Bahrain's credit profile to improve with adequate production from new oil discovery, Moody's says

Higher oil output will help reduce fiscal deficit and relieve pressure on the kingdom's currency

Bahrain needs comprehensive fiscal reform to address growing public debt, IMF says. Getty Images

Bahrain, the Arabian Gulf’s smallest oil producer, could reduce its fiscal deficit, boost growth, improve its credit profile and relieve pressure on its currency if it is able to adequately exploit its new oil and gas discovery, Moody’s Investors Service said.

The island kingdom, which was first to discover and produce oil in the region, said earlier this month it had discovered 20 trillion cubic feet of gas offshore and 80 billion barrels of shale oil. Bahrain hopes to produce from the new hydrocarbon discoveries in five years with potential help from international oil companies.

“A significant oil and gas discovery could improve Bahrain's economic and fiscal strength by allowing the kingdom to boost its rate of hydrocarbon production (and hence gross domestic product) and/or to extend its current rate of production for a number of additional years,” the rating agency said in a report released on Wednesday.

As the smallest Gulf economy, Bahrain is struggling to maintain its finances on the back of its reliance on oil income at a time when crude prices remain far below the $115 per barrel mid-2014 peak. Last year, ratings agencies including Moody’s and S&P Global Ratings downgraded the kingdom’s sovereign credit rating, citing weak external liquidity and increasing financial risk.

Bahrain, which has the highest breakeven oil price in the economic bloc of the GCC, earns 75 per cent of its revenues from the sale of hydrocarbons, although it is down from 87 per cent in 2013, Moody’s said.

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Therefore, any substantial increase in oil production will help narrow the fiscal deficit, which was as high as 17.8 per cent of GDP in 2016, the rating agency said. Pressure on Bahrain’s dinar, which is linked to the dollar, is also the most intense since the peg was introduced in 2001. The kingdom’s foreign reserves stood at $2.8 billion at the end of November, enough to cover only 1.4 months of imports of goods and services and less than 10 per cent of Bahrain's short-term external debt, Moody's noted.

“Over time, if production from the new oil field were to substantially increase Bahrain's oil production and exports, Bahrain's external vulnerability – and with it, pressure on the currency peg – would decrease, supported by improvements in the current account and rebuilding of foreign exchange buffers,” Moody's said.

“In the meantime, the kingdom's credit profile will remain the weakest among GCC peers and the most vulnerable, fiscally and externally, to potential declines in oil prices. This vulnerability is captured by the highest combination of fiscal and external breakeven oil prices in the region.”