(The following statement was released by the rating agency)

Fitch Ratings-Hong Kong/London-June 28: The financial support for Bahrain being prepared by the GCC will ease near-term external financing pressures, but a more durable improvement in Bahrain's financial position will depend both on the scale and nature of GCC support and on Bahrain's ability to implement fiscal reform, Fitch Rating says. We expected further material support from the GCC, given Bahrain's small size and strategic importance. Bahrain's 'BB-'/Stable sovereign rating already incorporates significant uplift to reflect existing and expected GCC support.

On Tuesday, Saudi Arabia, Kuwait and the UAE said that they were finalising "an integrated program that will soon be announced to enable the kingdom of Bahrain to support its economic reforms and fiscal stability". Bahrain's finance minister confirmed this, and the central bank reaffirmed its commitment to its US dollar peg.

We think support is likely to include dollar deposits at the Central Bank of Bahrain (CBB) to improve Bahrain's weak foreign exchange position ahead of a USD750 million sukuk maturing in November. GCC countries have boosted central bank reserves in a range of countries in recent years, including Egypt, Yemen, Jordan and Ethiopia. We estimate that the CBB's reserves cover less than one month of current external payments (CXP), despite rising in April to USD2.1 billion from USD1.4 billion in March following a USD1 billion sukuk issue. Reserves have been sliding following the oil shock at end-2014, when they totalled USD6.2 billion. An influx of USD3 billion-USD3.5 billion would put reserves back to around two months of CXP (their average in 2000-2015), although coverage would likely worsen again without fundamental fiscal improvements, in Fitch's view.

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.

Contact:

Toby Iles

Director, Sovereigns

+852 2263 9832

Fitch (Hong Kong) Limited

68 Des Voeux Road Central

Hong Kong

Jan Friederich

Senior Director, Sovereigns

+852 2263 9910

Mark Brown

Senior Analyst, Fitch Wire

+44 20 3530 1588

Media Relations: Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: peter.fitzpatrick@fitchratings.com.

The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article can be accessed at www.fitchratings.com . All opinions expressed are those of Fitch Ratings.

Related Research

Bahrain

https://www.fitchratings.com/site/re/10024901

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTPS://WWW.FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS . IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEB SITE AT WWW.FITCHRATINGS.COM . PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE, AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE CODE OF CONDUCT SECTION OF THIS SITE. DIRECTORS AND SHAREHOLDERS RELEVANT INTERESTS ARE AVAILABLE AT HTTPS://WWW.FITCHRATINGS.COM/SITE/REGULATORY . FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

Copyright 2018 by Fitch Ratings, Inc., Fitch Ratings Ltd. and its subsidiaries. 33 Whitehall Street, NY, NY 10004. Telephone: 1-800-753-4824, (212) 908-0500. Fax: (212) 480-4435. Reproduction or retransmission in whole or in part is prohibited except by permission. All rights reserved. In issuing and maintaining its ratings and in making other reports (including forecast information), Fitch relies on factual information it receives from issuers and underwriters and from other sources Fitch believes to be credible. Fitch conducts a reasonable investigation of the factual information relied upon by it in accordance with its ratings methodology, and obtains reasonable verification of that information from independent sources, to the extent such sources are available for a given security or in a given jurisdiction. The manner of Fitchs factual investigation and the scope of the third-party verification it obtains will vary depending on the nature of the rated security and its issuer, the requirements and practices in the jurisdiction in which the rated security is offered and sold and/or the issuer is located, the availability and nature of relevant public information, access to the management of the issuer and its advisers, the availability of pre-existing third-party verifications such as audit reports, agreed-upon procedures letters, appraisals, actuarial reports, engineering reports, legal opinions and other reports provided by third parties, the availability of independent and competent third- party verification sources with respect to the particular security or in the particular jurisdiction of the issuer, and a variety of other factors. Users of Fitchs ratings and reports should understand that neither an enhanced factual investigation nor any third-party verification can ensure that all of the information Fitch relies on in connection with a rating or a report will be accurate and complete. Ultimately, the issuer and its advisers are responsible for the accuracy of the information they provide to Fitch and to the market in offering documents and other reports. In issuing its ratings and its reports, Fitch must rely on the work of experts, including independent auditors with respect to financial statements and attorneys with respect to legal and tax matters. Further, ratings and forecasts of financial and other information are inherently forward-looking and embody assumptions and predictions about future events that by their nature cannot be verified as facts. As a result, despite any verification of current facts, ratings and forecasts can be affected by future events or conditions that were not anticipated at the time a rating or forecast was issued or affirmed.

The information in this report is provided as is without any representation or warranty of any kind, and Fitch does not represent or warrant that the report or any of its contents will meet any of the requirements of a recipient of the report. A Fitch rating is an opinion as to the creditworthiness of a security. This opinion and reports made by Fitch are based on established criteria and methodologies that Fitch is continuously evaluating and updating. Therefore, ratings and reports are the collective work product of Fitch and no individual, or group of individuals, is solely responsible for a rating or a report. The rating does not address the risk of loss due to risks other than credit risk, unless such risk is specifically mentioned. Fitch is not engaged in the offer or sale of any security. All Fitch reports have shared authorship. Individuals identified in a Fitch report were involved in, but are not solely responsible for, the opinions stated therein. The individuals are named for contact purposes only. A report providing a Fitch rating is neither a prospectus nor a substitute for the information assembled, verified and presented to investors by the issuer and its agents in connection with the sale of the securities. Ratings may be changed or withdrawn at any time for any reason in the sole discretion of Fitch. Fitch does not provide investment advice of any sort. Ratings are not a recommendation to buy, sell, or hold any security. Ratings do not comment on the adequacy of market price, the suitability of any security for a particular investor, or the tax-exempt nature or taxability of payments made in respect to any security. Fitch receives fees from issuers, insurers, guarantors, other obligors, and underwriters for rating securities. Such fees generally vary from US$1,000 to US$750,000 (or the applicable currency equivalent) per issue. In certain cases, Fitch will rate all or a number of issues issued by a particular issuer, or insured or guaranteed by a particular insurer or guarantor, for a single annual fee. Such fees are expected to vary from US$10,000 to US$1,500,000 (or the applicable currency equivalent). The assignment, publication, or dissemination of a rating by Fitch shall not constitute a consent by Fitch to use its name as an expert in connection with any registration statement filed under the United States securities laws, the Financial Services and Markets Act of 2000 of the United Kingdom, or the securities laws of any particular jurisdiction. Due to the relative efficiency of electronic publishing and distribution, Fitch research may be available to electronic subscribers up to three days earlier than to print subscribers.

For Australia, New Zealand, Taiwan and South Korea only: Fitch Australia Pty Ltd holds an Australian financial services license (AFS license no. 337123) which authorizes it to provide credit ratings to wholesale clients only. Credit ratings information published by Fitch is not intended to be used by persons who are retail clients within the meaning of the Corporations Act 2001

Fitch Ratings, Inc. is registered with the U.S. Securities and Exchange Commission as a Nationally Recognized Statistical Rating Organization (the "NRSRO"). While certain of the NRSROs credit rating subsidiaries are listed on Item 3 of Form NRSRO and as such are authorized to issue credit ratings on behalf of the NRSRO (see https://www.fitchratings.com/site/regulatory ), other credit rating subsidiaries are not listed on Form NRSRO (the "non-NRSROs") and therefore credit ratings issued by those subsidiaries are not issued on behalf of the NRSRO. However, non-NRSRO personnel may participate in determining credit ratings issued by or on behalf of the NRSRO.