October 11, 2017 / 8:22 AM / a year ago

Fitch: Rising Bahrain Debt Costs Add to Fiscal Pressures

(The following statement was released by the rating agency) LONDON, October 11 (Fitch) External borrowing to meet government financing needs is increasing pressure on Bahrain's budget, Fitch Ratings says. We forecast annual interest costs to rise 46% from 2017 to 2019, highlighting Bahrain's vulnerability to rising global interest rates. September's three tranche issuance of sukuk, 12-year and 30-year bonds raised USD3 billion and completes the Bahrain government's external financing needs for this year, coming after the USD600 million tap of its 2028 bond in February and almost BHD165 million (USD440 million) of net new local issuance in the first eight months of 2017. We now forecast the Bahrain government's 2017 total net financing requirement (which corresponds to the fiscal deficit) at nearly USD4.5 billion, with the remainder of around USD500 million likely to be met through more domestic issuance and some use of the government's cash reserves. Our revised oil price forecasts in our latest Global Economic Outlook, and the passage of the 2017/2018 budget, mean we now forecast a similar government financing requirement in 2018 and only a marginal decline in 2019, to USD4.3 billion. An increase in debt coming due will add to total issuance. Medium- and long-term debt maturities in 2019 will rise to USD1.8 billion and short-term maturities to USD6.5 billion, both increases of around 38% relative to 2017. Rising government interest payments are taking a toll on Bahrain's budget. Last year's USD250 million increase in annual interest costs almost completely offset reductions in subsidy and capital spending. We see the annual interest burden (on both local and foreign government debt) rising to USD1.8 billion in 2019 from USD1.2 billion this year, reflecting rising debt and higher rates. Interest costs will exceed 20% of revenues, well above the 'BB' median. <iframe src="https://e.infogram.com/fe59e5d7-58a9-4bf4-a45a-195bc6f875af?src=embed " title="Bahrain Debt Service Costs" width="550" height="593" scrolling="no" frameborder="0" allowfullscreen="allowfullscreen"> We expect the government deficit (including extra-budgetary spending) to fall to 12.8% of GDP in 2017 from 16% as oil revenues rise and subsidy and price reforms feed through to revenue and expenditure, and as government capital projects are replaced with GCC development fund projects. However, our new Brent oil price assumptions (USD52.5/bbl in 2018 and USD55/bbl in 2019) and budget outturns revealed in the latest bond prospectus mean we now expect deficits to narrow less in the coming two years, to 12.1% in 2018 and 10.9% in 2019 (2.3pp and 2.6pp wider, respectively, than our previous forecasts). The absence of a comprehensive medium-term strategy to tackle high deficits and rising debt was a key driver of our revision of the Outlook on Bahrain's 'BB+' Long-Term Foreign Currency Issuer Default Rating to Negative from Stable in June. Since then, the authorities have passed the two-year budget for 2017 and 2018, which projects that revenue will rise 25% and spending just 4% over the two-year period. Spending restraint combined with various non-oil revenue measures demonstrate that the government has some appetite for fiscal restraint. However, the measures announced so far will only slow the rate of increase for the debt ratio, which is likely to reach 95% of GDP in 2019 under our revised forecasts. Contact: Krisjanis Krustins Associate Director, Sovereigns +852 2263 9831 Fitch (Hong Kong) Ltd 19/F Man Yee Building 68 Des Voeux Road Central Hong Kong Jan Friederich Senior Director, Sovereigns +852 2263 9910 Mark Brown Senior Analyst, Fitch Wire +44 203 530 1588 Media Relations: Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: peter.fitzpatrick@fitchratings.com. The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings. ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEB SITE AT WWW.FITCHRATINGS.COM. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. 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