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Moody's Investors Service on Tuesday changed the outlook on Bahrain's sovereign ratings to negative from stable in light of the falling oil price.
These ratings are the country's A2 local and foreign currency government bond ratings, the A2 country ceiling for foreign currency bank deposits and the Aa3 country ceiling for foreign currency bonds.
Bahrain's country ceiling for local currency bank deposits and country ceiling for local currency bonds remain at Aa2, a Moody's statement said.
"The change in outlook was prompted by the steep decline in oil prices well below Bahrain's fiscal break even level," Tristan Cooper, vice president and senior analyst in Moody's Sovereigns Group.
"Compared with similarly rated oil exporters, Bahrain has more limited reserves of liquid financial assets that can be tapped to finance fiscal deficits and ease adjustment. Moreover, Bahrain may not have the resilience to absorb the price shock and avoid impairment to its credit fundamentals relative to global rating peers," he added.
Moody's noted that despite progress towards economic diversification, Bahrain's fiscal and external current accounts remain heavily dependent on oil export receipts.
According to the International Monetary Fund, Bahrain's fiscal break even oil price is around $75 per barrel, compared with a current oil price of $47.
"The government's ability to cut expenditure in response to the decline in its revenues has been partially compromised by large increases in current spending in recent years," added Cooper.
Moody's warned that the global and regional economic downturn was likely to have a significant effect on Bahrain's non-hydrocarbon sectors as well.
Although the country has had some success in diversifying its real economy away from oil in recent years, it has tended to focus on sectors that are also cyclical and vulnerable to fluctuations in external demand, including tourism and financial services.
The reports added that the competitiveness of the country's non-hydrocarbon exports and services has been hampered by the recent appreciation of the local currency, which is pegged to the US dollar.
Bahrain's country ceiling for local currency bank deposits remains unchanged.
"Nevertheless, Moody's does have some concerns over the capacity of the authorities to support the country's large banking sector in the event of a systemic crisis," added Cooper.
The last rating action on Bahrain was implemented on July 24, 2007, when Moody's upgraded Bahrain's government bond ratings to A2 from A3 based on the government's then booming oil revenues.
