Moody’s says the 80 billion barrel oil discovery in Bahrain could stimulate private investment in the country’s energy sector in the near term, and in the medium term could increase government oil- and gas-related revenue and reduce the country’s fiscal and current account deficit.
On 4 April, Bahrain’s (B1 negative) oil minister Sheikh Mohammed bin Khalifa Al Khalifa announced the discovery of hydrocarbon deposits containing at least 80 billion barrels of tight oil and 10-20 trillion cubic feet of deep natural gas in a new offshore field off the west coast of Bahrain.
§ A large increase in Bahrain’s oil production, and associated fiscal revenue, could therefore materially reduce Bahrain’s budget deficit, which was as high as 17.8% of GDP in 2016.
§ Bahrain’s current account would also benefit. When oil prices declined after mid-2014, the dollar value of Bahrain’s oil exports dropped significantly and the country’s current account swung from surpluses averaging 8% of GDP in 2012-13 to deficits averaging 3.7% of GDP in 2015-17.
§ Bahrain’s current account deterioration has driven the large erosion of foreign exchange reserves from a peak of $5.8 billion at the end of 2014 to a low of $1.3 billion in July 2017.
§ The reserves have since recovered somewhat on the back of large sovereign external bond issuances, including $3 billion in international bonds in September 2017 and $1 billion in international sukuk in April 2018.
§ But with foreign reserves of $2.8 billion at the end of November covering only 1.4 months of imports of goods and services and less than 10% of Bahrain’s short-term external debt, pressure on Bahrain’s pegged exchange rate regime is now at its highest since the formal peg of the rial to the dollar was introduced in 2001.