Fitch Ratings has affirmed Bahrain’s long-term foreign currency issuer default rating (IDR) at BBB and local currency IDR at BBB+.
The outlooks are stable. The issue ratings on Bahrain’s senior unsecured foreign and local currency bonds have also been affirmed at BBB and BBB+, respectively. The agency has simultaneously affirmed Bahrain’s country ceiling at BBB+ and short-term foreign currency IDR at F3.
“The rebound of oil production following disruptions in 2012 helped lift the overall growth rate to over 5% in 2013. The non-oil sector, hampered by budget under-execution and weak investment, experienced a slowdown relative to 2012, to 3%. Fitch expects the non-oil economy to drive activity in the medium term,” Fitch in a statement said.
“Disbursement of Gulf Cooperation Council (GCC) funding is underway. Of the $4.4billion worth of projects approved to date, 10 tenders worth $1.4billion have been awarded, although work has only commenced on two of these projects, worth about $40million. The remaining awarded tenders are expected to launch in 2014. In addition to supporting non-oil growth, GCC funding will result in budget savings by relieving pressure on capital expenditure,” Fitch in a statement said.
“Fiscal outturns have disappointed and the trajectory continues to be negative. Bahrain registered a larger 2013 deficit than was projected by Fitch, largely due to an increase in current spending. Total debt reached about 44% of GDP, representing an increase of 7% of GDP relative to 2012. This places Bahrain firmly above the BBB rated peer median debt level of 40% of GDP, further straining the fiscal profile and exposing it to fluctuations in oil prices. The break-even oil price is projected by Fitch to surpass USD130/barrel by 2015.”
“Political instability has made it difficult to press ahead with subsidy and wage reforms, and parliamentary elections scheduled in November have deferred any planned initiatives until 2015, at the earliest. Elevated oil prices and the expectation of incoming support from the GCC have further reduced the urgency for fiscal tightening.”
Fitch’s long-term baseline fiscal projections assume a gradual reduction in government deficits, reflecting some reduction in current spending. Given the lack of progress on this front to-date, risks to Fitch’s projections are skewed to the downside.
“Pressure to reach a deal with the Bahraini opposition is mounting ahead of the November elections, although Fitch does not expect a comprehensive political solution to be achieved in the near term.
“Bahraini banks have enjoyed strong profitability, rising capitalisation, and declining NPLs. The smaller Islamic banks have continued to merge. The sector is in the process of preparing for the implementation of Basel III regulations, and the Central Bank is overseeing measures aimed at improving corporate governance and oversight.
“Bahrain’s external position is stronger than its BBB rated peers. It registered a current account surplus of around 10% of GDP in 2013. Bahrain’s overall net creditor position, estimated by Fitch at over 100% of GDP in 2013, is the strongest of any similar-rated sovereign.
“GDP per capita and broader human development and business environment indicators are close to the A median. The strong regulatory framework and local skill base, combined with low costs, are key supports to the financial sector.”