Bahrain’s economy is teetering on the edge

Bahrain’s economy was on the ropes before the war with Iran broke out. Three weeks of Iranian attacks may now have it down for the count.

The conflict with Iran has added a layer of economic pressure that Bahrain could have done without. The US-Israeli war on Iran spiked the regional risk premium and drove up the cost of Bahrain’s already-expensive borrowing. Bahrain is also grappling with the disruption to the Red Sea trade flows that the country’s financial services and logistics sectors depend on, threatening to further destabilize an economy that is already heavily dependent on bailouts from its Gulf neighbors.

IN CONTEXT- In the months leading up to the war, both Fitch and S&P downgraded Bahrain’s sovereign credit ratings further into junk territory as government debt hit nearly 150% of GDP. That figure gives Bahrain the undesirable superlative of the second-highest debt-to-GDP ratio of any Fitch-rated sovereign, while debt servicing costs are similarly among the highest globally at 34% of government revenue.

They tried… Manama kicked off a fiscal consolidation package in December that includes introducing a 10% corporate tax in 2027, hiking energy prices for businesses, and implementing spending cuts. The war may have just cut the legs out from beneath the program.

Even with soaring prices, Bahrain’s fiscal breakeven oil price remains out of reach at around USD 127 / bbl. More importantly, the kingdom faces a structural irony: While hydrocarbons account for c. 75% of government revenue, the bulk of its oil income flows from the Abu Saafa offshore field, an asset whose production proceeds Riyadh shares equally with Manama under a decades-old arrangement. In other words, Bahrain can’t pump its way to solvency.

What to watch for: With reforms likely delayed by the war, it’s likely other GCC countries will be forced to extend another bailout package to prop up Bahrain. A destabilized Bahrain is a strategic liability for its neighbors — particularly Saudi Arabia — but the bailout will come with strings: Manama will have to show it’s serious about fiscal reform. Ratings agencies will be watching for any backsliding on the corporate income tax, legislation for which is due to reach parliament this year. Slippage in the timeline will be seen as a signal that the reform package is political theater, not fiscal medicine.