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Rating Action:

Moody's downgrades Bahrain's rating to Baa3, maintains negative outlook

Global Credit Research - 16 Apr 2015

Singapore, April 16, 2015 -- Moody's Investors Service has today downgraded Bahrain's long-term government issuer rating to Baa3 from Baa2. The outlook on the rating remains negative.

The decision to downgrade the rating is predominantly based on the expected deterioration in the government's finances as a result of the oil price shock.

The decision to maintain the negative rating outlook reflects the uncertainty regarding the government's response to the fiscal challenges posed by a prolonged period of lower oil prices.

In today's rating action, Moody's has also lowered Bahrain's foreign currency bond ceiling to Baa1 from A3 and the foreign-currency deposit ceiling to Baa3 from Baa2. The short-term foreign currency bond ceiling was maintained at Prime-2 (P-2), whereas the short-term foreign-currency deposit ceiling was lowered to P-3 from P-2. The local-currency country risk ceilings were maintained at A3.

Bahrain - Off Shore Banking Center's foreign-currency bond ceiling was maintained at A2/P-1 whereas the foreign-currency deposit ceiling was lowered to A3/P-2 from A2/P-1.

RATINGS RATIONALE

RATIONALE FOR THE DOWNGRADE TO Baa3 FROM Baa2

Since 2009, Bahrain's government finances have been showing a deteriorating trend. Bahrain is the only Gulf Cooperation Council (GCC) member state to have experienced continuous fiscal deficits since 2009. Moody's estimates that Bahrain's general government fiscal balance averaged about -4% of GDP between 2009 and 2014. As a result of persistent fiscal deficits, general government debt has risen to an estimated 48% of GDP at the end of 2014, up from only 13% in 2008.

Moody's expects Bahrain's government finances to deteriorate further as a result of the low oil price environment, due to the very high dependency of government revenues on hydrocarbon revenues. Oil and gas related revenues account for close to 90% of total government revenues.

In its central forecast scenario, the rating agency projects prices for Brent crude to average around $55 per barrel in 2015 and $65 during 2016. According to the IMF, Bahrain has the highest fiscal breakeven oil price within the GCC, estimated at $99.8 in 2015 and $110.3 in 2016. Therefore, Moody's projects sizeable fiscal deficits of close to 14% of GDP in 2015 and 10% in 2016, which will further increase the government's debt burden, to around 70% of GDP by 2016, and continuing to rise thereafter.

The ongoing deterioration in Bahrain's government finances comes against the background of a comparatively small reserve cushion, marked by the absence of a sizeable sovereign wealth fund. As of 2013, the net asset holdings of Bahrain Mumtalakat Holding Company (unrated) totalled a little less than 20% of GDP, placing it at the smaller end of sovereign wealth funds. In recent statements Mumtalakat has made clear that it does not intend to sell any of its investments to support the budget.

Nevertheless, despite the oil price shock, Moody's does not expect Bahrain to face difficulties financing its large government deficits in the domestic and international markets. For instance, in spite of the sharp deterioration in government finances since 2009, the willingness of domestic and international investors to provide financing for the government has remained strong. Bahrain has successfully issued five international bonds since 2009 and developed a yield curve extending to 30 years. While Bahrain's benchmark bond yields are higher than for peers rated Baa1 or Baa2, they have remained stable since 2014, and lower than for Baa3-rated peers.

RATIONALE FOR THE NEGATIVE OUTLOOK

The negative outlook reflects the uncertainty around the government's options for coping with lower oil revenues, and the potential implications for its debt burden over the medium term.

Over the past years, the Bahraini government has enacted only limited reforms to reduce the vulnerability of its finances to an oil price shock. A tariff rise for industrial users of gas took effect on April 1 this year, and the cabinet approved an increase of administered diesel prices earlier in the year. There is scope for further cuts to capital projects and subsidies. However, there has been no material progress on implementing a broader strategy to address the underlying issue of an undiversified revenue base and very strong expenditure growth.

Furthermore, economic policymaking is hampered by a still unsettled domestic political situation in the country. For instance, the publication of the budget for the two year period 2015-2016 has been delayed, following elections in November 2014. The experience of public unrest in 2011 suggests that the government will face continuing pressure to keep current spending growing.

Moody's expects oil prices to recover only very gradually until 2019. In that scenario, absent significant revenue and expenditure-side reforms, Bahrain's fiscal deficits will stay wide and government debt levels will rise further in the outlying years. The lack of clarity over what measures might be taken to arrest this rise presents risks to Bahrain's credit strength that are reflected in the negative outlook.

FACTORS THAT COULD CAUSE THE RATING TO MOVE UP/DOWN

The negative outlook indicates that rating pressures are to the downside. Moody's could take a negative rating action should it become clear that fiscal deficits will remain wide, and government debt levels will continue to rise materially beyond 2016, particularly should this lead to a sharp rise in the government's funding costs. A significant deterioration in the external payments position and/or a weakening in the banking system's capacity to fund government deficits weaken could also prompt a further downgrade.

On the other hand, greater clarity over what measures will be taken to lower fiscal deficits and arrest the rise in government debt could prompt a move to a stable outlook. Any such clarity would likely be accompanied by structural fiscal reforms to lower the vulnerability of government finances to oil price shocks, and a reduction in domestic political and social tensions. An unexpectedly sharp, sustained rise in the price of oil, allowing more time for clarity to emerge over the future direction of fiscal policy, could also lead to the rating stabilizing.

GDP per capita (PPP basis, US$): 51,714 (2014 Estimate) (also known as Per Capita Income)

Real GDP growth (% change): 4.5% (2014 Actual) (also known as GDP Growth)

Inflation Rate (CPI, % change Dec/Dec): 2.5% (2014 Actual)

Gen. Gov. Financial Balance/GDP: -5.7% (2014 Estimate) (also known as Fiscal Balance)

Current Account Balance/GDP: 5.8% (2014 Estimate) (also known as External Balance)

External debt/GDP: 133.0% (2014 Estimate)

Level of economic development: High level of economic resilience

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

On 13 April 2015, 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 fiscal or financial strength, including its debt profile, has materially decreased. Uncertainty over government response to low oil prices has increased. Other views raised included: The issuer's economic fundamentals, including its economic strength, have not materially changed. The issuer's institutional strength/ framework, have not materially changed. Domestic political risks have somewhat decreased.

The principal methodology used in these ratings was Sovereign Bond Ratings published in September 2013. Please see the Credit Policy 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 rating action, if applicable.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt 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 rating action on the support provider and in relation to each particular 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 rating action, and whose ratings may change as a result of this 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.

This rating was initiated by Moody's and was not requested by the rated entity.

This rated entity or its agent(s) did not participate in the rating process. Moody's was not provided, for purposes of the rating, access to the books, records and other relevant internal documents of the rated entity.

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

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.

Steffen Dyck
Vice President - Senior Analyst
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
SUBSCRIBERS: (852) 3551-3077

Anne B Van Praagh
MD - Sovereign Risk
Sovereign Risk Group
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

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

Moody's downgrades Bahrain's rating to Baa3, maintains negative outlook
No Related Data.
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