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Although Bahrain is likely to retain its investment grade status this year, the challenging prospects for fiscal consolidation suggest a medium-term rating downgrade to junk, a report from BofA Merrill Lynch has warned.
“The 2015-16 budgets, which we think break even at US$115/bbl, highlight the increasingly fragile fiscal situation, in our view,” it said, adding “the sticky spending levels and the high dependence on hydrocarbon revenues (86% of revenues in 2014) suggest that fiscal deficits are likely to remain elevated”.
All three rating agencies now rate Bahrain at BBB-, and all three, apart from Fitch who recently brought the outlook to stable, also maintain the outlook on negative.
Fiscal consolidation is complicated by the socio-political backdrop and the widening in imbalances caused by the sharp oil price drop. Furthermore, the scope for further capital spending rationalization is becoming thinner, BofA Merrill Lynch said in the report.