Bahrain Mirror: Fitch Ratings downgraded on Thursday (March 1, 2018) Bahrain's Long-Term Foreign-Currency Issuer Default Rating (IDR) to "BB-", with a stable outlook.

The agency said in a statement that "The government of Bahrain has yet to identify a clear medium-term strategy to tackle high deficits."

Fitch considered that "political fault lines, both domestic and regional, will continue to be a source of tension in Bahrain," and that this was reflected on the new rating.

It added that the lack of reconciliation between the government and the predominantly Shia opposition generated sporadic incidents of violence. The two main opposition groups have been banned and the hard-line stance against some opposition individuals and Shiite leaders has continued.

The apparent sabotage of an oil pipeline in November highlighted the additional risk of terrorism. However, the seventh anniversary of the 2011 uprisings passed without much incident in February and Fitch's baseline assumption is that Bahrain's security forces will continue to prevent the sort of escalation of domestic tensions that would materially affect economic stability.

The agency said that the main factors that could lead to positive rating action are: a broadly accepted political solution to domestic political tensions, as well as a narrowing of the budget deficit consistent with the government debt-to-GDP ratio reaching a peak in the medium term.

In Fitch's view, further material support from the GCC would be forthcoming in case of extreme political, financial, or fiscal instability, given Bahrain's small size and strategic importance. The expectation of such support has supported Bahrain's market access and US dollar peg despite extremely low foreign exchange reserves, which fell to an estimated one month of current external payments at end-2017.

The report expected the consolidated gross general government debt ratio to surpass 90% of GDP in 2019 and to keep rising in the following years, breaking 100% of GDP in 2023.

The report forecast that the budget deficit will narrow close to 9% of GDP in 2019. Non-oil revenue will increase by 1% of GDP, assuming implementation of VAT in mid-2019, assuming average Brent crude oil prices of $52.5.

Oil prices would need to improve to around $70-75 on average to reduce the deficit to levels that would stabilize government debt/GDP, versus the current 67$ price.

Fitch estimated real GDP growth of 3.3% in 2018-2019, which is the same ratio recorded in 2017.

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