Bahrain's fiscal deficit will fall only marginally to 12.3 percent of GDP this year from 13.6 percent in 2016 as oil prices settle well below the country's breakeven figure, according to ratings agency Fitch.
The agency said it expects Brent to average $45 per barrel in 2017, nearly $40 below the breakeven price for the Gulf kingdom.
Fitch Ratings affirmed Bahrain's long-term foreign and local currency issuer default ratings at 'BB+' with a stable outlook.
It noted that Bahrain's ratings are supported by high GDP per capita and human development indicators and a developed financial sector.
The strengths are balanced by double-digit fiscal deficits, high and rising debt, a highly oil-dependent government budget and domestic political tensions that hamper fiscal adjustment, it added.
Fitch expects GDP growth of 2.4 percent in 2017-2018 including a moderation of non-hydrocarbon growth to 3 percent from an estimated 3.4 percent in 2016.
Continued deficits will push debt to 84 percent of GDP in 2018 from 75 percent in 2016, Fitch said.
It added that the country's gradual increases in domestic gas and fuel prices will partly offset the negative effect of oil price weakness on hydrocarbon revenue.
Fitch said it expects spending to grow at a rate below non-oil GDP growth, after a broad-based cut of 8.2 percent in 2016. The biggest spending cuts were to subsidies and transfers and capital spending. Notably, the nominal wage bill also fell for the first time in recent history.
In Fitch's forecast, the government's foreign borrowing reaches roughly $3.2 billion in 2017 and $2.2 billion in 2018, after $2.9 billion in 2016.
It added that banks are well placed to extend more credit to the economy and the government, enjoying profitability, high levels of capitalisation and liquidity, and low nonperforming loan levels.
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