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EVEN as Bahrain's leadership thinks that the repercussions of the global crisis on key development projects can be surmounted by exploring new funding mechanisms, Moody's Investors Service has changed the outlook on the kingdom's sovereign ratings to negative from stable.
The change in outlook was prompted by the steep decline in oil prices well below Bahrain's fiscal break-even level. 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, says Tristan Cooper, vice-president and senior analyst in Moody's Sovereigns Group.
Bahrain is a minor exporter compared with Kuwait, the UAE and Saudi Arabia. But it still relied on crude and gas for 80 per cent of its government revenue in 2007 while the oil sector comprised 25 per cent of its gross domestic product, according to a research note by Standard Chartered Bank in Dubai.
"The reason Moody's has done this is that Bahrain doesn't have the cushion that the rest have," says Mary Nicola, an economist with Standard Chartered. "It's all about can they pay their debt back, and that's what they're looking at."
Standard Chartered says that while Bahrain's accounts are healthy, its exports will "take a hit" and, like the rest of the region, the country will face difficulties this year. The bank projects GDP to fall to about 3.5 per cent.
Moody's notes that despite progress towards economic diversification, Bahrain's fiscal and external current accounts remain heavily dependent on oil export receipts.
According to the IMF, Bahrain's fiscal break-even oil price is around $75 per barrel, compared with a current oil price of around $45 per barrel. Bahrain's fiscal break-even is higher than that of most other oil exporters rated by Moody's, including lower-rated Russia, Kazakhstan, and Trinidad and Tobago.
"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," says Cooper.
Moody's cautions that the global and regional economic downturn is 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. Moreover, 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 as contagion from the global financial crisis to the retail banking system seems to have been contained. "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," cautions Cooper.
Meanwhile, Fitch Ratings has downgraded ratings of a number of GCC banks including Taib Bank, Gulf International Bank and BBK.
The rating agency has downgraded Taib Bank long-term IDR to BBB from BBB+ with stable outlook and its short-term IDR to F3 from F2.
BBK has had its individual rating downgraded to C/D from C, while Gulf International Bank has had its individual rating downgraded to D from C/D.
All the three banks' other ratings have been affirmed by Fitch as have all the ratings for Ahli United Bank, Arab Banking Corporation, BMB Investment Bank and National Bank of Bahrain.
Most GCC banks' Issuer Default Ratings (IDRs) remain driven by Fitch's view of the probability of support from the respective sovereign authorities, and most of these have been affirmed by Fitch.
The exceptions are the downgrades to the IDRs of Dubai Bank and Taib Bank, respectively owned 70 per cent and 60 per cent by Dubai Holdings, whose creditworthiness is in turn strongly linked to the Dubai government.
Dubai's creditworthiness has deteriorated, despite strong support from the UAE federation, due to the worsened economic outlook and the pressure this will put on Dubai's public finances.
The exposure of GCC banks to the global credit crunch has been reflected in the downgrades of certain GCC financial institutions' individual ratings.
"Fitch's outlook for GCC banks has become less favourable as it has become evident that the region's banks and financial institutions will not be able to fully insulate themselves from the global credit crisis," says Fitch's Financial Institutions Dubai-based director Robert Thursfield. "GCC banks are now feeling the effects of the crisis, which is likely to cause deterioration in banking sector profitability and capitalisation going forward."
"There is a growing realisation that the GCC is not decoupled from the world economy and this appears to be reflected in the deteriorating business sentiment across the region," he says.
All these systemic factors, coupled with relatively high levels of inflation, are likely to put stress on GCC corporates and individuals, which is likely to lead to increased loan delinquencies.
