Bahrain's economy remains robust, says central bank

S&P lowered its ratings based on the kingdom's 'weak external liquidity and increasing financial risk'
The Central Bank of Bahrain has said that its economy is “robust” and supported by a strong financial sector in in response to the lowering of its sovereign credit rating by S&P Global Ratings.
By Bernd Debusmann Jr
Mon 04 Dec 2017 09:32 AM

The Central Bank of Bahrain has said that its economy is “robust” and supported by a strong financial sector in in response to the lowering of its sovereign credit rating by S&P Global Ratings.

On Friday, S&P lowered Bahrain’s foreign and local currency sovereign credit rating from to B+ from BB-, in a move it said was a reflection of Bahrain’s weak external liquidity and increasing financial risk.

According to S&P, Bahrain’s gross international reserves are low and have become more volatile throughout the year, having fallen as low as 30 percent of the monetary base during Q3 2017.

In S&P’s view, the Bahraini government’s access to international capital markets has been crucial in supporting the central bank’s low level of foreign currency reserves. This, however, this increases financial risk should Bahrain’s access to external liquidity deteriorate.

S&P added that its outlook on Bahrain is stable, largely because of an expectation that foreign sovereigns will offer their financial support if Bahrain’s central bank is unable to meet demands for foreign currency or temper the effects of the potential worsening of investor sentiment.

In response to the S&P statement, the Central Bank of Bahrain (CBB) put out a statement which said that “notwithstanding the rating agency’s action, the economic situation in Bahrain remains robust, supported by a strong banking system.”

“Despite the current low oil price, the economy continues to grow with low inflation reflecting the government’s ongoing initiatives to foster sound fiscal and economic policies,” the statement added.

The CBB statement also noted that the country’s economic growth was recorded at 3.4 percent during the first half of 2017, compared to 3.2 percent in 2016. The non-oil sector, for its part, grew 4.7 percent in H1 2017, compared to 4 percent during the same period in 2016.

“This is a remarkable achievement in light of lower oil prices and subdued regional growth, reflecting the effectiveness of the government’s initiatives in gradually adjusting the fiscal imbalances and the efforts in enhancing the overall legal, investment and business environment,” the statement added.

Additionally, the CBB noted that foreign direct investment has grown to $695 million as of October, compared to $280 million in 2016, and that the capital adequacy ratio of the banking reached 19.8 percent in September 2017. Retail deposits also grew to $45.1 billion in October, a 4.5 percent increase over the same period in 2016.

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