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Rating Action:

Moody's changes Bahrain's outlook to negative, affirms B2 ratings

29 Apr 2021

Singapore, April 29, 2021 -- Moody's Investors Service ("Moody's") has today changed the outlook on the Government of Bahrain to negative from stable and has affirmed its B2 long-term issuer and senior unsecured ratings.

The change of outlook to negative reflects increased downside risks to Bahrain's ratings stemming from a larger than earlier expected weakening in fiscal metrics and ongoing uncertainty around the timing and the size of the augmentation of the financial support package for Bahrain from the fellow Gulf Cooperation Council (GCC) sovereigns. The very large fiscal deterioration during 2020 will make a path toward stabilizing the government's debt burden at a sustainable level significantly more challenging than Moody's had previously expected. The oil price and economic shock triggered by the coronavirus pandemic and persistently high off-budget spending, which Moody's expects to continue in the next several years, account for the increased downside risks.

Moreover, the government's ability to continue meeting its very large funding needs, including through large issuances in the international capital markets, relies on the credibility of financial support being extended and significantly upsized. Delays in augmenting such support, in addition to the absence of new significant debt-stabilizing fiscal consolidation measures, would likely weaken investor confidence and markedly increase already elevated government liquidity risks.

The affirmation of the B2 ratings takes into account Moody's expectation that financial support from Saudi Arabia (A1 negative), Kuwait (A1 stable) and the United Arab Emirates (Aa2 stable) will continue, which partly mitigates Bahrain's very weak debt and debt affordability metrics and high government liquidity and external vulnerability risks. Bahrain's B2 long-term issuer rating is also supported by its relatively high income per capita and a more diversified economy than most regional peers, which provides a degree of shock absorption and economic resilience.

The rating affirmation at B2 also applies to the backed senior unsecured foreign currency rating of the drawdowns from the sukuk (trust certificate) issuance program of the CBB International Sukuk Programme, a special purpose vehicle whose debt is in Moody's view ultimately an obligation of the Government of Bahrain.

Bahrain's local currency (LC) and foreign currency (FC) country ceilings remain unchanged. The LC country ceiling at Ba3, two notches above the sovereign issuer rating, incorporates high external imbalances and heavy reliance on a single revenue source mitigated by predictable institutions and moderate political risk. The FC country ceiling at B1, one notch below the LC ceiling, reflects relatively modest transfer and convertibility risks, notwithstanding a track record of weak fiscal policy effectiveness and a high level of external indebtedness.

RATINGS RATIONALE

RATIONALE FOR THE CHANGE OF OUTLOOK TO NEGATIVE FROM STABLE

CREDIT CHALLENGES AGGRAVATED BY THE CORONAVIRUS SHOCK

A sharp decline in oil prices triggered by the economic fallout from the coronavirus pandemic eroded government revenues, most of which are derived from sales of oil and gas, and led to a very significant widening of Bahrain's fiscal deficit to an estimated 18% of GDP in 2020 from an already high 9% of GDP in 2019 (including net off-budget spending). Consequently, government debt rose to around 130% of GDP in 2020 from 102% of GDP in 2019 and 95% in 2018 (including borrowing from the central bank). This very large increase in the debt burden, which was amplified by a 10% decline in nominal GDP, was one of the largest among the Moody's rated sovereigns. Bahrain now has the largest debt burden among B-rated peers and its debt affordability (measured by interest payments to revenue) at 31% in 2020 remains substantially weaker than the B-rated median.

Although Bahrain's fiscal accounts and GDP will benefit from the recovery in economic activity and oil prices during 2021, Moody's expects fiscal deficits to remain around 10% of GDP in the next two years with the debt burden rising towards 140% of GDP by 2023. These projections are based on Moody's baseline assumption that oil prices average around $50/barrel in 2021 and rise gradually towards the middle of the $45-65/barrel range in the medium term.

The coronavirus shock has derailed the government's implementation of the Fiscal Balance Program, which was announced in October 2018 along with the $10 billion GCC support package to be disbursed in support of fiscal adjustment aimed at balancing the budget by 2022 and capping the government debt below 90% of GDP (excluding borrowing from the central bank, which accounted for 7% of GDP in 2018 and rose to nearly 14% of GDP in 2020). Although no revised plan nor targets have been announced to-date, a much weaker starting point will make it significantly more challenging to stabilize government debt at a sustainable level in the medium term.

The challenge of reducing deficits sufficiently to set government debt on a declining path relative to GDP is underscored by the large non-oil GDP contraction in 2020 of 6.7% on top of a 0.4% contraction in 2019, which Moody's expects to take close to three years to fully reverse due to Bahrain's exposure to the tourism and transportation sector which has been particularly hard and persistently hit by the pandemic.

