Fitch Ratings has placed the Kingdom of Bahrain's ratings on watch positive. The rating action follows a visit to Bahrain earlier this year and subsequent discussions with the authorities intended to clarify the macroeconomic outlook and prospects for the fiscal position, balance of payments and Bahrain's position as a net external creditor.
A review is expected to be concluded in a relatively short period and in advance of Bahrain's planned debut eurobond issue in early 2003. Current ratings are: Long-term foreign currency rating BBB; Short-term foreign currency rating F3; Long-term local currency rating BBB+.
There have been further improvements in both the political and economic arenas since Fitch upgraded Bahrain's ratings a year ago. Political reforms reached a watershed in October with elections to the lower chamber of the new National Assembly.
Although the elections were boycotted by important opposition groups, turnout was nevertheless sufficient to give the institution legitimacy. In the economic area, diversification continues, with 2001 seeing a further acceleration in non-oil GDP growth that kept overall growth at a respectable 4.8 percent, despite a slowdown in the key oil and banking sectors.
The government is embarked on an ambitious public investment program, financed mainly from budget surpluses set aside in 2000 and 2001, aimed at enhancing Bahrain's export potential and facilitating growth and employment in the non-oil private sector.
As well as examining broad macroeconomic prospects against the background of increased regional tensions, the review will also draw on the latest information regarding Bahrain's external and public finances. Data provision and transparency in this area have improved over the past year and, although shortcomings remain, present a better picture than previously.
Looking ahead, although sovereign external borrowing is increasing to augment the public investment program, the government will remain a net external creditor, even before taking account of official external non-reserve assets. Central government external debt service is less than one percent of current external receipts and is covered 40 times by official reserves. The overall gross public debt burden is also rising but remains comfortable in peer group terms, especially in view of public debt held within the rest of the public sector and resources in the Reserve for Strategic Projects.
The strong performance of external and public finances in 2000 and 2001 puts Bahrain in a fairly comfortable position to withstand the weakening in the budget and current account positions now in progress as public investment steps up. In the short-term, increased public investment is bringing higher imports and rising expatriate remittances that, together with a temporary cut in aluminium output earlier this year, will leave the current account in deficit in 2002.
A budget deficit could follow in 2003. Although increased public investment should facilitate higher exports in future years, the move into current account and probably budget deficit, against the background of oil prices significantly above their long-term average, increases vulnerability to future oil price weakness. Against this must be set the fact that past oil price volatility has not led to any permanent weakening in Bahrain's net external creditor position.
Bahrain's banking system is also a net external creditor, although for domestic banks this is partly a counterweight to their domestic foreign currency liabilities. The size of banks' external and foreign currency liabilities is substantial compared to the size of the economy and makes the Bahrain Monetary Authority's strong supervisory regime and credibility of the long-standing exchange rate peg vital as supports to the rating.
For offshore banks, however, Fitch believes that, on the basis of past instances of regional and domestic political and economic stress, the need for sovereign support in a crisis would be limited. External liquidity, defined as official reserves and bank liquid external assets relative to liquid external liabilities, is near the median for international financial centers. — (menareport.com)
© 2002 Mena Report (www.menareport.com)
