Fitch Ratings has affirmed Bahrain's Long-term foreign currency rating at A-, its Short-term foreign currency rating at F1 and its Long-term local currency rating at A. The Outlook on the Long-term ratings remains Stable.
Bahrain's ratings are underpinned by its strong overall net external creditor status, comfortable public finances, high per capita income, positive business climate and support from Gulf Co-operation Council (GCC) members, especially Saudi Arabia. US support is also important. Bahrain is home to the US Fifth fleet, is a "major non-NATO ally" of the US and will benefit from a Free Trade Agreement (FTA) about to be negotiated.
Meanwhile, political and economic reforms spearheaded by the King since 1999 are addressing many of the weaknesses in Bahrain's credit profile. The elected chamber has begun its second annual session, and a new National Audit Court has authority to investigate most aspects of public finances and should stimulate further necessary improvements in transparency.
In the economic sphere, reforms aim to further strengthen non-oil growth - which accelerated to six percent last year - and together with improved training and education, reduce unemployment among Bahrainis. The proposed sale of a 26 percent stake in Aluminium Bahrain (ALBA) and the FTA are recent affirmations of the government's reformist intent. The effectiveness of political and economic reforms over time will be the main influence on the direction of Bahrain's rating.
A major public investment programme is enhancing Bahrain's infrastructure and aims to catalyze and support private sector activity. In the short term, it is leading to wider budget and current account deficits until the benefits begin to flow. Precise forecasts are difficult given the uncertain timing of costs and benefits.
Moreover, although a doubling of capacity at the Abu Sa'afa oil field, which Bahrain shares with Saudi Arabia, is underway, Fitch has based its forecasts on the highly conservative assumption of unchanged Bahraini exports, due to uncertainty as to the precise share out. Assuming in addition a slight easing of oil prices and full implementation of project expenditure, Fitch projects the state budget deficit to approach five percent of gross domestic product (GDP) in 2005, and the overall deficit, including extra-budgetary spending and the pension fund surplus, to approach six percent of GDP.
Meanwhile, the current account deficit may approach 10 percent of GDP, swelled by the cost of the capacity expansion at ALBA. Given that extra capacity at Abu Sa'afa is worth an estimated nine percent of GDP, however, at least some of which is likely to accrue to Bahrain, both forecasts may well be bettered. The increased budget and current account deficits will also be temporary, with financing already largely in place. Fitch believes public finances are also robust to an oil price stress test for the A rating category. This is important given the emergence of budget and current account deficits at a time of relatively high oil prices.
Gross public debt will rise to 45 percent of GDP this year, in line with the median for credits in the A category, and the overall and sovereign net external creditor position may weaken a little. However, Bahrain's official external assets are understated, though to an unknown extent, and sovereign domestic financial assets probably exceed gross public debt. A full understanding of public finances would benefit from a complete and fully consolidated public sector balance sheet.
Problems in a few small banks over the past year have been contained. Weaknesses these revealed in the Bahrain Monetary Authority's (BMA) supervisory system have been tightened in response. Meanwhile, the BMA's development of the infrastructure for an Islamic securities market has been one of the past year's success stories. — (menareport.com)
© 2003 Mena Report (www.menareport.com)