UNCERTAINTY AROUND TIMING AND MAGNITUDE OF GCC SUPPORT AUGMENTATION

The adverse growth environment will increase implementation risks of any contemplated fiscal adjustment efforts due to pressures to support the non-oil economy and the sectors most adversely affected by the pandemic. Nevertheless, Moody's expects that the current $10 billion GCC support package will be augmented with an additional funding commitment by early 2023, when the currently scheduled disbursements will end, given willingness by and political incentives for the GCC to provide support.

However, there is uncertainty as to when and by how much the current GCC financial support package will be augmented, and this uncertainty may weaken investor sentiment towards Bahrain, especially in the event of another large external shock. Despite a much larger financing need during 2020, and likely in the next two years, compared to what the government had expected in its 2018 version of the Fiscal Balance Program, the GCC support package has so far not been augmented. This has inevitably increased Bahrain's reliance on market funding and, in turn, increased its exposure to volatile investor sentiment, a vulnerability that has been further amplified by Bahrain's very thin financial buffers. At the end of 2020, central bank foreign currency reserves stood at $1.9 billion and covered only one month of imports of goods and services (1.2 months of non-oil imports), dwarfed by scheduled government external debt service payments (principal and interest) averaging $3 billion per year during the next 5 years.

Although central bank foreign-currency reserves rose to $3.5 billion in February 2021 (1.8 month of imports), boosted by $2 billion of sovereign issuance in late January, they had dipped as low as $772 million in April last year (less than 0.5 month of imports) when global liquidity unexpectedly tightened and the market issuance to refinance a $1.25 billion eurobond maturing in late March was delayed until May. In that instance, a near complete depletion of reserves was avoided when the government arranged a three-month $650 million bridge loan from a consortium of Bahraini and regional banks shortly before the eurobond maturity. It nevertheless underscores Bahrain's high and continuing exposure to volatile investor sentiment even in the presence of a large GCC finance support commitment given the government's exceptionally large annual financing needs which Moody's estimates will average around 38% of GDP in the next three years (including the rollover of domestic short-term debt).

RATIONALE FOR AFFIRMING THE B2 LONG-TERM ISSUER RATING

The B2 issuer rating reflects the credit support afforded by the continuing financial support committed to Bahrain by the three higher-rated fellow GCC sovereigns, including through the track record of disbursements from the $10 billion package of highly-concessional loans agreed in 2018 and the $7.5 billion package of housing and infrastructure development grants announced in 2011. As of the end of 2020, $3.9 billion of loans and $4 billion of grants remained available for disbursement.

This support partly mitigates Bahrain's very weak fiscal and debt metrics, which have deteriorated very significantly since the previous oil price shock in 2014-15, and its high government liquidity and external vulnerability risks. The support has been instrumental in preserving Bahrain's access to international capital markets, where the government raised 70% of all long-term external financing during 2020. In addition, Moody's estimates that interest-free GCC loans will reduce Bahrain's interest rate bill and the fiscal deficit by around 1% of GDP compared to what it would have been if the financing had been secured at market rates. Furthermore, disbursements from the GCC support package continued during 2020 even though the Fiscal Balance Program, which the package is designed to support, had gone significantly off track starting with higher than expected debt levels at the end of 2019, indicating the degree of tolerance embedded within the GCC commitment.

Bahrain's B2 issuer rating is also supported by high income per capita and a relatively diverse economy compared to the rest of the GCC, which are a source of economic resilience and strengthen Bahrain's shock absorption capacity. The B2 issuer rating also takes into account Bahrain's large, well-capitalized and liquid domestic banking system, which supports a large portion of government liquidity needs through the annual rollover of domestic debt equivalent to 25% of GDP in 2020 (including short-term T-bills).

In the longer term, increased hydrocarbon production from the new very large oil and gas reservoir discovery in the Khalij Al-Bahrain Basin, which was announced in April 2018, could improve Bahrain's fiscal and external balances. However, there remains a high degree of uncertainty about how significantly and how durably could Bahrain's hydrocarbon production be increased from these new discoveries, while at least part of such increase will likely be offset by the decline in output from the existing, mature on-shore field.

ENVIRONMENTAL, SOCIAL AND GOVERNANCE CONSIDERATIONS

Bahrain's ESG Credit Impact Score is highly negative (CIS-4), reflecting highly negative exposure to environmental risks, moderately negative social risks and moderate institutions and governance strength. Governance captures weaknesses in policy effectiveness, that will likely hamper the sovereign's ability to respond to negative environmental and social trends.

