In a move reflecting current economic challenges, Fitch Ratings announced a downgrade of the Kingdom of Bahrain’s long-term foreign currency issuer default rating from “B+” to “B”. This decision comes amid close monitoring of the Kingdom’s financial indicators, while maintaining a “stable” outlook.
Reasons for lowering the credit rating
The agency attributed its decision to a number of pressing economic factors, most notably the continued rise in public debt levels, in addition to the large fiscal deficit plaguing the general budget. Fitch also pointed in its report to the decline in foreign exchange reserves, which places additional pressure on the country's financial solvency.
In an official statement, the agency explained that the downgrade reflects its expectation that the government debt-to-GDP ratio – already very high – will continue its upward trajectory in the coming period. This expectation comes despite the government's strenuous efforts and the implementation of a package of fiscal consolidation measures aimed at curbing the deficit.
Financial reforms and government efforts
Despite the challenges, Bahrain continues to implement ambitious fiscal reform plans. Late last year, the kingdom announced a series of measures aimed at strengthening public finances and diversifying revenue sources away from total dependence on oil. These reforms included decisions to raise fuel prices, adjust electricity and water tariffs, and introduce new fees, in an effort to reduce the gap between revenues and expenditures.
Context of global rankings and agency consensus
Fitch's decision is not isolated from the general context of international financial institutions' assessments of the Bahraini economy during that period. Standard & Poor's (S&P), a rating agency of similar international standing, had already taken a similar step in late November of last year, also downgrading the Kingdom's sovereign credit rating to "B".
Economic repercussions and the importance of the rating
Credit ratings are of paramount importance to countries, as they directly impact the cost of borrowing from international markets. A downgrade typically means higher interest rates on sovereign debt, which can increase the debt service burden on the public budget. However, maintaining a "stable" outlook indicates the agency's confidence in Bahrain's ability to meet its current financial obligations, supported by ongoing structural reforms and anticipated regional support from the Gulf Cooperation Council (GCC) countries. This reinforces the Kingdom's fiscal and monetary stability despite existing structural challenges.
