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S&P revises Bahrain outlook to 'stable'

MANAMA, November 28, 2021

S&P Global Ratings has revised its outlook on Bahrain to stable from negative on the back of the kingdom recently announcing additional fiscal reforms to strengthen non-oil revenue and rationalise expenditure. 
 
It has affirmed its 'B+/B' long- and short-term foreign and local currency sovereign credit ratings on the sovereign. The transfer and convertibility assessment on Bahrain remains 'BB-', it said.
 
The stable outlook indicates the agency expects the government to implement measures to reduce the budget deficit and benefit from support from other GCC sovereigns if needed, in addition to the direct fiscal support already pledged, said a S&P Global Ratings report.
 
The agency said it expects the government's accumulation of debt to moderate, supported by recently announced measures that provide more clarity with regard to its medium-term fiscal consolidation programme.
 
The government has updated and extended its Fiscal Balance Plan, changing the target date for a balanced budget to 2024 from 2022. The government has announced that the value-added tax (VAT) rate will double to 10% starting in 2022, strengthening non-oil revenue, it noted.
 
"We expect the increase in VAT could contribute receipts of about 3% of GDP over the medium term, up from about 1.7% in 2021. Beginning in 2023, the government aims to further increase non-oil revenue by increasing fees and budget contributions from government-related entities and adding charges to government services.
 
"Although we have not changed our oil price assumptions in the outer years of the forecast period ($55 a barrel over 2023-2024), oil prices have been higher than our assumption over 2021 and we revised our price assumption upward for 2022, helping revenue in the near term. We expect oil to average $75 a barrel for the remainder of 2021 and $65 a barrel in 2022," the agency said.
 
On the expenditure side, although there are no major initiatives planned for 2022, the government plans to significantly reduce spending by rationalising government operating expenditure (opex), reducing manpower expense, rationalising social subsidies, and cutting capital expenditure (capex) over 2023-2024, the agency notes.
 
This is in contrast to the previous plan, where the onus of fiscal consolidation was on raising non-oil revenue, after expenditure-reducing measures in 2019. "The recently announced measures represent a positive shift to a more balanced fiscal consolidation plan," it said.
 
Even with non-oil revenue-raising measures, the government's dependence on oil receipts (accounting for about 70% of revenue in 2019) will continue over the forecast period to 2024, it said.
 
The agency said it expects economic growth to recover in 2021 after a 5.1% contraction in 2020, as oil prices remain relatively high and economic activity in the region increases.
 
Bahrain's small ($37 billion) economy contracted by an estimated 5.1% in real terms in 2020 as the pandemic and lower oil prices reduced consumption and investment activity. In particular, it was hit by contractions in larger GCC economies, given the close links between the countries through the tourism, transportation, and real estate sectors. The non-oil economy contracted by
7% in real terms. A deeper contraction was likely mitigated by government stimulus measures, with the full package amounting to BD4.5 billion (about 32% of GDP), largely a BD3.7 billion increase in loan facilities from the CBB and about BD290 million (2% of GDP) in
budgeted stimulus measures. Growth in the oil sector was flat. 
 
We expect the economy to rebound in 2021, with real GDP expanding by 2.8%, as oil prices increase and regional economic activity picks up. The government's vaccination campaign has been successful and the King Fahd Causeway to Saudi Arabia reopened in May, providing
additional impetus to economic growth. Projects funded by the $7.5 billion GCC Development Fund, provided in 2011-- which is separate from the $10 billion GCC support package -- will continue to support investment over the forecast period, it said.
 
It expects Bahrain's current account deficit to narrow to 2.1% of GDP in 2021, following the 9.4% deficit in 2020 on lower oil prices and weaker receipts from tourism and financial services. Income payments and workers' remittances will remain a drain on the current account balance over the forecast period, it added. - TradeArabia News Service
 



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