“The downgrade reflects Fitch’s view that recent political developments will have a short-term impact on growth and result in further fiscal expansion over the medium term. It also reflects Fitch’s judgment that despite the regime’s attempts to engage stakeholders in an inclusive national dialogue, any political reform that will appease the protestors is likely to be over an extended horizon,” said Purvi Harlalka, Director in Fitch’s Middle East and Africa Sovereign Ratings Group. “The Negative Outlook reflects the economic and political uncertainties associated with a drawn-out political process, which increase the risks to the sovereign’s credit profile.”
“The expected weakening in the fiscal outlook is a key rating driver as it follows the rapid doubling of debt to 33% of GDP in 2010 from 16.4% in 2008. However, even at these elevated levels, debt will remain below the forecast ‘A’ median and Bahrain has a demonstrated track record of fiscal prudence. In addition, the budgetary expansion is more affordable given increasing oil prices and rising oil production.”
“Nonetheless, low debt, which has counter-balanced several structural weaknesses, including high dependence on a limited hydro-carbon endowment, and social and political tensions, has been the main strength of Bahrain’s ‘A’ rating. This now appears compromised, affording the sovereign less policy flexibility to deal with shocks that might materialise in an uncertain environment,” the report said.
“However, while short term (up to 12 months) political uncertainty has risen, Fitch has a more optimistic view of the medium to long-term (3-5 years) prospects for political reform in Bahrain. Encouraging developments include the agreement on a unified list of demands following talks between the seven main political parties, of both Sunni and Shia affiliation, and the relatively rapid concession to some of these demands by the ruling family,” it said.
“Moreover, by appointing the Crown Prince, who is a liberal, as the main negotiator on the ruling family’s behalf, the regime has signalled its willingness to accommodate the concerns of its people. The Crown Prince, who has also been handed oversight of the security situation, has reined in the security apparatus, further pointing to the regime’s conciliatory intentions. The demonstrators have reciprocated by continuing to avoid violence. However, the longer the negotiations take, the more impatient the stakeholders are likely to get, leading to a risk of renewed unrest,” the Agency said.
“A substantial worsening in the security situation and/or protracted delays in the political reform process would prompt a downgrade. By contrast, a smooth transition to a sustainable political outcome would alleviate the negative rating pressure,” the Agency viewed.