Moody’s places Bahrain sovereign ratings on review for possible downgrade

Moody's Investors Service has placed Bahrain's A3 government bond ratings on review for possible downgrade, motivated by concern that the ongoing political turmoil in the kingdom has sharpened fiscal and broader economic downside risks.
The rating agency has also placed under review for possible downgrade the following sovereign ratings of Bahrain: (1) the A1/P-1 country ceilings for foreign currency bonds, the A3/P-1 country ceilings for foreign currency bank deposits; (2) the Aa3 country ceilings for local currency bonds and bank deposits; and (3) the Aa3/P-1 ceilings for the bonds and deposits of Bahrain's wholesale banks.
Moody's expects to conclude the ratings review within three months. Barring an extreme outcome to the political unrest, expects Bahrain's ratings are expected to remain within investment grade.
Although the Crown Prince of Bahrain is attempting a "national dialogue" with opposition groups, it remains to be seen whether this effort will be successful in calming the political situation in a sustainable way. As stated in Moody's credit opinion on Bahrain from December 2010, the political tension between the government and the Shiite-dominated opposition is a credit challenge. At the time, Moody's also stated that a marked deterioration in the domestic or regional political environment could lead to a ratings downgrade.
Moody's believes that efforts by the authorities to appease discontent are likely to lead to further increases in government expenditure. However, even before the recent turmoil, Moody's had already expressed its concerns about the loosening direction of the country's public finances, as reflected in the downgrade of Bahrain's government bond ratings to A3 from A2 in August 2010. The primary driver of this downgrade was the gradual rise in the breakeven oil price of Bahrain's budget.
The government's expansionary budget for 2011 and 2012, which was published in January before the recent outbreak of unrest, requires a breakeven oil price of between $97 and $100 per barrel — a high level compared with other oil exporters.
Unlike other oil exporters in the region, Bahrain is not known to have a significant sovereign wealth fund of offshore financial assets that could potentially be liquidated to support the budget or broader economy in a crisis. Moreover, Bahrain's hydrocarbon reserves are relatively limited.
Moody's also remains concerned about the large size of Bahrain's banking system relative to the government's resources. Total bank assets amount to around 11 times GDP, with assets of retail banks alone amounting to over three times GDP. The potential liabilities stemming from the banking sector in a systemic crisis could therefore present a significant challenge to the authorities, notwithstanding mitigating factors.
Moody's is keen to stress the positive factors that support Bahrain's sovereign ratings. These include a substantially positive net international investment position (as per the latest data for the end of 2009), a current account surplus, a typically dynamic non-oil sector and a high (albeit volatile) level of GDP per capita. Furthermore, Bahrain has strong international relations that should ensure external financial support, if needed. Moody's would expect Saudi Arabia to be especially supportive in case of need.