Moody’s: Bahrain issuer rating on review for possible downgrade

Moody's Investors Service has placed Bahrain's Baa1 government issuer rating on review for possible downgrade due to the fiscal implications of the kingdom’s high and rising break-even oil price; the outlook for lower trend growth over the medium term; and, the impact of a low-growth, high government expenditure and weaker oil price scenario on Bahrain's long-term debt sustainability.
Moody's said it will conclude the rating review within three months and expects Bahrain's ratings to remain within investment grade.
The rating agency said that the first driver underlying the decision is the country's rising government debt burden, which introduces uncertainty into the longer-term debt sustainability. Although Bahrain's fiscal deficit for 2012 was a moderate 2.6% of GDP and smaller than the deficits recorded in 2009 and 2010, the IMF estimates Bahrain's high and rising fiscal break even oil price to be at $118.70/barrel, which is above the forecast of $106/barrel for the average oil price in 2013. This reflects expenditure pressures that will likely widen the deficit considerably into the 4.0%-5.0% range in 2013 and 2014, 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 rating peers.
The second driver is the growing uncertainty, in Moody's view, surrounding the dynamism of Bahrain's longer-term growth prospects. Although the country has a more diversified economy than its Gulf Cooperation Council (GCC) peers, Bahrain's economy remains dependent on the oil and financial sectors. In addition, Moody's believes that continued political and social tensions may dampen confidence and investment in the economy, and ultimately weaken long-term growth prospects. Moreover, it expects that Bahrain's real GDP trend growth rate will remain below its pre-crisis performance.
The third driver behind Moody's rating decision is that the two previous factors are likely to lead to a considerable medium-term rise in government debt as a share of GDP, which the IMF predicts will exceed 60% of GDP by 2018.
Although not a prime ratings driver, Moody's also notes that the banking sector remains large. Assets of onshore retail banks are almost three times Bahrain's GDP. Moody's recognizes, however, that high levels of capitalization should help to absorb losses and limit the sovereign's potential contingent liabilities in a severe downside scenario. Nevertheless, the large size of the banking sector poses a degree of systemic risk.
At the same time, Moody's notes a number of factors that support Bahrain's rating. These include a strong positive net international investment position and continued current account surpluses. In addition, Bahrain has a record of receiving sizable amounts of external financial assistance from fellow GCC governments.