The kingdom of Bahrain launched another round of conventional bond and sukuk (Islamic bond) issuances last month, as the government looks to bridge projected fiscal deficits for both this year and next.
In late July the Central Bank of Bahrain (CBB) issued a BD200m ($530.5m), five-year government development bond with a coupon rate of 5.35%. The issue was oversubscribed, with subscriptions totalling BD224m ($594.2m).
This was followed by a BD125m sukuk with an ijara (leasing) structure, with a fixed annual rate of 4.2% and a tenor of three years.
Together, these issues bring the total value of the 14 outstanding conventional and sharia-compliant bonds listed on the Bahrain Bourse to $6.41bn, with rates ranging from 3% to 8.25%.
New bonds against a backdrop of ratings revisions
Continued appetite for the debt is a welcome development for Bahrain, which has seen its fiscal and external position come under increased pressure from low energy revenues, leading to downward revisions of its credit profile by the major international ratings agencies.
In the days following these recent issues, Moody’s downgraded Bahrain’s credit rating from “Ba2” to “B1”, with a negative outlook, citing persistent budget deficits and the need for further fiscal consolidation to offset flagging revenue.
A little more than a month earlier Standard & Poor’s (S&P) had revised the country’s ratings outlook from stable to negative, though it maintained a long-term sovereign credit rating of “BB-” and a short-term foreign and local currency rating of “B” for Bahrain and the CBB.
Fitch, too, changed Bahrain’s credit outlook from stable to negative in June, affirming a “BB+” rating for the sovereign’s long-term foreign and local currency issuer default ratings, senior unsecured foreign and local currency long-term bonds, and sukuk trust certificates.
Ratings agencies had already adjusted their outlook on the economy last year. S&P downgraded Bahrain to “BBB-/A-3” in 2015, with a negative outlook, before further downgrading it in 2016 to “BB-” with a stable outlook.
Lower revenues and continued spending impact fiscal balance
The recent ratings actions reflect Bahrain’s changing fiscal position since oil prices dropped in mid-2014.
Oil revenues declined by the equivalent of 10% of GDP in 2015, according to the World Bank, with the general fiscal deficit increasing from 3.4% of GDP in 2014 to 12.8% in 2015, and public debt rising to 62% of GDP.
And while fiscal consolidation measures introduced in the last two years have helped slow the pace of debt accumulation, persistently low oil prices nonetheless saw the fiscal deficit widen to an estimated 18% of GDP last year, while public debt rose to 82% of GDP.
However, most observers expect the fiscal deficit to gradually decrease. In April the IMF forecast it would narrow to 12.6% of GDP this year and remain close to that level over the medium term, thanks to reduced spending and increased non-oil revenue.
Progress on fiscal reform
The budget bill for 2017-18 – which assumes an average oil price of $55 per barrel, slightly above the $52.61 Brent crude was trading at as of August 21 – forecasts a BD1.3bn ($3.4bn) deficit this year and a BD1.2bn ($3.2bn) deficit for 2018, down from BD1.5bn ($4) in 2016.
When discussing the new budget draft law last month, Sheikh Ahmed bin Mohammed Al Khalifa, minister of finance, reiterated the government’s focus on increasing income and containing public debt.
“We aspire to reduce the general deficit without impacting the economic growth negatively,” he told local media.
However, given that government spending, as well as GCC-funded infrastructure projects, remain an important contributor to GDP growth, much of the consolidation focus has been on the revenue side of the equation.
Among other measures, the country has introduced a 5% levy on tourism, a 12% sales tax on petrol and stamp duty on real estate to boost non-oil tax revenue, which stood at just 0.6% of GDP in 2014.
The government is also working on the introduction of value-added tax (VAT), part of a GCC-wide initiative to roll out the levy in early 2018. According to the IMF, VAT could give Bahrain a fiscal boost of around 2% of GDP – equivalent to roughly one year of current economic output.