Capital Intelligence, the international emerging markets rating agency, has raised Bahrain's long-term foreign currency rating to BBB from BBB- and its short-term foreign currency rating to A2 from A3. The ratings agency also assigned a long-term local currency rating of A- to the sovereign and a short-term local currency rating of A2. The long-term outlook is stable.
Bahrain's sovereign ratings balance solid economic growth prospects and moderate government indebtedness against limited fiscal flexibility and weaknesses in the country's economic structure.
Bahrain's economy has performed well in recent years due to relatively high world oil prices, increasing volumes of non-associated natural gas, and robust growth in non-hydrocarbon sectors. In real terms, gross domestic (GDP) expanded on average by an estimated 5.0 percent annually in 2000-02; non-hydrocarbon sectors grew by a slightly faster 5.2 percent pa over the same period. Growth has outpaced population growth, thereby raising per capita incomes.
Medium-term growth prospects are favorable, underpinned by a large-scale government capital spending program, to end-2004, projects to expand output in the refined petroleum and aluminium sectors, and plans to increase the capacity of the Abu Sa'afa oilfield. While Abu Sa'afa is formally owned by Saudi Arabia, its output is shared with Bahrain as part of a longstanding and open-ended agreement.
Bahrain has maintained a reasonably prudent fiscal stance in recent years. Small past budget deficits and recent surpluses have translated into a modest government debt stock and light debt-service burden. Central government debt is estimated at 32 percent of GDP at end-2002, with government external debt equivalent to just 5.6 percent of GDP. This compares favorably with government liquid financial assets of 34 percent of GDP.
The fiscal position is expected to deteriorate in 2003-04 due to the adoption of an ambitious investment program that aims to accelerate economic growth, expand industrial export capacity, and create jobs for nationals. The resultant increase in the government-financing requirement is expected to be manageable and the associated increase in the debt stock will be moderate as the government intends to finance part of the increased spending out of its Reserve for Strategic Projects, which contains the 2000 and 2001 budget surpluses, an amount equivalent to 12.7 percent of 2002 GDP.
CI notes, however, that despite significant progress diversifying the economy away from oil and gas, hydrocarbons remain the mainstay of the economy. Oil and gas account for around 20 percent of GDP, 68 percent of merchandise export receipts, and over 60 percent of budget revenue.
Moreover, government services, which are financed largely by oil proceeds, account for 21 percent of non-hydrocarbon GDP. The growth of non-oil sectors has not translated into higher budgetary revenues due to the absence of a developed tax system. This is unlikely to change much going forward due to official concerns that broadening the tax base would erode Bahrain’s competitive positive in the region. Public finances, external accounts, and much of the real economy are therefore vulnerable to fluctuations in oil prices. — (menareport.com)
© 2003 Mena Report (www.menareport.com)
