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