World Economy

Fitch Downgrades Bahrain to ‘BBB-’

Fitch Downgrades Bahrain to ‘BBB-’
Fitch Downgrades Bahrain to ‘BBB-’

Fitch Ratings has downgraded Bahrain’s long-term foreign currency issuer default rating (IDR) to ‘BBB-’ from ‘BBB’ and long-term local currency IDR to ‘BBB’ from ‘BBB+’. The outlooks are stable.

The issue ratings on Bahrain’s senior unsecured foreign and local currency bonds have also been downgraded to ‘BBB-’ from ‘BBB’ and ‘BBB’ from ‘BBB+’, respectively. The agency has simultaneously affirmed Bahrain’s country ceiling at ‘BBB+’ and short-term foreign currency IDR at ‘F3’, bi-me reported.

The downgrade of the IDRs and senior debt ratings reflects the following key rating drivers and their relative weights:

High: Lower oil prices have added to the strain on Bahrain’s fiscal position. Fiscal deficits have been recorded each year since 2008 and based on Fitch’s oil price assumptions, the deficit is forecast to reach double digits, estimated at -10.9% of GDP in 2015 from -5.5% of GDP in 2014, before falling into high single digits in 2016 and 2017.

Fitch estimates Bahrain’s fiscal breakeven oil price to be around $130 per barrel compared with an oil forecast for Brent to average $65 per barrel in 2015, highlighting the fiscal challenges confronting the country. The policy response has been modest, with the authorities taking a cautious approach due to social and competitiveness considerations.

 Rise in Debt Burden

The emergence of sizeable fiscal deficits has led to a rapid rise in the general government debt burden, which reached 45.1% of GDP in 2014, materially above the ‘BBB’ median of 41.1%.

Fich forecasts the governmet debt will continue climbing, reaching 54.2% of GDP in 2015 and 58.6% of GDP in 2016 on current policy settings.

Bahrain’s ‘BBB-’ IDRs also reflect the following key rating drivers:

Economic growth is above peers and has been unaffected by the fall in oil prices. Real non-oil growth was 4.9% in 2014, driven by tourism, social and personal services and construction.

Execution of (P)GCC-financed project work by local subcontractors will support non-oil growth of 4.0%-4.5% over the forecast period.

Bahrain’s external balance sheet is stronger than its ‘BBB’ rated peers. The net external creditor position of 164% of GDP compares with a peer median of -5.4% of GDP. After 12 consecutive years of current account surpluses, a small deficit is forecast for 2015. The current account is forecast to return to surplus in 2016.

Although gross oil exports are over 50% of current external receipts (CXR), Bahrain also imports oil from Saudi Arabia to refine for export products, meaning net oil exports are 25% of CXR.

Governance indicators are below the peer median. There has been no progress in resolving the political stalemate since the opposition Wefaq party boycotted the elections of November 2014.

Bahrain’s financing flexibility has allowed it to be a regular Eurobond issuer, most recently raising $1.25b at a 30-year maturity in August. The domestic capital market continues to provide the main source of financing. The government has active conventional and Islamic issuance programs and issued its first 10-year domestic sukuk in January 2015.