Country Economic Forecasts > Bahrain

S&P downgraded the sovereign credit of Bahrain by two notches to BB in mid-February, leaving its debt at junk or non-investment grade status. This reflects the expectation that the oil price will remain depressed and the implications for the sustainability of the already weak public finances in a country with relatively high political risk, modest economic growth and few policy buffers. The authorities have clearly signalled substantial fiscal austerity with an emphasis on cutting subsidies, control of the wage bill and increased non-oil revenues. Even so, with the oil price set to remain at low levels, we forecast the deficit to widen to 14.5% of GDP in 2016 from 13.7% of GDP last year. Meanwhile, Bahrains dollar peg has been under pressure, with the 12-month dollar forward rate hitting a high of 750bps in early February, although it has fallen back a little since. Given Bahrains precarious position and our oil price forecast, such attacks on the peg may well intensify, so that the peg could yet be abandoned over the next year or so even if the economic case is weak and the political and social implications concerning.