Fitch Ratings has downgraded Bahrain’s long-term foreign currency issuer default rating (IDR) to BBB- from BBB and long-term local currency IDR to BBB from BBB+.
The outlooks are stable. The issue ratings on Bahrain’s senior unsecured foreign and local currency bonds have also been downgraded to BBB- from BBB and BBB from BBB+, respectively.
The agency has affirmed Bahrain’s country ceiling at BBB+ and short-term foreign currency IDR at F3.
Fitch said lower oil prices have added to the strain on Bahrain’s budget deficit is forecast to rise to 10.9 per cent of GDP in 2015 from 5.5 per cent of GDP in 2014, before falling into high single digits in 2016 and 2017.
The general government debt burden reached 45.1 per cent of GDP in 2014.
Fitch said real non-oil growth was 4.9 per cent in 2014, driven by tourism, social and personal services and construction. GCC-financed project work by local subcontractors will support non-oil growth of 4-4.5 per cent over the forecast period. The tourism industry, which is driven by the Saudi Arabian market, is also expected to continue registering high growth. Major expansions to manufacturing projects will contribute to growth. Inflation is forecast to stay below the peer median.
Fitch said Bahrain’s net external creditor position of 164 per cent of GDP compares with a peer median of -5.4 per cent of GDP. A small current account deficit is forecast for 2015. The balance of payment will return to surplus in 2016.
Bahrain’s financing flexibility has allowed it to be a regular Eurobond issuer, most recently raising $1.25bn at a 30-year maturity in August 2014. The domestic capital market continues to provide the main source of financing. The government issued its first 10-year domestic sukuk in January 2015.
Fitch said Bahraini banks have enjoyed strong profitability, rising capitalisation, and declining NPLs. 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.
Fitch forecasts that Brent crude will average $65 a barrel in 2015 and $75 a barrel in 2016.
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. Lower oil prices are not assumed to impact the flow of funds from these countries.