The downgrade of Bahrain’s ratings outlook from ‘Stable’ to ‘Negative’ by Capital Intelligence is being weighed in the City of London and other European investor centres.
The international rating agency based in Cyprus announced (27 March 2015) that it has affirmed Bahrain’s Long-Term Foreign and Local Currency Ratings of ‘BBB’ and its Short-Term Foreign and Local Currency Ratings of ‘A2’ but revised the outlook for Bahrain’s ratings to ‘Negative’ from ‘Stable’.
The revision of the outlook is supported by the following factors:
a) Deterioration in the public finances in view of the country’s dependence on declining oil revenues, in addition to continued increase in debt levels.
b) Deterioration in current account position in view of the decline in the value of oil exports, which limits the country’s shock absorption capacity.
Reflecting rising public expenditure and declining international oil prices, the budget deficit is expected to have doubled to 6.8% of GDP in 2014 and is on course to exceed 12% in the coming years, assuming no change in key policies and an average oil price of US$ 50 per barrel in 2015-16. The central government budget structure remains weak in view of the lack of diversification of government revenue (oil accounts for around 88% of central government revenue), and the absence of fiscal consolidation measures in view of the polarised political climate.
Spurred by growing deficit, central government debt level continued its increase reaching 47.1% of GDP in 2014, compared to as low as 21.4% of GDP in 2009, while it is expected to top 69.2% of GDP in 2016. Gross financing needs are also expected to increase to a still manageable level of 18.5% of GDP in 2016, compared to 7.5% of GDP in 2013.
External balances are expected to weaken as well, as the current account balance is expected to break even in 2015, compared to a surplus of 6.6% in 2014, on account of lower value of hydrocarbon exports. The significant decline in current account surpluses would exert significant pressure on the country’s limited reserve buffer of US$ 5.5 billion (circa 16% of GDP, covering 4.5 months of imports), thus constraining its capacity to absorb economic shocks or prolonged periods of low hydrocarbon prices.
In gross terms, the country’s external debt has fallen from 9 times GDP in 2007 to just over 4 times as of December 2014, due to the continued deleveraging of the wholesale banking sector. The seemingly high debt ratios reflect Bahrain’s standing as a regional financial centre, with most of the external debt stock demonstrating the foreign liabilities of foreign banks. Public external debt is more moderate, standing at 19% of GDP in 2014. Foreign asset holdings are relatively high and both the public and banking sectors are net external creditors.
Bahrain’s investment-grade ratings are still underpinned by several factors, including the comparatively high level of GDP per capita, the diversified nature of the economy relative to regional peers, and currently stable growth prospects. The ratings also take into account the likelihood that other members of the Gulf Cooperation Council (GCC), in particular Saudi Arabia (‘AA-’/ ‘A1+’/‘Stable’), would provide financial and other forms of support to Bahrain in the event of financial stress.
Recent growth performance has been good. Bahrain’s economy is expected to have expanded by 3.9% in 2014 and is expected to grow by around 3% in 2015, supported by increased activity in the non-oil sectors and the disbursement of GCC development funds.
The Outlook for the ratings is ‘Negative’. This means that Bahrain’s ratings are likely to be downgraded in the next 12-24 months, provided that key credit metrics evolve as envisioned in CI’s baseline scenario.
The ‘Negative’ Outlook primarily reflects the significant deterioration in the public finances and external balances which limits the country’s shock absorption capacity and triggers higher debt levels, the rating agency said.