Fitch Ratings has cut Bahrain's Long-Term Foreign-Currency Issuer Default Rating to B, down from B+, while keeping the outlook at stable. The agency based the downgrade on projections that the country's government debt - already very high as a share of GDP - will continue to increase despite ongoing fiscal consolidation efforts.
Fitch estimates that Bahrain's government debt reached 146.8% of GDP at the end of 2025, a level that the agency notes is the second highest among Fitch-rated sovereigns and far above the 'B' category median of 53.4%. While the rating agency expects the rate of debt accumulation to slow as consolidation measures take effect, its baseline forecast sees debt rising to 153.3% of GDP by the end of 2027.
The ratings agency projects a gradual narrowing of the budget shortfall, with the deficit easing to 9.2% of GDP in 2027 from an estimated 13.4% in 2025. These improvements are expected to be underpinned by a fiscal consolidation package launched in December 2025 that raises fuel and energy prices, increases utility tariffs and fees for government services, and requires higher dividend transfers from government-related entities. In addition, the government has signalled plans to implement a corporate income tax in 2027.
Fitch describes the government's consolidation assumptions as credible. The agency expects higher oil production and improved non-oil revenue to help reduce the deficit in line with official projections. A central element in this assessment is the ramp-up of output from the expanded Bahrain Petroleum Company (Bapco) refinery, which Fitch says will boost exports and support the current account position.
On external balances and support, Fitch points to substantial financial assistance from Gulf Co-operation Council partners that has historically supported Bahrain. The agency expects concessional funding to increase in response to the country's fiscal reforms, including cheap loans, capital expenditure grants, and investment programmes. Fitch projects the current account will record an average surplus of 4.9% of GDP over 2026 and 2027, reflecting higher export receipts from the enlarged Bapco refinery.
Despite these supports, some external buffers remain limited. The Central Bank of Bahrain's international reserves stood at 1.3 months of current external payments at end-2025, well below the 'B' category median of 4.5 months. On the growth front, Fitch expects GDP to pick up slightly, projecting growth of 3.3% in 2026 compared with 3.1% in 2025, driven by completion of the Bapco refinery expansion which will raise capacity to 380,000 barrels per day from 267,000 barrels per day.
In sum, Fitch's downgrade reflects a balance between entrenched and rising fiscal indebtedness on one side and external support, refinery-driven export improvements, and the government's consolidation programme on the other. The stable outlook indicates Fitch sees these offsetting factors as broadly balancing downside and upside risks over the near term.