(The following statement was released by the rating agency)
LONDON, December 19 (Fitch) Fitch Ratings has revised the
Outlooks on Bahrain’s
Long-term foreign and local currency Issuer Default Ratings
(IDR) to Negative
from Stable and affirmed the IDRs at ‘BBB’ and ‘BBB+’,
respectively. The issue
ratings on Bahrain’s senior unsecured foreign and local currency
bonds have also
been affirmed at ‘BBB’ and ‘BBB+’, respectively. The agency has
simultaneously
affirmed Bahrain’s Country Ceiling at ‘BBB+’ and Short-term
foreign currency IDR
at ‘F3’.
KEY RATING DRIVERS
The revision of the Outlook to Negative reflects the following
key factors and
their relative weights:
HIGH
The fall in oil prices has exacerbated the already challenging
fiscal situation.
Fitch estimates Bahrain’s fiscal breakeven oil price to be
around USD130/bl,
compared with a forecast for Brent to average USD83/bl in 2015.
Fiscal
flexibility is constrained by the very low share of non-oil
revenue of just 14%
of total revenues. Wages and subsidies together account for 70%
of total budget
spending.
The 2015 budget has been delayed until at least March due to
November’s
elections. Fitch has few details on the fiscal strategy that
will be adopted or
specific measures that may be proposed. Fitch’s forecasts assume
a cut back in
capital spending, some moderation in current spending growth,
and incremental
measures to raise non-oil revenue and reduce subsidies by better
targeting.
However, these measures are unlikely to make major inroads in
the deficit, which
is forecast to increase by 2ppts to 7.7% of GDP in 2015 on a
general government
basis, including estimated extra-budgetary spending. (The state
budget deficit
is forecast to rise from an estimated 3.7% of GDP in 2014 to
6.2% in 2015).
Government debt has continued to rise, to reach a forecast 47.2%
of GDP at the
end of 2014 and 52% in 2015. The ratio has moved further ahead
of the ‘BBB’
median of 39.2%. Moreover, Fitch’s forecasts show the ratio
continuing to rise
in the medium term, even assuming some fiscal adjustment
measures in the delayed
2015 budget.
MEDIUM
Talks between the government and opposition aimed at reaching a
political
compromise ahead of the November elections came to nothing and
the opposition
boycotted the elections, which went ahead without major
incident. There are no
plans for further talks and the political stalemate continues.
Fitch does not
expect a comprehensive political solution to be achieved in the
near term.
The affirmation also reflects the following factors:
Financing flexibility is good. The government has domestic bank
deposits of an
estimated 14.4% of GDP. These were drawn down during the last
oil price fall in
2009 and were also used in 2014. Fitch assumes further drawdown
during the
forecast period. The domestic capital market is quite deep: a
single two-year
development bond issued in September financed the whole of this
year’s estimated
budget deficit of 5.6% of GDP. Bahrain has also become a regular
eurobond
issuer, most recently raising USD1.25bn at 30-year maturity in
August.
Growth has accelerated this year, with both hydrocarbon and
non-hydrocarbon
activity surprising to the upside. Oil sector growth averaged 6%
in 9M14, while
non-oil growth rose to 5.2% in Q314. The latter is largely due
to the increased
activity triggered by GCC-funded infrastructure projects,
particularly in
housing. Of the USD4.4bn of projects approved to date (out of a
total USD10bn
promised over 10 years), work has now commenced on 28% of them.
This is a
substantial increase from six months ago when virtually no
projects had
commenced. GCC funded projects are off budget and will not be
affected by any
fiscal consolidation effort. Fitch’s forecasts of 4.3% overall
GDP growth this
year and next are higher than six months ago.
Bahrain’s external position is stronger than its ‘BBB’ rated
peers. It
registered a current account surplus of an estimated 6.7% of GDP
in 2014
(quarterly balance of payments data are not published) and
although this will
decline next year, Fitch still expects a figure in excess of 4%
of GDP. Although
gross oil exports are over 50% of current external receipts
(CXR), Bahrain also
imports oil from Saudi Arabia to refine exported products. Net
oil exports are
only 25% of CXR. Bahrain is also a net external creditor at 150%
of GDP, well
above the ‘BBB’ median.
GDP per capita and broader human development and business
environment indicators
exceed the ‘BBB’ median. The strong regulatory framework and
local skill base,
combined with low costs, are key supports to the financial
sector.
Bahraini banks have generally reported sound profitability
during 2014.
Capitalisation remains solid and asset quality improved overall.
The smaller
Islamic banks have continued to merge. The sector is in the
process of preparing
for the implementation of Basel III regulations, and the Central
Bank is
overseeing measures aimed at improving corporate governance and
oversight.
RATING SENSITIVITIES
The rating Outlook is Negative. The main factors that
individually, or
collectively, could lead to a downgrade include:
– Difficulty in reining in fiscal deficits, resulting in a
continuing rise in
the government debt burden.
– Sustained oil price weakness that would exacerbate an already
challenging
medium term debt trajectory
– Severe deterioration of the domestic security situation.
The main factors that, individually or collectively, could lead
to a
stabilisation of the rating Outlook include:
– Significant fiscal measures which reduce the budget deficit
and are consistent
with the stabilisation of the debt-to-GDP ratio in the medium
term.
– A broadly accepted political solution that eases political
unrest.
– A recovery in oil prices that improves public finances.
KEY ASSUMPTIONS
Fitch forecasts that Brent crude will average USD83/bl in 2015
and USD90/bl in
2016. Production levels are assumed to increase marginally to
reflect capacity
upgrades.
Fitch assumes that Bahrain will continue to benefit from savings
through the
implementation of GCC development projects financed by Kuwait,
Saudi Arabia, and
the UAE. Agreement on commitments from Qatar is at a less
advanced stage.
Fitch assumes there will be no challenge to the rule of the
royal family or the
current succession.
Fitch assumes no material deterioration in the internal security
situation but
also does not expect a comprehensive political solution to be
achieved in the
near term.
Bahrain is in a volatile region and its rating factors in
existing tensions and
conflicts which are assumed to continue. Fitch assumes that
regional
geopolitical conflicts will not impact directly on Bahrain or on
its ability to
trade.
Contact:
Primary Analyst
Richard Fox
Senior Director
+44 20 3530 1444
Fitch Ratings Limited
30 North Colonnade
London E14 5GN
Secondary Analyst
Paul Gamble
Director
+44 20 3530 1623
Committee Chairperson
Ed Parker
Managing Director
+44 20 3530 1176
Media Relations: Athos Larkou, London, Tel: +44 203 530 1549,
Email:
athos.larkou@fitchratings.com; Rebecca O’Neill, London, Tel: +44
203 530 1697,
Email: Rebecca.ONeill@fitchratings.com.
Additional information is available at www.fitchratings.com.
Applicable criteria, ‘Sovereign Rating Criteria’ dated 12 August
2014 and
‘Country Ceilings’ dated 28 August 2014, are available at
www.fitchratings.com.
Applicable Criteria and Related Research: Bahrain – Rating
Action Report
here
Sovereign Rating Criteria
here
Country Ceilings
here
Additional Disclosure
Solicitation Status
here
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