S&P also affirmed the ratings on the Central Bank of Bahrain.
The transfer and convertibility (T&C) assessment remains ‘BBB’.
“The outlook revision reflects our view of Bahrain’s stable growth, the likelihood of no further deterioration in the political environment, the inflow of Gulf Cooperation Council (GCC) development funds, and our medium-term assumption of higher oil prices of about $111/barrel,” S&P in a statement said.
“Our ratings on Bahrain are supported by the country’s strong external and fiscal positions, both of which are underpinned by hydrocarbon resources. The ratings are constrained by our view of continuing domestic political tensions and the fiscal dependency on sustained high oil prices and international donor support. The ratings are also constrained by stagnating real GDP per capita growth, which we forecast at about 1% in 2013-2015. This is low compared to peers at similar wealth levels,” S&P, added.
“Though Bahrain’s 2011 political crisis weakened growth potential and damaged the country’s reputation as a business services hub, we believe a post-crisis status quo has been established. However, this still includes violent street protests with occasional fatalities, entrenched polarization between the two sectarian communities, internal communal divisions, and the relegation of economic policymaking,” it said.
“That said, tensions are largely contained outside the main centers of economic activity: in the suburbs of Manama, in villages, and in online forums. Despite some government initiatives, no broader political process that could change the status quo appears to be on the horizon. In addition, regional geopolitical competition between Iran and Saudi Arabia, as well as heightened regional sectarianism, does not bode well for national reconciliation and an improvement in the policymaking environment, in our view.
“Bahrain’s fiscal vulnerability to oil prices remains high. Given an average oil price of $111/barrel in 2012, the general government deficit was negligible, but transfers to the state-owned airline, Gulf Air, and valuation changes raised net general government debt by an estimated 3.7% of GDP. Assuming similar oil prices, we forecast deficits of roughly 2% of GDP for 2013-2015. Oil- and gas-related revenues account for 88% of total central government revenues, making the budget highly sensitive to declines in price or volume,” it said.
“The hydrocarbon-related increase in government revenues masks the full extent of Bahrain’s expansionary fiscal policy, under which general government expenditures climbed to 33.5% of GDP in 2012 from 28.3% in 2011. Increases have mainly been in the form of transfers and subsidies that have financed temporary consumption. As such, we view the structural flexibility of public finances as having deteriorated. However, we believe this will be partly offset by GCC development funds of about $1 billion annually over 10 years, which we expect will begin having an effect in 2013. This non-debt financing should reduce Bahrain’s need to borrow to meet its capital expenditure needs.
“As a result, we do not believe the general government debt burden will increase significantly from current levels. At end-2012, general government assets roughly equaled debt; the net asset position of a few years ago had eroded. However, we expect net general government debt will rise to a still-modest 5%-6% of GDP by 2015. Despite Bahrain’s relatively large financial sector and large number of majority-government-owned companies, we consider sovereign contingent liabilities to be limited. The financial system appears relatively well regulated, with manageable asset quality risks. The currency peg to the U.S. dollar limits monetary flexibility, but persistent current account surpluses have maintained a net external asset position.”
“The stable outlook reflects our opinion that political risks and the potential for sharp oil price declines are unlikely to be severe enough to lead to a downgrade in the near term. Large-scale public investment and greater hydrocarbon production should support growth prospects.”
“We could lower the ratings if there were an unexpected escalation of political turmoil such that economic prospects were weakened or external and fiscal performances were threatened. Similarly, if oil prices were to fall below $100/barrel for a sustained period, if difficulties arose in dispensing GCC development funds, or if other government expenditure pressures weakened the fiscal profile, we could lower the ratings.”
“Conversely, we could raise the ratings if a credible political process emerges and a renewed social contract appears likely. In addition, if the boost in public investment improves Bahrain’s growth prospects beyond our expectations, we could raise the ratings.”