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Bahrain - Stable outlook for long-term foreign and local currency issuer

Global Arab Network - - George Haddad

Tuesday, 22 December 2009 16:09

Fitch Ratings has today affirmed Bahrain's Long-term foreign and local currency Issuer Default Ratings (IDRs) at 'A' and 'A+' respectively, Short-term foreign currency IDR at 'F1' and Country Ceiling at 'A+'. The Outlook on the Long-term IDR is Stable.

"Bahrain's credit fundamentals and domestic banking sector have proved relatively resilient in the face of the stresses of the last year," says Purvi Harlalka, Associate Director in Fitch's Sovereign group. "Although growth has slowed and the budget has moved into large deficit, government and external debt ratios will remain better than rated peers. Domestic banks' exposure to the property sector will continue to exert pressure on asset quality, but Fitch believes further deterioration can be absorbed with capital ratios remaining adequate, supporting the Stable Outlook."

Bahrain's rating is supported by its high per capita income relative to the 'A' range median. A credible monetary and exchange rate regime has contained inflation at 2.8% on average during the last five years. This, together with diversification away from the hydrocarbon sector, has kept output growth higher and more stable than in other 'A'-rated sovereigns. Nonetheless, financial services and construction, which have accounted for a little over half of the expansion over 2003-2008, are at the heart of the global crisis, with the result that Bahrain's growth will likely be a more subdued 3%-4% over the medium term.

Public finances are also a rating strength. Aided by the oil price rally, the general government balance registered an average surplus of 3.5% of GDP over 2004-2008, which compares favourably with the average deficit of 1.8% of GDP of 'A'-range peers for the same period. As a result, debt moderated to 15% of GDP (45% of revenues) in 2008 from 37% (117%) in 2003, which is noticeably below the 'A' median of 34.1% of GDP and 132.8% of revenue. However, the 40% decline in energy prices and the counter-cyclical budget in 2009 will cause the general government balance to swing from a surplus of 5.7% of GDP in 2008 to a deficit of 6.8% of GDP. Debt will rise to 23% of GDP from 15%. Since government spending has long been cautious, with a self-imposed deficit ceiling of 3% of GDP, Fitch expects the deficit and debt will be reined in beyond 2010.

Dependence on oil revenues (about 75% of the total) is high compared to peers and neighbours, making fiscal outturns volatile and warranting a cautious fiscal policy. Moreover, this dependence is set to rise with enhanced oil recovery techniques likely to result in substantially increased oil production over the next 15 years.

Bahrain's exports are also more commodity-dependent than typical 'A' range sovereigns. However, high commodity prices have benefited Bahrain's external finances, which compare well with peers. Bahrain has run a succession of current account surpluses averaging almost 10% of GDP since 2003, and will register a further, albeit reduced, surplus of 4% of GDP this year. Moreover, although gross external debt (GXD) is 8.6x GDP, this is due to the operations of the wholesale banking sector, which does not pose a contingent liability to the sovereign. The wholesale banking sector is also a net external creditor, as are retail banks and the government.

Although Bahrain's financial sector has not escaped the global crisis unscathed, damage has been relatively inexpensive, with official support for retail banks confined to liquidity operations. In contrast to some other GCC countries, there has been no need for blanket deposit guarantees or government-led recapitalisation. Nevertheless, some risks remain, stemming mostly from domestic banks' heightened exposure to property, both domestic and regional, especially in the Islamic segment of the market. The materialisation of large losses that impose a sizeable cost to the sovereign would impair Bahrain's creditworthiness, although this is not Fitch's central scenario.

Global Arab Network

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