Bahrain's highly negative exposure to environmental risks, reflected in its E-4 issuer profile score, mainly relates to carbon transition due to its economic and fiscal dependence on the hydrocarbon sector, which is only partly mitigated by low hydrocarbon extraction costs. Bahrain is also one of the world's most arid states and rapid economic and population growth in recent decades have increased challenges surrounding water sustainability and exposure to physical climate risk. While the majority of Bahrain's water is produced by energy-intensive desalination plants, which are also vulnerable to attacks and oil spills, the country has access to cheap energy that mitigates some of this risk. Bahrain, being an island state in the Gulf, is also exposed to longer-term risks associated with rising sea levels.

Exposure to social risks is moderate (S-3 issuer profile score). The main source of pressure arises from the labor market due to the current and expected rapid population and labor force growth over the coming decades and high expectations of the native population for the provision of services and employment by the government. The effectiveness of labor market nationalization policies in controlling the unemployment rate among citizens will remain the key policy challenge and an important driver of social risks in the foreseeable future, although a relatively large share of expatriates in the overall labor force partly mitigates these risks.

Bahrain's weak track record of fiscal policy effectiveness is captured by a moderately negative G-3 issuer profile and presents the key impediment to the sovereign's ability to adjust to adverse social and environmental trends and future shocks. This is, in part, balanced by the strength of civil society and the track record of monetary policy effectiveness.

GDP per capita (PPP basis, US$): 51,948 (2019 Actual) (also known as Per Capita Income)

Real GDP growth (% change): 2% (2019 Actual) (also known as GDP Growth)

Inflation Rate (CPI, % change Dec/Dec): 1.2% (2019 Actual)

Gen. Gov. Financial Balance/GDP: -9% (2019 Actual) (also known as Fiscal Balance)

Current Account Balance/GDP: -2.1% (2019 Actual) (also known as External Balance)

External debt/GDP: [not available]

Economic resiliency: baa3

Default history: No default events (on bonds or loans) have been recorded since 1983.

On 26 April 2021, a rating committee was called to discuss the rating of the Bahrain, Government of. The main points raised during the discussion were: The issuer's economic fundamentals, including its economic strength, have not materially changed. The issuer's institutions and governance strength, have not materially changed. The issuer's fiscal or financial strength, including its debt profile, has materially decreased. The issuer's susceptibility to event risks has not materially changed.

FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS

The negative outlook indicates that an upgrade is unlikely in the near term. A timely and sufficiently large augmentation of the current GCC financial support package would support continued market access to meet large financing requirements and allow for a stabilization of the outlook, particularly if accompanied by a credible fiscal adjustment program that aims to set the government's debt burden on a declining path while reducing Bahrain's fiscal and external vulnerability to potential future declines in oil prices. A change to a stable outlook would also be supported by a sustained rebuilding of the central bank's foreign currency buffers that would materially reduce external vulnerability risks.

Lack of evidence of continued GCC support to Bahrain, including beyond the drawdown of the currently committed funds, would likely lead to a downgrade of the ratings, in particular if it also pointed to the loss of investor confidence and the sovereign's diminished capacity to access international capital markets at sustainable rates and maturities. Such weakening would likely reflect an erosion of Bahrain's commitment to implementing non-oil fiscal consolidation measures and would manifest in rising government liquidity and external vulnerability risks, possibly rapidly and especially in an event of another large external shock.

The principal methodology used in these ratings was Sovereign Ratings Methodology published in November 2019 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1158631. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

The weighting of all rating factors is described in the methodology used in this credit rating action, if applicable.

The local market analyst for these ratings is Alexander Perjessy, +971 (423) 795-48.

REGULATORY DISCLOSURES

For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.

These ratings are unsolicited.

a.With Rated Entity or Related Third Party Participation: NO

b.With Access to Internal Documents: NO

c.With Access to Management: NO

For additional information, please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at http://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1263068.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the UK and is endorsed by Moody's Investors Service Limited, One Canada Square, Canary Wharf, London E14 5FA under the law applicable to credit rating agencies in the UK. Further information on the UK endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Martin Petch
VP - Senior Credit Officer
Sovereign Risk Group
Moody's Investors Service Singapore Pte. Ltd.
50 Raffles Place #23-06
Singapore Land Tower
Singapore 48623
Singapore
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077

Marie Diron
MD - Sovereign Risk
Sovereign Risk Group
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

Releasing Office:
Moody's Investors Service Singapore Pte. Ltd.
50 Raffles Place #23-06
Singapore Land Tower
Singapore 48623
Singapore
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077

No Related Data.
© 2021 Moody’s Corporation, Moody’s Investors Service, Inc., Moody’s Analytics, Inc. and/or their licensors and affiliates (collectively, “MOODY’S”). All rights reserved.

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