Fitch Ratings has affirmed Bahrain’s Long-term foreign currency Issuer Default Rating (IDR) at ‘BBB’ and local currency IDR at ‘BBB+’. The Outlooks are Stable. The issue ratings on Bahrain’s senior unsecured foreign and local currency bonds have also been affirmed at ‘BBB’ and ‘BBB+’, respectively. The agency has simultaneously affirmed Bahrain’s Country Ceiling at ‘BBB+’ and Short-term foreign currency IDR at ‘F3′.
KEY RATING DRIVERS
The affirmation and Stable Outlook reflect the following factors:
The rebound of oil production following disruptions in 2012 helped lift the overall growth rate to over 5% in 2013. The non-oil sector, hampered by budget under-execution and weak investment, experienced a slowdown relative to 2012, to 3%. Fitch expects the non-oil economy to drive activity in the medium term.
Disbursement of Gulf Cooperation Council (GCC) funding is underway. Of the USD4.4bn worth of projects approved to date, 10 tenders (worth USD1.4bn) have been awarded, although work has only commenced on two of these projects (worth about USD40m). The remaining awarded tenders are expected to launch in 2014. In addition to supporting non-oil growth, GCC funding will result in budget savings by relieving pressure on capital expenditure.
Fiscal outturns have disappointed and the trajectory continues to be negative. Bahrain registered a larger 2013 deficit than was projected by Fitch, largely due to an increase in current spending. Total debt reached about 44% of GDP, representing an increase of 7% of GDP relative to 2012. This places Bahrain firmly above the ‘BBB’ rated peer median debt level of 40% of GDP, further straining the fiscal profile and exposing it to fluctuations in oil prices. The break-even oil price is projected by Fitch to surpass USD130/barrel by 2015.
Political instability has made it difficult to press ahead with subsidy and wage reforms, and parliamentary elections scheduled in November have deferred any planned initiatives until 2015, at the earliest. Elevated oil prices and the expectation of incoming support from the GCC have further reduced the urgency for fiscal tightening. Fitch’s long-term baseline fiscal projections assume a gradual reduction in government deficits, reflecting some reduction in current spending. Given the lack of progress on this front to-date, risks to Fitch’s projections are skewed to the downside.
Pressure to reach a deal with the Bahraini opposition is mounting ahead of the November elections, although Fitch does not expect a comprehensive political solution to be achieved in the near term.
Bahraini banks have enjoyed strong profitability, rising capitalisation, and declining NPLs. The smaller Islamic banks have continued to merge. The sector is in the process of preparing for the implementation of Basel III regulations, and the Central Bank is overseeing measures aimed at improving corporate governance and oversight.
Bahrain’s external position is stronger than its ‘BBB’ rated peers. It registered a current account surplus of around 10% of GDP in 2013. Bahrain’s overall net creditor position, estimated by Fitch at over 100% of GDP in 2013, is the strongest of any similar-rated sovereign.
GDP per capita and broader human development and business environment indicators are close to the ‘A’ median. The strong regulatory framework and local skill base, combined with low costs, are key supports to the financial sector.
The Stable Outlook reflects Fitch’s assessment that upside and downside risks to the rating are currently balanced. The main factors that individually, or collectively, could trigger negative rating action include:
- Sustained difficulty in reining in fiscal deficits resulting in a material deterioration of the government debt burden.
- Serious deterioration of the domestic security situation.
- A prolonged period of significantly lower oil prices.
The main factors that, individually or collectively, could lead to positive rating action are:
- A reduction and lasting stabilisation of the debt-to-GDP ratio around the peer median. This would be achieved through measures to address structural budget rigidities including containing the government wage bill and revising the subsidy system.
- A broadly accepted political solution that eases political unrest.
- A prolonged period of significantly higher oil prices that improve the public finances.
Fitch forecasts that Brent crude will average USD105/bl in 2014 and USD100/bl in 2015 and that Bahraini export crude will continue to trade at a small discount to Brent. The disruption to the pipeline supplying oil from the Abu Saafa field during 2012 is not expected to reoccur. Production levels are assumed to increase marginally to reflect capacity upgrades.
For 2014 and 2015, Fitch assumes that Bahrain will benefit from savings through the implementation of GCC development projects financed by Kuwait, Saudi Arabia, and the UAE. Agreement on commitments from Qatar is at a less advanced stage.
Fitch assumes there will be no challenge to the rule of the royal family or the current succession.
We also assume no material deterioration in the internal security situation. In addition, Bahrain is in a volatile region and its rating factors in existing tensions and conflicts which are assumed to continue. Fitch assumes that regional geopolitical conflicts will not impact directly on Bahrain or on its ability to trade.
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