Moody's downgrades Bahrain rating
Singapore, September 18, 2013
Moody's Investors Service today downgraded Bahrain's government issuer rating by one notch to Baa2 from Baa1, and assigned a negative outlook to the rating.
The rating action is driven by the government's weak fiscal position, arising from a high and rising fiscal break-even oil price; and the outlook for lower-trend economic growth over the medium term, it said.
The rating action concludes the review for downgrade announced in June 2013, it said.
The negative rating outlook reflects the high degree of event risk, particularly regarding Bahrain's susceptibility to domestic and regional geopolitical instability, as well as potential negative impact from an oil price shock, Moody's said.
At the same time, Moody's lowered Bahrain's country risk ceilings to A3 from A1. The long-term foreign currency bond ceiling was also lowered by one notch to A3, while the short-term foreign currency bond ceiling was affirmed at Prime-2. The long-term foreign currency deposit ceiling was lowered to Baa2 from Baa1, while the short-term foreign-currency deposit
ceiling was affirmed at Prime-2.
The offshore banking centre's long-term foreign-currency bond and bank deposit ceilings were lowered by one notch to A2 from A1, while the short-term ceilings were affirmed at Prime-1, it said.
The first driver underlying Moody's decision to downgrade Bahrain's sovereign rating is the country's weak fiscal position, it said. The IMF estimates Bahrain's fiscal break-even oil price to be $118.70/barrel, which exceeds Moody's forecast of $109.5/barrel for the average oil price in 2013. As a result, expenditure pressures are likely to widen the deficit considerably into the 4.0 per cent-5.0 per cent range in 2013 and 2014, from 2.6 per cent in
2012, according to the IMF.
Given the budget's significant dependence on oil revenues, Bahrain's government finances are less flexible and its shock-absorption capacity is lower than that of its regional and global rated peers.
The second driver of the downgrade is Moody's outlook for lower-trend economic growth in Bahrain. The domestic economy remains dependent on the oil and financial sectors that have uncertain growth prospects, despite having a relatively more diversified economy than its Gulf Cooperation Council (GCC) peers. In addition, Moody's believes that continued political and social tensions may dampen confidence and investment in the economy.
Overall, the rating agency expects that Bahrain's real GDP trend growth rate will remain below its pre-crisis
performance of 6.3 per cent average growth per year between 2000 and 2008.
Moody's notes that these two factors, if sustained, are likely to lead to a considerable rise in government debt as a share of GDP over the medium term.
In fact, the IMF predicts that Bahrain's debt will exceed 60 per cent of GDP by 2018. A combination of weaker growth and higher interest rates could, in Moody's view, jeopardise government debt sustainability.
Moody's also notes that the banking sector remains large. Assets of onshore retail banks are almost three times Bahrain's GDP, posing a degree of systemic risk.
Moody's recognises, however, that high levels of capitalisation should help to absorb losses and limit the sovereign's
potential contingent liabilities in a severe downside scenario.
At the same time, Moody's notes a number of factors that support Bahrain's rating. These include a strongly positive net international
investment position and consistent surpluses in the current account balance.
In addition, the government of Bahrain has a record of receiving sizable amounts of external financial assistance and political support from fellow GCC governments, namely Saudi Arabia. - TradeArabia News Service