Additional options for support could include Saudi Arabia allowing Bahrain a larger share of production from the offshore Abu Safa'a oil field. Bahrain currently receives half of the output (150,000 b/d), but has received more in the past, including 100% of output in some years. An extra 75,000 b/d (taking its allocation to 75%) in 2018-19 would imply extra revenue of at least USD1.5 billion in 2018 and 2019 (assuming Brent crude prices of USD70/b and USD65/b), potentially cutting the budget deficit and bringing public debt/GDP below 75%. Bahrain hopes to significantly boost its own oil production following a large oil discovery in April, but this will take at least five years.
Another conduit could be a top-up of the GCC Development Fund, inaugurated in 2011. Bahrain's USD7.5 billion allocation has enabled it to reduce capital spending in the budget and has supported robust GDP growth. An enlargement may bolster medium term growth, but would not create as much additional fiscal space as capex is a smaller component of the budget.
A boost to FX reserves and other financial support would bolster Bahrain's sovereign credit metrics, at least temporarily. The full impact will depend on the exact nature of GCC support, but without a stronger fiscal reform programme, Bahrain's public finances would likely come under renewed pressure at some point. While GCC support does not typically come with explicit conditionality, we believe that Bahrain's partners will push for fiscal reform measures to contain the need for further support. This could involve introducing VAT in a certain timeframe, for example.
Some subsidy reforms and spending restraint notwithstanding, Fitch's view that the government had yet to identify a clear medium-term strategy to tackle high deficits was reflected in our two-notch downgrade to 'BB-' in March. We forecast that government debt/GDP will edge down in 2018 to 80%, given higher oil prices, but then rise to 89% in 2020 and continue rising thereafter, as oil prices drop back (we forecast USD57.5/b in 2020, while Bahrain's fiscal breakeven price is still close to USD100/b). Debt maturities also pick up from 2020, averaging around USD1.5 billion annually in 2020-2023.
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