Bahrain’s sovereign ratings outlook cut to ‘negative’

Moody's Investors Service has changed the outlook on Bahrain's sovereign ratings to ‘negative’ from ‘stable’. These ratings are the country's A2 local and foreign currency government bond ratings, the A2 country ceiling for foreign currency bank deposits and the Aa3 country ceiling for foreign currency bonds. Bahrain's country ceiling for local currency bank deposits and country ceiling for local currency bonds remain at Aa2.
"The change in outlook was prompted by the steep decline in oil prices well below Bahrain's fiscal break even level. Compared with similarly rated oil exporters, Bahrain has more limited reserves of liquid financial assets that can be tapped to finance fiscal deficits and ease adjustment. Moreover, Bahrain may not have the resilience to absorb the price shock and avoid impairment to its credit fundamentals relative to global rating peers," said Tristan Cooper, Vice President and Senior Analyst in Moody's Sovereigns Group.
Moody's notes that despite progress towards economic diversification, Bahrain's fiscal and external current accounts remain heavily dependent on oil export receipts. According to the IMF, Bahrain's fiscal break even oil price is around US$75 per barrel, compared with a current oil price of around US$45 per barrel. Bahrain's fiscal break even is higher than that of most other oil exporters rated by Moody's, including lower-rated Russia, Kazakhstan, and Trinidad and Tobago.
"The government's ability to cut expenditure in response to the decline in its revenues has been partially compromised by large increases in current spending in recent years," said Cooper. Moody's expects the headline credit metrics of oil exporters to be stronger than those of non-oil exporters at a similar rating level because of the pronounced volatility of their economic performance.
Moody's cautioned that the global and regional economic downturn is likely to have a significant effect on Bahrain's non-hydrocarbon sectors as well. Although the country has had some success in diversifying its real economy away from oil in recent years, it has tended to focus on sectors that are also cyclical and vulnerable to fluctuations in external demand, including tourism and financial services. Moreover, the competitiveness of the country's non-hydrocarbon exports and services has been hampered by the recent appreciation of the local currency, which is pegged to the US dollar.
Bahrain's country ceiling for local currency bank deposits remains unchanged as contagion from the global financial crisis to the retail banking system seems to have been contained. "Nevertheless, Moody's does have some concerns over the capacity of the authorities to support the country's large banking sector in the event of a systemic crisis," cautioned Cooper.
Political event risk to Bahrain's sovereign ratings is considered to be at a moderate level on Moody's global scale of this particular rating factor. Like other GCC countries, Bahrain is affected by the precarious regional political situation, with the stability of Iran and Iraq perennial concerns. But unlike other GCC countries, Bahrain's domestic politics are more fractious and potentially prone to instability in the event of a prolonged economic downturn.
Further downward pressure on Bahrain's ratings would arise from an inability of the government to make the necessary fiscal adjustments to prevent a long-term impairment of its balance sheet. This would be reflected in an unfavourable trajectory of government financial metrics relative to Bahrain's global rating peers.