S&P Global Ratings revised its outlook for Bahrain to positive from stable, citing expectations that the country's fiscal deficit will shrink as the government continues to implement its reform plans.
The credit rating agency also affirmed its 'B+/B' long- and short-term foreign and local currency sovereign credit ratings, it said in a report on Friday.
"The positive outlook primarily indicates that we expect the government to implement further reforms to keep fiscal deficits on a decreasing trajectory," S&P said. "The positive outlook also demonstrates the more stable external position, with support from other GCC sovereigns bolstering reserve assets."
Bahrain received a pledge of $10 billion (Dh36.7bn) in October 2018 from the UAE, Saudi Arabia and Kuwait to financially support its reforms that aim to eliminate the budget deficit by 2022. S&P forecasts that the fiscal deficit will decline to 5.1 per cent of Bahrain's gross domestic product in 2020, compared to 5.7 per cent this year. The government has been implementing reform measures to reduce the budget deficit including this year introducing VAT and a voluntary early retirement scheme that reduced the public sector workforce by around 18 per cent.
S&P's positive outlook for Bahrain shows the country's "more stable external position" as support from other Gulf countries bolsters reserve assets, it said. The $3.7bn tranche Bahrain received from the $10bn total sum has supported its foreign currency reserves.
"We expect these deposits to stay, helping to improve Bahrain's external resilience and maintain confidence in the exchange rate peg," the report said.
The agency's ratings are constrained by its view of Bahrain's continued dependence on oil revenue, high stock of government debt and weak trend in economic growth as measured by real GDP per capita, it said.
Still, S&P expects Bahrain's economy to expand 2.1 per cent this year and the next while growing 2.4 per cent in 2021 and 2022.
The government's plans to promote infrastructure development, including several large projects like the refinery modernisation programme, are expected to stimulate growth, S&P said.
"Bahrain's relatively diversified economy still benefits from its proximity to the large market of Saudi Arabia, strong regulatory oversight of the financial sector, relatively well-educated workforce and low-cost environment," it said.
In 2019, Bahrain's economy will grow 2.1 per cent compared to 2.2 per cent a year ago as the government services sector is expected to shrink, weighing on growth, S&P said.
The government is seeking to balance its budget by 2022, a plan that will involve seeking more non-oil sector revenue and reducing government expenditure such as cuts in the public sector workforce.
S&P expects Bahrain's fiscal deficit will narrow to 4.2 per cent of GDP by 2022 — an improvement over recent years — but falling short of the target because of expected continued dependence on oil, it said.
Non-oil revenue increased in 2019 as Bahrain introduced VAT, which could increase revenue by 1.5 per cent of the GDP per year, S&P said.
Government expenditure is expected to drop through to 2022 amid plans to decrease spending through centralised procurement, reducing government transfers to the Electricity and Water Authority, and forms to subsidy programmes.
S&P could raise its ratings on Bahrain within the next 12 months if its "fiscal performance proves stronger" than currently expected.
It could revise its outlook downward to stable if fiscal reforms slow or reverse, it said.
