Kingdom of Bahrain 'A/A-1' Sovereign Ratings Affirmed; Outlook Stable

Published December 27th, 2009 - 09:13 GMT

Standard & Poor's Ratings Services said it had affirmed its 'A' long-term and 'A-1' short-term sovereign credit ratings on the Kingdom of Bahrain. The outlook is stable.


The ratings on the Kingdom of Bahrain reflect the government's net financial asset position and strong international alliances. These factors provide a counterbalance to high geopolitical risks (relative to the majority of other rated sovereigns); the Bahraini economy's vulnerability to external shocks; and the secular decline of its hydrocarbon resources. A comparatively strong regulatory environment also mitigates some risks related to the large financial sector.


We estimate the general government's debt net of deposits at a 2% of GDP asset position in 2009. This continues to compare well with a median debt position of 24% of GDP for Bahrain's 'A' rated sovereign peers. Oil revenues have been conservatively budgeted on the basis of a $40 oil price for both 2009 and 2010, and we expect there to be a general government surplus (including extra-budgetary expenditures) of up to about 5% of GDP in both years. Oil and gas revenues account for about 80% of total fiscal revenues, however, making the budget sensitive to price swings and volume output.


A well developed and closely regulated financial system helps to contain Bahrain's exposure to declines in real estate and stock market prices. Some Bahraini institutions have been affected by deleveraging in developed markets, and by localized problems related to Saudi-owned groups with Bahraini subsidiaries. The problems have mostly been with wholesale banks, which we do not treat as a contingent liability for the sovereign, given the government's past position to limit moral hazard. Similarly, Bahraini banks' exposure to Dubai public enterprises is modest in aggregate, limiting the direct impact of Dubai World's debt standstill. Nevertheless, turbulent financial conditions in the rest of the Gulf and further afield have been felt via a slowdown in the important financial sector and wider economic activity.


Background geopolitical risks, and their possible ramifications for domestic stability, are partly mitigated by strong international alliances. Despite past efforts at political reform, discontent among the Shia majority remains a possible source of tensions.


The stable outlook balances the Kingdom's fiscal and external asset positions against political risks, limited oil resources, and the challenge of carrying through structural reforms needed for economic diversification, in particular in education and the labor market. Success in improving human capital to underpin sustainable growth, addressing long-term energy needs, and reducing the pace of current expenditure growth could have a positive effect on the ratings. Conversely, the ratings would come under pressure if there was a sustained deterioration in fiscal or economic performance, or in the financial sector.

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