
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077