Bahrain’s ratings affirmed

March 29, 2014 9:52 am

Capital Intelligence (CI), the international credit rating agency, today announced that it has affirmed Bahrain’s Long-Term Foreign and Local Currency Ratings of ‘BBB’ and its Short-Term Foreign and Local Currency Ratings of ‘A2’. The Outlook for Bahrain’s ratings is affirmed at ‘Stable’.

Bahrain’s investment-grade ratings are underpinned by several factors, including an adequate external position, a relatively diversified economic base, comparatively high GDP per capita and stable growth prospects. The ratings also take into account the likelihood that other members of the Gulf Cooperation Council (GCC), in particular Saudi Arabia (AA-/A1+/Stable), would provide financial and other forms of support to Bahrain in the event of financial stress.

Despite the relative improvement in the security situation in the past six months, Bahrain’s political climate continues to be marred by entrenched sectarian tensions and sporadic outbreak of demonstrations. Nevertheless, political risk factors appear to have had little impact on macroeconomic performance in 2013 with real GDP growth expected to have picked up to 4.4%, supported by higher public spending and increased activity in non-oil sectors. The recovery is expected to continue over the next two years, supported by the disbursement of GCC development funds. These grants are expected to be in the region of $1 billion (c3.5% of GDP) per annum and will be directed to infrastructural and other projects.

Bahrain’s external position remains reasonably strong, in part due to the continued strength of international oil prices. The current account surplus is expected to have exceeded 13% of GDP in 2013, boosted by higher oil exports and a rebound in tourism receipts. Official foreign exchange reserves increased to USD5.3 billion in September 2013 from USD4.8 in 2012, and both the government and banking sector have maintained net external creditor positions.

In gross terms, the country’s external debt has also fallen from 9 times GDP in 2007 to nearly 4.6 times as of September 2013, driven down by the continued deleveraging of the wholesale banking sector. The seemingly high debt ratios reflect Bahrain’s standing as a regional financial centre, with most of the external debt stock reflecting the foreign liabilities of foreign banks. Public external debt is more moderate, standing at 19% of GDP in June 2013.

Notwithstanding the above factors, Bahrain’s sovereign ratings continue to be constrained by the lack of diversification of government revenue (oil revenue accounts for around 87% of central government revenue), the country’s more limited shock-absorption capacity compared to other GCC sovereigns and domestic and geopolitical risks, as well as institutional weaknesses and limited data disclosure.

Recent fiscal performance has been broadly weak. The general government budget deficit is expected to have exceeded 4% in 2013 and is expected by CI to average about 5% of GDP in 2014-15, assuming slightly lower oil prices of USD 97 per barrel and no change in key policies.

According to CI’s estimates, gross central government debt continued its upward trend in 2013 and is expected to have exceeded 40% of GDP, compared to below 13% as recently as 2008. Net general government debt, which takes into account the position of the social security system and general government deposits with domestic banks, is much lower at an estimated 20% of GDP in 2013. However, the pension funds pose a long-term fiscal challenge for the government due to their large unfunded actuarial deficits, which were equivalent to 52% of GDP in 2011.

Rating Outlook
The Outlook for the ratings is ‘Stable’. This means that Bahrain’s ratings are likely to remain unchanged in the next 12-24 months, provided that key credit metrics evolve as envisioned in CI’s baseline scenario and no other credit quality concerns arise.

The ‘Stable’ Outlook primarily balances the steady economic recovery and the dissipation of the impact of political unrest on the country’s macroeconomic performance against the weakening of the public finances and rising debt burden.

Primary Analyst
Dina Ennab
Sovereign Analyst
Tel: +357 2534 2300