“The wholesale banking sector’s assets (at around 350% of GDP) have stabilised after five years of decline. Consolidation is continuing in the small Islamic retail banking sector, where there have been some asset quality problems,” Fitch in a statement added.
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’.
Bahrain’s external position is stronger than its ‘BBB’ rated peers. A current account surplus of around 10% of GDP is estimated for 2013, which will be the 10th consecutive year of surplus. Bahrain’s overall net creditor position, at almost 100% of GDP at end-2012, 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.
The political situation has stagnated and low level violence is on-going. Hopes of reconciliation have been derailed following clashes in August 2013 between security forces and protestors. The main opposition group Al Wefaq’s subsequent political boycott of the reconciliation process has added to a polarised local climate. Fitch expects the political stalemate to continue. Parliamentary elections scheduled for October 2014 could trigger protests, leading to some additional flare-ups of violence, although Fitch does not expect a material deterioration in the security situation.
Growth is steady and supported in the medium term by GCC funding. Real GDP is estimated to have risen by 4.9% in 2013, up from 3.4% in 2012, largely driven by the resumption of oil production after disruptions in 2012. In 2014 and 2015, as oil growth stabilises, non-oil growth will benefit from disbursement of the GCC project fund.
A high estimated breakeven oil price (at USD122 per barrel for 2013), recurring budget deficits, and rising debt strain Bahrain’s fiscal profile and expose it to fluctuations in oil prices. At 42.9% of GDP estimated for 2013, the general government debt-to-GDP ratio has tripled since 2008 and is above the ‘BBB’ range median. However, net debt is lower due to government deposits estimated by Fitch at above 20% of GDP.
The stable outlook reflects Fitch’s assessment that upside and downside risks to the rating are currently balanced.
Fitch forecasts that Brent crude will average USD100/b in 2014 and 2015 and that Bahraini export crude will continue to trade at a small discount to Brent. The disruption to the pipeline supplying oil from the Abu Saafa field during 2012 is not expected to reoccur. Production levels are assumed to increase marginally to reflect capacity upgrades.
For 2014 and 2015, Fitch assumes that Bahrain will only benefit from savings through the implementation of GCC development projects financed by Kuwait, Saudi Arabia, and the UAE. Agreement on commitments from Qatar is at a less advanced stage. Any spending from Qatar would allow a further reduction in capital expenditure through the budget.