Fitch Ratings has upgraded the Kingdom of Bahrain's ratings, removing them from Rating Watch Positive. The long-term foreign currency rating is upgraded to A- from BBB; the short-term foreign currency rating is upgraded to F1 from F3; and the long-term local currency rating is upgraded to A from BBB+.
The Rating Outlook on the ratings is Stable, reflecting Fitch's view that the ratings are robust to most risk scenarios that can be envisaged in current circumstances. Geopolitical risks are partly offset by Bahrain's status as a 'major non-NATO ally' of the US.
There have been further improvements in the political and economic arenas since Fitch upgraded Bahrain's ratings in November 2001. Political reforms reached a watershed in October with elections to the lower chamber of the new National Assembly (NA).
Although the elections were boycotted by important opposition groups, turnout was nevertheless sufficient to give legitimacy to the institution and to the policies and reforms it will now consider. Only time will tell how effective the NA will be in fostering further reforms, and this will have an important bearing on future rating progress.
In the economic area, diversification efforts continue and 2001 saw a further acceleration in non-oil GDP growth to 5.7 percent. Overall growth is likely to have accelerated in 2002, with the government embarked on an ambitious public investment program.
Financed mainly from budget surpluses set aside in 2000 and 2001, this aims to enhance Bahrain's export potential and facilitate growth and employment, especially among Bahrainis, in the non-oil private sector.
The short-term impact of increased public investment has been a reduction in the overall budget surplus and the emergence of a current account deficit in 2002: Fitch estimates these at around two percent of gross domestic product (GDP) and almost five percent of GDP respectively.
However, Bahrain starts from a strong position and, although the availability, quality and timeliness of key data still leave room for improvement, increased government transparency reveals both the fiscal and external positions to be materially stronger than previously thought.
The government and the country as a whole are substantial net external creditors, even before taking account of official non-reserve external assets, the size of which is undisclosed. Although sovereign external borrowing is rising modestly, the net external creditor position remains secure.
The increase in the current account deficit at a time when oil prices are significantly above their long-term average increases vulnerability to any fall in oil prices. However, previous such swings into current account deficit, as in 1998, have been partly covered by drawings on official non-reserve assets and this is expected to continue.
Meanwhile, central government external debt service is less than one percent of current external receipts and covered 40 times over by official reserves.
The budget could register a deficit in 2003, and the gross public debt burden is rising. However, both indicators remain comfortable in peer group terms, especially against the background of public debt held within the rest of the public sector and resources in the Reserve for Strategic Projects.
Moreover, the budget deficit has not exceeded five percent of GDP in more than a decade and in the event of a significant oil price fall, Fitch would expect adjustments to be made to contain any increase in the budget deficit.
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)
© 2003 Mena Report (www.menareport.com)
