On Friday, S&P Global Ratings lowered its long-term sovereign credit ratings on Bahrain to ‘B’ from ‘B+’ whilst revising the ratings for Kuwait: S&P upgraded the credit ratings on Kuwait to ‘AA-/A-1+’ from ‘A+/A-1’.
S&P’s Official Revision
According to the S&P Report, the latest revisions come from sustained debt in Bahrain and a series of fiscal reforms enacted by the Kuwait Central Bank under Vision 2035.
Bahrain’s Debt Issues
Bahrain’s debt issues predate the latest downgrade.
In fact, perceived political instability, oil-revenue reliance, and fiscal mismanagement continues to limit investor confidence and macroeconomic flexibility.
The Paradox: High Revenue Dependence Versus Oil as % of GDP
The World Bank calculates that Manama gets over 70% of government revenues from petroleum despite oil being one of the lowest percentage shares of GDP across the GCC.
Oil forms the majority of government expenditure yet oil production fails to add domestic value across other sectors of the economy.
Macroeconomic Reforms: Non-Oil Acceleration and Taxation
The Bahraini government continues to make strides on diversification, however, diversification fails to generate sufficient lucrative income streams to catch-up with the pace of oil-generated revenues.
Manama’s reliance on GCC credit is a welcome respite although bailouts sustain a catch-22 situation: survival by bailouts without meaningful reform.
According to Mahdi Ghuloom, Bahraini Junior Fellow (Geopolitics), at Observer Research Foundation Middle East: “Bahrain’s debt is under control, and the Kingdom has never failed to meet a debt commitment. That is positive in itself, and it is worth noting that S&P’s downgrading came with an upgrade of the outlook.”
Ghuloom suggested that privatisation and taxation may be possible macroeconomic reforms in the medium term: “This may reflect plans to reform the economy, including the hints we saw during last Ramadan from liberalising fuel, electricity, and water prices toward market-based pricing to introducing carbon-emission fees and imposing taxes on local corporate profits. All of these measures would improve the fiscal balance.”
Reforms, via market-based incentives and taxation, would be a welcome relief for the Kingdom if Manama is serious about reassuring investors.
Kuwait’s Fiscal Prudence
S&P upgraded Kuwait’s credit rankings in a big confidence boost to the kingdom.
According to the National Bank of Kuwait, the upgrade is due to strong governance changes owing to Kuwait’s political and economic reforms.
In a report published yesterday by Kuwait NBK, stakeholders cited the “new finance and liquidity laws” in addition to it’s “strong government and external asset positions.”
Kuwait has one of the highest oil percentage revenues in the GCC, contrary to Bahrain, yet strong macroeconomic policy puts the country in a stronger position in the long-term than it’s GCC neighbour further south.
According to Thamr Al- Musilam, the Head of Economies Unit (EDAC) at the GCC, “Kuwait’s S&P upgrade highlights its strong fiscal position, low debt, and solid external buffers, aligned with the broader resilience we’re seeing across all GCC economies.”
Decisions to regulate the liquidity markets, via the liquidity law, in addition to subsidy rationalisation, excise taxation, and public service repricing differs to Manama’s approach where subsidies and taxation reforms are delayed despite sustained debt increases.
Compared to regional peers, the upgrade puts Kuwait’s rating one notch above Saudi Arabia (A+) and one notch below the UAE and Qatar (AA).
Al-Musilam added that sustaining this momentum for Kuwait will depend on “advancing structural and fiscal reforms.”
Forecast(s) Ahead
If the latest forecasts tell us one thing, it is that governance as a political and economic tool matters.
According to Justin Alexander, Director of Khalij Economics and GCC analyst for GlobalSource Partners, “Bahrain needs to learn from Oman, which has implemented broad fiscal balance reforms since 2020, halved its debt in relative terms and seen a dramatic rerating back to investment grade. Before that, Oman’s bond yields were higher than Bahrain’s, now they are close to Saudi Arabia’s.
Justin Alexander went further on what Bahrain needs: “Unlike Oman, Bahrain’s debt is now so high that it can’t rebalance alone, but needs a combination of support from allies with strong fiscal discipline… prioritising spending that grows the economy and supports lower and middle income families, while ending blanket subsidies and unnecessary military hardware purchases.”
Delaying reform disincentivises investor confidence and Manama ought to ease investor angst through rationalisation, taxation reform, and an acceleration of value-added measures in non-oil sectors.
Kuwait’s success is testament to governance, not destiny, as a hyper-rentier state in transition.
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