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Rating Action:

Moody's places Bahrain's government issuer rating on review for possible downgrade

14 Jun 2013

Singapore, June 14, 2013 -- Moody's Investors Service has today placed Bahrain's Baa1 government issuer rating on review for possible downgrade.

Today's rating action was prompted by:

1) the fiscal implications of Bahrain's high and rising break-even oil price;

2) the outlook for lower trend economic growth in the country over the medium term; and

3) the impact of a low-growth, high government expenditure and weaker oil price scenario on Bahrain's long-term debt sustainability.

The review will focus on the degree to which Bahrain's economic model has structurally weakened and the resilience of Bahrain's credit fundamentals to an outlook of subdued global growth.

Moody's will conclude the rating review within three months and expects Bahrain's ratings to remain within investment grade.

RATINGS RATIONALE

RATIONALE FOR THE REVIEW FOR POSSIBLE DOWNGRADE

The first driver underlying Moody's decision to place Bahrain's Baa1 sovereign rating on review for possible downgrade is the country's rising government debt burden, which introduces uncertainty into the country's longer-term debt sustainability. Although Bahrain's fiscal deficit for 2012 was a moderate 2.6% of GDP and smaller than the deficits recorded in 2009 and 2010, the IMF estimates Bahrain's high and rising fiscal break even oil price to be at $118.70/barrel, which is above our forecast of $106/barrel for the average oil price in 2013. This reflects expenditure pressures that will likely widen the deficit considerably into the 4.0%-5.0% range in 2013 and 2014, according to the IMF. Given the budget's significant dependence on oil revenues, Bahrain's government finances are less flexible and its shock-absorption capacity is lower than that of its regional and global rating peers.

The second driver informing the rating review is the growing uncertainty, in Moody's view, surrounding the dynamism of Bahrain's longer-term growth prospects. Although the country has a more diversified economy than its Gulf Cooperation Council (GCC) peers, Bahrain's economy remains dependent on the oil and financial sectors, both of which have uncertain growth prospects. In addition, Moody's believes that continued political and social tensions may dampen confidence and investment in the economy, and ultimately weaken long-term growth prospects. Moreover, Moody's expects that Bahrain's real GDP trend growth rate will remain below its pre-crisis performance.

The third driver behind Moody's rating decision is that the two factors above are likely to lead to a considerable medium-term rise in government debt as a share of GDP, which the IMF predicts will exceed 60% of GDP by 2018.

Although not a prime ratings driver, Moody's also notes that the banking sector remains large. Assets of onshore retail banks are almost three times Bahrain's GDP. Moody's recognizes, however, that high levels of capitalization should help to absorb losses and limit the sovereign's potential contingent liabilities in a severe downside scenario. Nevertheless, the large size of the banking sector poses a degree of systemic risk.

At the same time, Moody's notes a number of factors that support Bahrain's rating. These include a strong positive net international investment position and continued current account surpluses. In addition, Bahrain has a record of receiving sizable amounts of external financial assistance from fellow GCC governments.

GDP per capita (PPP basis, US$): 27,735 (2011 Actual) (also known as Per Capita Income)

Real GDP growth (% change): 3.9% (2012 Actual) (also known as GDP Growth)

Inflation Rate (CPI, % change Dec/Dec): 1.2% (2012 Actual)

Gen. Gov. Financial Balance/GDP: -2.6% (2012 Actual) (also known as Fiscal Balance)

Current Account Balance/GDP: 8% (2012 Actual) (also known as External Balance)

External debt/GDP: [not available]

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 June 2013, 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 materially decreased. The issuer's institutional strength/ framework, have not materially changed. The issuer's governance and/or management, have not materially changed. The issuer's fiscal or financial strength, including its debt profile, may be weakening. The systemic risk in which the issuer operates has not materially changed. The issuer's susceptibility to event risks has not materially changed. Other views raised included: An analysis of this issuer, relative to its peers, indicates that a repositioning of its rating could be appropriate.

METHODOLOGY

The principal methodology used in this rating was Sovereign Bond Ratings published in September 2008. 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.

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 books, records and other relevant internal documents of the rated entity

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.

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
Asst Vice President - 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: (65) 6398-8308

Bart Jan Sebastian Oosterveld
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: (65) 6398-8308

Moody's places Bahrain's government issuer rating on review for possible downgrade
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