Moody’s Cuts Bahrain Credit Ratings, Citing Budget

Bahrain’s sovereign credit ratings were lowered by Moody’s Investors Service, which said higher oil prices were needed by the government to balance its budget and cited the negative outlook on the banking sector.

The nation’s local and foreign-currency debt ratings were reduced one level to A3, the seventh-highest investment grade ranking, from A2, with a stable outlook, Moody’s said in an e-mailed statement in Dubai today.

Bahrain, the smallest of the six Gulf Cooperation Council states, halted about $13 billion of projects last year as the global financial crisis sapped demand for real estate and prices fell across the Persian Gulf region. Economic growth slowed to 3.1 percent in 2009 and public debt rose to 24.2 percent of gross domestic product in the first quarter of this year, from 17.4 percent in the previous three months.

“A gradual but significant rise in the breakeven oil price in the Bahraini budget over recent years” and a “relatively modest level of official financial assets has led to a divergence between the government’s fiscal flexibility and that of rating peers,” Moody’s said in the statement.

To balance the budget, the government needed an oil price of $80 last year, compared with $30 in 2004, according to Moody’s estimates. Increased spending has led to a higher breakeven oil price, giving the government less flexibility, Moody’s said.

Public Debt

“The fiscal situation is not something that’s alarming,” said Giyas Gokkent, Abu Dhabi-based economist at National Bank of Abu Dhabi PJSC. “When you look at the public debt as a proportion of GDP for Bahrain, the debt indicator is relatively low in an international context.” Gokkent is forecasting a slight budget surplus in Bahrain this year.

Bahrain’s crude-oil production dropped 0.5 percent in 2009 to 66.5 million barrels as reserves dwindled. Output in the first quarter was 16.4 million barrels, slightly lower than the same period a year earlier.

Moody’s raised Kuwait’s sovereign ratings outlook Aug. 5 to stable after the Persian Gulf country’s parliament approved economic legislation and due to its fiscal and trade performance. The agency also raised Saudi Arabia’s credit rating Feb. 15, citing “strong” government finances that have withstood volatile oil prices and the global recession.

“Although capital expenditure can be cut in some years to offset revenue shortfalls, as it was in 2009, Moody’s notes that such reductions cannot usually be sustained without damaging growth prospects,” the rating company said.

Moody’s expects Bahrain’s banking sector to face increasing competition from other regional financial sectors. The central bank last year took two Saudi-owned wholesale banks under administration after they defaulted on loans.

“Because of the emergence of the Dubai International Financial Center and Abu Dhabi’s plans to create an asset- management hub, increasingly Bahrain will face competition,” Gokkent said. “The question is: How much of that activity shifts?”

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