Bahrain’s deficit set to halve this year says Fitch

Bahrain’s budget deficit will more than halve in 2021, below 8 per cent of GDP, says Fitch Ratings.

In the Mena Sovereign Credit Overview 4Q21 report released yesterday, the US-based ratings agency has forecast the country’s deficit narrowing to just under 7pc of GDP in 2022-2023, including 2pc-of-GDP of extrabudgetary spending, helped by the doubling of the VAT rate to 10pc.

If oil prices were to rise $10/bbl higher than Fitch’s “conservative” assumptions, then the deficit would be close to 2.5pc of GDP, all else being equal.

According to the firm, confidence in a narrowing of the budget deficit and a firm downward path in government debt/GDP over the medium term, have reduced the potential need for an expanded GCCfinancing package beyond 2023.

Bahrain’s ratings are supported by strong financial backing from partners in the GCC (which provides significant uplift to the rating), high GDP per capita even relative to ‘BBB’ medians and a recent record of robust macroeconomic performance.

Fitch expects significant narrowing of fiscal deficits/GDP for all GCC sovereigns this year, owing to oil prices, reform momentum and somewhat improved political stability.

A gradual return of global trade and tourism is also brightening the economic prospects for much of the region, supported by Covid-19 vaccination and easing restrictions.

“Our forecasts assume average Brent crude oil prices of $63 a barrel (bbl) in 2021, accompanied by further unwinding of OPEC+ production cuts. Our baseline oil price assumptions are conservative and well below current prices,” the report says, adding that oil prices are seen dropping back to $55/bbl in 2022 and $53/bbl in 2023 for Brent.

Fitch expects that significantly higher oil production in 2022-2023 will partly offset lower prices, contributing to a further small narrowing of budget deficits in Bahrain, Oman and Saudi Arabia, alongside incremental fiscal reforms; in Abu Dhabi, the UAE and Qatar, budgets will remain close to balance, but the deficit in Kuwait will widen, assuming a debt law is passed.

However, medium-term fiscal prospects remain challenging.

Fiscal break-even oil prices range from $55/bbl to $90/bbl and hydrocarbon revenue makes up more than 60pc on average of budget revenue, underscoring the region’s vulnerability to renewed oil price volatility in the near term and public finance reform challenges in the medium term.




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