By Andy Sambidge
Rating agency move follows fall of oil price well below Gulf state's break-even mark.
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.
Isn't it amazing that the world credit crisis came, and the Rating Agencies were blissfully unaware of it until it hit the world...? These rating agencies heaped huge ratings on the US and European banks (some of them who no longer exist!), with poor ratings on African and the Middle Eastern Financial Institutions, and look who went bust? The Middle East, especially the GCC, is widely considered a safe haven from the credit crunch and Moody's come with a rating like this. Not only is it comical, but it is stupid in its logic...! Moody's base its logic on a spot oil price, when a day later, the price of Oil goes to above UD$50 per barrel. A mindblowing assertion is that the Bahraini government might not have the financial muscle to bail out its banking sector...!!! Where were you guys over the last few years, did you not see the oil price over the last few years? Besides, it is not the government's place to "bail out" the banks (a la USA!!!) it is the banks business to bail out the banks. It would have made more sense to extrapolate a sensible oil price avg for the FY09 and then come up with its conclusion. Instead, their assessment takes no cognisane of the reserves Bahrain have built up over the last 7 years when there was an extraodinary run on the Oil price. Perhaps, Moody's, if you employ smarter people, your organisation won't pump out this kind of drivel?