'Wait and watch' policy

Bahrain's business and financial sector have adopted a policy of 'wait and watch' after the series of unfortunate events that unfolded on the island nation last week.

While banks and markets functioned as usual, several multi-national institutions rolled out their business continuity plans and some even moved expatriate staff and their families to neighbouring Gulf States.

A number of major cultural events and exhibitions scheduled for this week such as the French Week 2011 and Bahrain Garden Show have been postponed.

More worryingly, International Jewellery Bahrain 2011 scheduled to take place in April at the Bahrain International Exhibition and Convention Centre, has also been postponed due to the 'unforeseen political situation in the Middle East, especially the Kingdom of Bahrain', said World Trade Fair Limited.

Although none of the local and multi-national banks based in Bahrain approached by GulfWeekly were willing to go on record, international credit rating agencies have expressed concern.

Standard & Poor's Ratings Services said today that it lowered its long-and-short-term sovereign credit ratings on the Kingdom of Bahrain to 'A-/A-2' from 'A/A-1' and placed them on CreditWatch with negative implications. At the same time, they lowered the ratings on the Central Bank of Bahrain and Bahrain Mumtalakat Holding Co., the sovereign wealth fund, to 'A-/A-2' from 'A/A-1' and also placed them on CreditWatch negative. The Transfer and Convertibility Assessment on Bahrain was also changed to 'A' from 'AA-'.

A spokesman said: "The rating actions reflect our reappraisal of political risks in Bahrain ... We project that general government will post deficits (net of social security surpluses of about 1.5 per cent of GDP) less than two per cent of GDP this year and next if oil prices remain near $100 per barrel."

Fitch Ratings has put Bahrain's A rating 'on notice' for a downgrade unless there is an improvement in the situation and a restoration of law and order.

Fitch said it would monitor political developments and their economic impact and aims to make a decision on Bahrain's rating within the usual three to six month time horizon.

"The Rating Watch Negative reflects the intensification of unrest, which together with the growing divide between protesters' demands and the government's position on political reform suggests that the protests will be extended," claimed Purvi Harlalka, director of Fitch's Middle East and Africa division.

"The unrest has created economic and political uncertainties, which increase the risks to the sovereign's credit profile."

Fitch also expressed concern with regard to the risks posed to the economy and the public finances saying that the government's recent announcement of handing out benefits totalled around two per cent of Bahrain's national income.

The international rating agency said the worry lies in the fact that the recently announced measures have come on top of an already expansionary budget that would see gross debt more than double to 38 per cent of Bahrain's GDP by 2012 from just 16 per cent in 2008.

Though Fitch did note that Bahrain has a 'demonstrated track record of fiscal prudence' and that the current level of oil prices makes the new measures more affordable, it said the increase in debt is weakening the kingdom's credit-worthiness.

On condition of anonymity, a financial analyst said that a downgrade did not bear well for a country that was so dependent on skilled expatriate labour and an economic need to maintain good public relations. He said that the downgrade would mean that borrowing money by the country and its financial institutions would become more expensive and would ultimately reflect on the economy, which has already been hard hit by the economic recession, consequent loss of jobs and slowing down of the real estate market resulting in surplus availability of residential and commercial properties.

Meanwhile, stock markets in Bahrain, the smallest in the region, declined 0.2 per cent to 1471.58 on Sunday and newspaper reports said that the country's credit default swaps, the cost of insuring sovereign debt, has surged 30 per cent in the last week amid protests.

Bahrain is considered by many banking analysts as the banking capital of the Middle East with the kingdom giving a major push to this sector with favourable regulations for off-shore banking and encouraging its use as a base for managing the Gulf's petro-dollar wealth.

The efforts have paid off with Bahrain generating over a quarter of its national income from its financial services sector. It gained the status when civil war broke out in Lebanon.