Bahrains Sovereign Ratings Raised

Thursday, 5 June 2008

Bahrains Sovereign Ratings Raised
Capital Intelligence, the international rating agency, today announced that it has raised Bahrains long-term foreign currency rating to A  from A-(A minus) and its short-term foreign currency rating to A1 from A2. The outlook is Stable. Bahrains ratings reflect the strength of the public and external finances as well as favourable prospects for sustained economic growth.
Bahrain is enjoying a prolonged period of above-trend economic growth, which is supported by high oil prices and strong regional liquidity and underpinned by efforts to diversify the economy. Real GDP grew at an annual average rate of almost 7% in 2005-07, driven by domestic demand and exports of non-oil goods and services, and is expected by Capital Intelligence to increase by 6.1% in 2008 and close to 5.7% in 2009 and 2010 with non-oil growth about a percentage point higher in each year.
Soaring oil prices have more than offset the impact on the public finances of declining oil production, enabling the government to boost spending on social and physical infrastructure while at the same time reducing debt  to a projected 17% of GDP in 2008  and accumulating financial assets. Capital Intelligence expects the central government budget to remain in surplus over the medium term, further strengthening the governments net creditor position.
High oil prices along with the expansion of non-oil export capacity have also contributed to large current account surpluses (15% of GDP in 2007; a projected 21% in 2008) and the growth of official foreign assets. The countrys external balance sheet is strong, with the foreign assets of the banking system (including the central bank) exceeding the stock of external debt by an estimated 57% of current account receipts (or 82% of GDP) at the end of 2007.
Bahrains ratings remain constrained by the governments reliance on income from oil, which accounts for about 75% of budget revenue, and the geopolitical risk factors that affect the ratings of all Gulf sovereigns. Key short-term policy challenges include dealing with the unwelcome side-effects of economic success and high oil prices. Capital Intelligence notes that consumer price inflation and asset price inflation have picked up speed and private sector credit growth is relatively high (45% year-on-year in the first quarter of 2008). The banking system, though profitable and well-capitalised, has greatly increased its exposure to the real estate sector where concerns of oversupply have begun to emerge. Capital Intelligence is encouraged by central bank initiatives to raise prudential standards, but a more politically challenging tightening of fiscal policy may yet be needed to help contain inflation.