S&P Global has downgraded Bahrain’s economic outlook from “stable” to “negative,” citing growing concerns over the country’s financial stability. The global ratings agency’s decision reflects a combination of market volatility, higher social spending, and an increasingly strained fiscal environment. The shift in outlook suggests that Bahrain faces heightened risks that could further destabilise its economic trajectory.
The decision comes at a time when Bahrain is grappling with a set of challenges that are intensifying its financial pressures. Key factors driving the revision include fluctuations in global oil prices and ongoing maintenance work at the Abu Sa’fah oil field, one of the country’s most important energy assets. The dip in oil prices has added to the difficulty of balancing the government’s budget, as it continues to rely heavily on oil revenues to fund its fiscal obligations. These vulnerabilities are compounded by the country’s increasing reliance on debt, which is contributing to growing financing costs.
S&P Global also highlighted that Bahrain’s efforts to implement fiscal reforms have yet to yield the desired results. While the introduction of the value-added tax in 2019 and its subsequent increase in 2022 were seen as steps toward diversifying non-oil revenues, these measures have been overshadowed by escalating social spending and rising interest payments on government debt. According to the agency, these fiscal reforms, although positive, have not been sufficient to stem the rising debt-to-GDP ratio, which remains a significant concern for long-term financial stability.
One of the more pressing issues identified by S&P Global is Bahrain’s weak foreign currency reserve position. The country’s foreign reserves are vital for supporting its currency peg to the US dollar, and a decrease in these reserves could make it harder for Bahrain to meet its external financial obligations. As the outlook continues to weaken, the pressure on Bahrain to secure external financing may increase, potentially leading to higher borrowing costs.
Bahrain’s fiscal deficit has remained a persistent problem, driven by a combination of external and internal pressures. Lower oil revenues and the elevated cost of government services, especially in areas such as social spending, have led to growing deficits that show little sign of abating in the short term. The government’s continued commitment to welfare programs, coupled with rising interest rates, has left it struggling to balance its books.
Despite these fiscal challenges, the government has pledged to push forward with economic diversification efforts, aiming to reduce its dependency on the oil sector. This has included expanding initiatives in non-oil sectors such as finance, tourism, and manufacturing. However, these sectors remain in the early stages of development, and it is unclear whether they will be able to offset the volatility of the oil market in the near future. As a result, Bahrain’s economy continues to be highly vulnerable to shifts in global energy prices.
In its report, S&P Global acknowledged the government’s efforts to implement structural reforms aimed at improving economic resilience. Measures to increase transparency, boost competitiveness, and enhance the business environment have been welcomed by international observers. Nevertheless, these reforms have not yet proven sufficient to counterbalance the underlying fiscal and structural challenges facing the country.
Bahrain’s vulnerability to external shocks, particularly in the oil market, has long been a concern. While the country has made strides in strengthening its financial systems and diversifying its economy, the ongoing volatility in global markets presents a significant hurdle. With market sentiment increasingly negative, Bahrain’s financial stability may continue to be at risk unless additional measures are taken to stabilise the economy and secure long-term growth.
The downgrade of Bahrain’s outlook underscores the broader challenges facing Gulf economies that have traditionally been dependent on oil revenues. For many of these nations, the path to economic diversification is fraught with obstacles, as they seek to balance fiscal discipline with the need to maintain social stability in a time of global financial uncertainty. As Bahrain continues to navigate these challenges, the actions taken by its leadership will play a crucial role in determining the future trajectory of its economy.