Standard & Poor’s Ratings Services says that it expects that competition will continue to strain the profitability of the Bahraini retail banks, encouraging further consolidation.
“Despite Bahrain’s relatively large financial sector and large number of majority-government-owned companies, we consider sovereign contingent liabilities to be limited,” S&P in a statement said.
“Although the size of the overall banking system has declined, our base-case scenario assumes that outflows, in terms of both external funding and the physical presence of international banks, will be contained. We also view the sovereign as a potential source of support for wholesale institutions not covered by parent entities or home countries, but still important from a systemic or reputational standpoint. Similarly, we include all wholesale banks’ external liabilities in our assessment of the country’s external financing needs.
“The stable outlook reflects our opinion that the fiscal position will remain broadly stable despite a gradual decline in oil prices. Meanwhile, large-scale public investment and greater hydrocarbon production should support growth prospects.
“We could lower the ratings if there were an unexpected escalation in political tensions, such that economic prospects were weakened or external and fiscal performances were threatened. Similarly, if oil prices were to fall below our expectations for a sustained period, difficulties arose in implementing GCC development funds, or other government expenditure pressures weakened the fiscal profile, we could lower the ratings.
“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.”