Bahrain Faces Mounting Fiscal Pressures Amid S&P Outlook Downgrade

S&P Global Ratings has revised Bahrain's sovereign credit outlook from 'stable' to 'negative', citing deteriorating financing conditions and sustained fiscal imbalances. The agency maintained the kingdom's long- and short-term foreign currency ratings at 'B+/B', but warned that persistent deficits, rising debt servicing costs, and external vulnerabilities could undermine fiscal stability.

The downgrade reflects a confluence of factors straining Bahrain's public finances. Lower oil prices have curtailed hydrocarbon revenues, while maintenance at the Abu Sa'fah oil field—a significant source of income jointly operated with Saudi Arabia—has further dampened output. Concurrently, increased social spending and market volatility have escalated funding costs, exacerbating the fiscal deficit. S&P projects the deficit to widen to approximately 7% of GDP in 2025, up from 5.2% in 2024.

Despite implementing fiscal reforms, including the introduction and subsequent increase of a value-added tax to 10%, the government’s efforts have been offset by escalating expenditures. Interest payments are anticipated to consume a growing share of revenue, reflecting the mounting debt burden. S&P expressed concerns over Bahrain's limited foreign currency reserves and continued reliance on oil-related income, which heightens exposure to external shocks.

Fitch Ratings has also highlighted Bahrain's fiscal challenges, affirming its 'B+' rating but revising the outlook to negative. The agency forecasts government debt to rise from 130% of GDP in 2024 to 136% by 2026, significantly above the median for similarly rated sovereigns. Interest payments are projected to account for one-third of government revenue in 2025, up from 22% in 2019. Fitch noted that, absent substantial reforms, Bahrain may require increased concessional funding from Gulf Cooperation Council partners to stabilize its fiscal position.