DIFC - Dubai, May 26, 2011 -- Moody's Investors Service has today downgraded Bahrain's government bond
ratings by one notch to Baa1 from A3, and assigned a negative outlook
to the rating. Today's rating action concludes the review
for possible downgrade that Moody's initiated on 23 February 2011.
Moody's decision to downgrade Bahrain's ratings is driven by the following
three reasons:
1. The likely adverse effect of the recent political turmoil on
the country's growth prospects and its public finances.
2. Continuing increases in the break-even oil price that
is needed to balance the budget.
3. A weakening of the fundamental strength of Bahrain's large
banking sector.
The negative outlook on the Baa1 ratings reflects Moody's continued concern
over the political situation in Bahrain.
RATINGS RATIONALE
The main driver underlying Moody's decision to downgrade is the
significant deterioration in Bahrain's political environment since
February. The government of Bahrain has forcibly suppressed an
uprising by the Shi'ah-led opposition with the backing of
an intervention of armed forces from other member states of the Gulf Cooperation
Council (GCC), most importantly from its neighbour Saudi Arabia.
Political tensions in the country remain high and there seems little prospect
of the underlying causes of the unrest being peaceably resolved,
at least over the short term. The political outlook is therefore
highly uncertain.
Moody's believes that these events are likely to have damaged economic
growth significantly, especially in services sectors such as tourism,
trade and financial services. These sectors had previously been
championed by the government in its effort to diversify the economy away
from oil. The timing and pace of any economic recovery will very
much depend on political developments. In any case, the negative
effect on consumer and investor confidence will likely linger.
The crisis has also affected Bahrain's public finances. In
February, the government announced cash transfers to families,
and in May the parliament approved an expansionary budget for 2011-12.
The resulting rise in current expenditure is reducing fiscal flexibility.
The second factor informing Moody's rating action is the continued
rise in the break-even oil price for the budget, which Moody's
estimates exceeded $100 per barrel in 2010 [the break-even
oil price is the average annual oil export price necessary to balance
the budget, all other things being equal]. Despite historically
high levels of oil prices, the government has posted wide deficits
during the past two years. Unlike other GCC oil exporters,
Bahrain does not have a sovereign wealth fund of offshore financial assets.
The third driver is the likely further worsening of the fundamental strength
of Bahrain's large banking system owing to weakened asset quality,
particularly in relation to loans for real estate or equity purchases.
This is negative for the sovereign rating because banks potentially represent
a contingent liability for the government. Moody's changed
its outlook on Bahrain's banking system to negative in 2009 and
has since downgraded the ratings of a number of retail and wholesale banks.
Those ratings are now under review for possible further downgrade,
reflecting concerns about potential erosion in asset quality and liquidity
pressure.
Moody's has limited today's sovereign downgrade to one notch
because of an assumption of continued strong political and financial support
from Saudi Arabia (rated Aa3, stable) and other GCC neighbours.
These countries have continued to provide strong political backing for
the Bahraini government and have announced a $10 billion aid package
for Bahrain, although the terms and disbursement profile of this
aid are not yet clear. Given this linkage, Bahrain's
sovereign ratings could be negatively affected by any downgrade of our
sovereign ratings of other GCC states.
COUNTRY CEILINGS
Since Bahrain's stock of government debt is relatively modest and
seems to have limited roll-over risk, Moody's believes
that the government has sufficient capacity at present to meet its debt
servicing needs. Longer-term concerns and heightened systemic
risk, however, have prompted Moody's to lower the rating
ceilings it applies to Bahrain's bank deposits and other private
sector debt obligations, both in domestic and foreign currency.
Moody's has downgraded Bahrain's local currency ceilings to
A1, and the country's offshore bank ceilings to A1 with a
negative outlook. It has downgraded Bahrain's country ceiling
for foreign currency bonds by one notch to A2 with a negative outlook,
while the country ceiling for foreign currency bank deposits has also
been downgraded by one notch to Baa1 with a negative outlook. Bahrain's
short-term ceilings have been downgraded to Prime-2.
PREVIOUS RATING ACTION AND METHODOLOGY
Moody's previous rating action on Bahrain was implemented on 23 August
2010 when the rating agency downgraded Bahrain's government bond
ratings to A3 from A2.
The principal methodology used in this rating was "Sovereign Bond
Ratings", published in September 2008.
REGULATORY DISCLOSURES
Information sources used to prepare the credit rating are the following:
public information
Moody's Investors Service considers the quality of information available
on the issuer or obligation satisfactory for the purposes of maintaining
a credit rating.
This issuer did not participate in the credit rating process. The
Rating Committee was not provided, for purposes of the rating,
access to the books, records and other relevant internal documents
of the rated entity or related third party.
Moody's adopts all necessary measures so that the information it uses
in assigning a credit rating is of sufficient quality and from sources
Moody's considers to be reliable including, when appropriate,
independent third-party sources. However, Moody's
is not an auditor and cannot in every instance independently verify or
validate information received in the rating process.
Please see ratings tab on the issuer/entity page on Moodys.com
for the last rating action and the rating history.
The date on which some Credit Ratings were first released goes back to
a time before Moody's Investors Service's Credit Ratings were fully digitized
and accurate data may not be available. Consequently, Moody's
Investors Service provides a date that it believes is the most reliable
and accurate based on the information that is available to it.
Please see the ratings disclosure page on our website www.moodys.com
for further information.
Please see the Credit Policy page on Moodys.com for the methodologies
used in determining ratings, further information on the meaning
of each rating category and the definition of default and recovery.
DIFC - Dubai
Tristan Cooper
VP - Senior Credit Officer
Sovereign Risk Group
Moody's Middle East Limited
Telephone: 00971 4237 9536
New York
Bart Oosterveld
MD - Sovereign Risk
Sovereign Risk Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653
Moody's Middle East Limited
Gate Precinct 3, Level 3
P.O. Box 506845
DIFC - Dubai
UAE
Telephone: 00971 4237 9536
Moody's downgrades Bahrain to Baa1 with negative outlook
