Bahrain’s weak track record of fiscal reform, high debt levels and liquidity/external vulnerability risks weigh on the rating. Moreover, unlike some of its higher rated GCC peers its asset buffers are insufficient to meet all its external funding needs. The GCC did provide a financial support package of USD10.25bn to Bahrain in 2018, to be disbursed over a number of years, which has helped to mitigate some of these risks. Nevertheless, reflecting these credit constraints, the Kingdom of Bahrain is rated sub-investment grade (B2/B+/BB- by Moody’s/S&P/Fitch).
The Central bank of Bahrain’s update on its foreign currency reserves for the March-May period highlight some of Bahrain’s risks. This showed reserves had plunged to Bahraini Dinar 290.3m (USD772m) in April (~0.4 months of import cover) but then recovered to USD1.8bn in May following USD2bn of sovereign bond issuance.
According to Moody’s, Bahrain has already met bond principal repayments of USD1.25bn that were due this year but still has principal repayments of USD1.8bn in 2021. It will have to fund sizeable fiscal and current account deficits given the lower oil price environment hence attracting capital inflows and retaining access to bond markets remains important. In terms of the GCC financial support package, Moody’s note that Bahrain has already drawn down over USD4.6bn with USD1.76bn designated for 2020 expected to be drawn down in 2H’20. However, given the coronavirus economic shock, Moody’s expect that the drawdown of the USD3.92bn GCC funds for 2021-22 could be accelerated if needed and that: “The overall GCC support commitment could also be increased should the government face difficulties raising enough external financing to fund its budget deficit, cover its external debt repayments and, by extension, support its currency peg.”n
We continue to target higher quality IG credits within the portfolios and in the GCC we favour holdings in a number of sovereign and quasi-sovereign issues from Abu Dhabi and Qatar. Abu Dhabi and Qatar’s sovereign ratings look to be well underpinned by significant asset buffers against the backdrop of weaker energy prices. Moreover, Bahrain does not screen attractively on our models at this juncture: For example, using a best BB- rating from Fitch, Bahrain 6% 2044 is screens ~1.7 credit notches expensive.