S&P Global Ratings has revised Bahrain's outlook to 'stable' from 'negative' on the back of new fiscal reforms aimed at improving non-oil revenues and cutting state spending, the ratings agency said in a statement.
Rated below investment grade, Bahrain was bailed out to avoid a credit crunch in 2018 with a $10 billion package from wealthy neighbors, Saudi Arabia, Kuwait, and the UAE.
That money was linked to a set of fiscal reforms, but after the coronavirus crisis strained its finances, Bahrain in September postponed plans to balance its budget by two years and announced plans to increase a value-added tax.
"The Bahraini government recently announced additional fiscal reforms to strengthen non-oil revenue and rationalize expenditure. These measures, along with the more supportive oil price environment, should improve the sovereign's fiscal position", S&P said in a statement this weekend.
The agency said it expects the government to benefit from additional financial support from its Gulf neighbors, if needed.
Bahrain will double value-added tax to 10 percent next year, a move which S&P estimated could contribute receipts of about 3 percent of gross domestic product in the next few years, up from about 1.7 percent this year.
The Gulf state is also planning to rationalize operational government expenditure and social subsidies in 2023 and 2024, a move which shifts the focus of its reforms more on the spending side than on raising non-oil revenues.
"We believe there is higher implementation risk in expenditure rationalization as the delicate political and social environment on the island, which has constrained the government's efforts, persists", S&P said.