Standard & Poor's assigned its single-'A'-minus long-term foreign currency and single-'A' long-term local currency sovereign credit ratings to the Kingdom of Bahrain. At the same time, Standard & Poor's assigned its 'A-2' short-term foreign currency and its 'A-1' short-term local currency sovereign credit ratings to Bahrain. The outlook is stable.
The higher local currency credit ratings balance the government's ability to raise revenues and access the domestic capital markets against geopolitical risks that could impair its ability to service both local and foreign currency debt.
"The ratings on the Kingdom of Bahrain balance the government's prudent fiscal policies with its dependence on one oil field; its low debt levels with its opaque public finances; and its stable monetary and financial system with uncertainty in the policy agenda after the formation of a new parliament and cabinet this October," said Ala'a Al-Yousuf, director at Standard & Poor's.
Bahrain's investment-grade ratings are supported by the government's prudent fiscal policy. Government budget deficits have typically been below two percent of Gross Domestic Product (GDP). In 2000 and 2001, however, the budget was in surplus as oil revenues were higher-than budgeted, while expenditures were broadly within original budget allocations. This year, extra-budgetary spending for capacity expansion at the offshore Abu Sa'afa oil field, however, is likely to push the overall fiscal position into a small deficit of about 0.6 percent of GDP.
Moreover, higher capital expenditures in 2003 are likely to widen the overall deficit to about 4.7 percent of GDP, although this should narrow to two percent in 2004 as capital spending declines and oil revenues increase.
Central government debt at year-end 2001 was 30 percent of GDP, of which only five percent of GDP was external debt, all to regional development funds. Interest payments are relatively small at about five percent of revenues. The general government had a net asset position in 2001 of 50 percent of GDP, which compares favorably with similarly rated sovereigns.
Bahrain's fixed exchange rate underpins price stability. Moreover, a robust financial system has enabled it to diversify economic activity and maintain a relatively deep and liquid market for government securities. The Bahrain Monetary Agency has a good reputation as a banking supervisor, with standards in line with international best practice, reducing the risk of financial instability and the government's contingent liability.
The ratings are constrained by a narrow base for government revenues. Oil revenues, virtually all from Abu Sa'afa, account for about 67 percent of total revenues. This share is expected to exceed 70 percent after 2004 as oil production is slated to increase by 50 percent. Ownership of Abu Sa'afa is shared equally with Saudi Arabia, but in 1996 Saudi Arabia agreed to grant its half share of oil production to Bahrain.
The ratings are predicated on the understanding that this agreement will hold for the foreseeable future and that the oil reserves are sufficient to last for several decades at projected rates of extraction. Although the government is likely to continue to assume a conservative oil price in the budget, the government's high reliance on oil revenues from a single offshore field is a source of vulnerability.
Another ratings constraint is the lack of transparency in public finances. The published accounts of the central government are neither comprehensive nor presented according to international standards. Implicit subsidies to public utilities are not transparent; nor are transfers to the oil company and the aluminum smelter, the two largest non-financial public enterprises, with combined debt estimated to reach about 37 percent of GDP by 2004 increasing the contingent liability of the government.
There is also uncertainty about the policy agenda. A new bicameral parliament will be formed in October—with an elected lower chamber after a 27-year hiatus—followed by the formation of a new cabinet. It remains to be seen how the new policy-making regime will evolve and function.
While the new regime is expected to bring greater political stability, transparency and accountability, it is unclear how it will address key structural challenges such as reducing unemployment, expanding the role of the private sector, reforming the public sector and broadening the government's revenue base.
"The stable outlook reflects Standard & Poor's view that the government will maintain macroeconomic stability and a low debt burden, while it might not make sufficient or early progress on improving the transparency of public finances and implementing structural reforms," said Al-Yousuf. — (menareport.com)
© 2002 Mena Report (www.menareport.com)
