The agency has simultaneously affirmed Bahrain’s country ceiling at ‘BBB+’ and short-term foreign currency IDR at ‘F3’ with outlook stable.
“Bahrain should begin to experience a subdued recovery in H211, which could lift growth to an average 1.2% for the year as a whole. However, growth will be mainly underpinned by the public sector, as private sector activity is unlikely to bounce back vigorously in 2011 in light of the still unsettled political environment,” S&P in a statement said.
In a statement Fitch said that the resolution of the RWN and affirmation of the rating reflects Fitch’s view that the near term risks to the political and economic outlook have abated following the lifting of the state of emergency on 1 June.
The stable outlook reflects Fitch’s judgment that the fiscal and economic damage inflicted by the events of Q111, and the worsening of Bahrain’s political climate, which is likely to prove long-lasting, are adequately reflected in its ‘BBB’ rating.
“Fitch believes that the time horizon for political reform that could appease the protestors is likely to be extended and that low-level political unrest will continue in the meantime. However, there is some tolerance for political volatility at the ‘BBB’ rating level,” Purvi Harlalka, Director in Fitch’s Middle East and Africa Sovereign Ratings Group, said. “Some moves to defuse political tensions have been made. However, failure to make genuine progress on political liberalisation over the next few years would likely deepen the rift between the establishment and the polity, bringing the threat of further radicalisation of the latter. Such a scenario would impose additional economic and fiscal costs on the sovereign and put eventual downward pressure on the rating.”
Fitch is encouraged by the establishment of an independent commission to investigate human rights abuses in June as it suggests more willingness by the royal family to analyse the grievances against it than shown earlier in the year. The transfer of trials to civilian courts from military ones in July is also a step in the right direction. On balance, Fitch also considers the national dialogue a positive development because it eschews violence in favour of consultation, albeit imperfectly.
The opposition’s dissatisfaction with the national dialogue, in which they felt under-represented and marginalised, resulted in Bahrain’s largest opposition party, Al Wefaq, walking out of the talks. It also remains unclear whether Al Wefaq, which held 45% of the seats in the lower house of Parliament before it resigned in protest against the regime’s crackdown in March, will participate in the parliamentary by-elections that will be held in September. Meanwhile, demonstrations continue and are likely to do so as long as the opposition perceives the regime to be shying away from bona fide political reforms.
Nevertheless, unless there is a serious resumption in violence, in Fitch’s opinion the worst of the short-term economic fallout from the political unrest is likely to have passed.
A 40% yoy increase in the average price of oil in Q111 points to an improvement in external finances. Fitch expects high oil prices to lift the current account surplus for the year as a whole to 11.2% of GDP from 2.6% in 2010. The fiscal accounts are also set to benefit from higher oil sector receipts, which provided nearly 85% of Bahrain’s total revenue collections in 2010. However, Bahrain needs the increased revenue to mitigate the impact of the planned fiscal expansion under which current and total expenditure will rise by 33% yoy and 18.5% yoy, respectively, in 2011. This will cause the budget break-even oil price to increase to $119 per barrel in 2011 from $97 in 2010, increasing Bahrain’s exposure to future oil price shocks.
“The deepening of social divisions will weigh on the budget beyond 2011 as the government tries to assuage them with higher social spending. The $10billion in aid from neighbours over the coming decade will reduce Bahrain’s financing requirements, but increase its dependence on its neighbours. Bahrain has also suffered reputational damage, which could affect the fortunes of its financial sector, 20% of GDP in 2010. Together with the near tripling of public debt levels to 46% of GDP in 2011, from 16% in 2008, these factors have materially weakened Bahrain’s credit quality since the beginning of the year,” Fitch in a statement said.
A substantial worsening in the security situation and/or a significantly larger deterioration in public finances than Fitch is currently projecting would result in renewed downward pressure on the rating. By contrast, genuine political reform would lead to a sustainable improvement in Bahrain’s political environment, with positive consequences for the fiscal and economic outlook and the rating.