Moody's: Bahrain's credit profile balances high wealth and diversified economy against weak fiscal position

The Government of Bahrain's Ba2 credit rating with a negative outlook is supported by the country's high wealth levels, a diversified economy and the positive net international investment position, Moody's Investors Service said in a report today. However, the sovereign also faces credit constraints, including the sharp deterioration in government finances since 2009, a trend intensified by lower oil prices.

The negative outlook on the rating reflects heightened government and external liquidity risks and the government's so far slow and incremental response to lower oil revenues.

The annual update, "Government of Bahrain -- Ba2 negative: Annual Credit Analysis", is now available on www.moodys.com. Moody's subscribers can access this report via the link at the end of this press release. The research is an update to the markets and does not constitute a rating action.

"The government's ability to continue managing its debt and deficit levels will determine the sovereign's rating trajectory in the coming years," said Steffen Dyck, a Moody's Vice President -- Senior Credit Officer and co-author of the report. "In the absence of significant revenue and expenditure reforms, and given our expectation that oil prices will remain range-bound between $40-$60 per barrel over the coming years, Bahrain's fiscal deficits will stay wide and government debt will rise to 85% of GDP by 2020."

Moody's expects Bahrain's growth performance to moderate in the coming years, on the back of stagnant oil and gas output and the expected negative impact on growth from fiscal consolidation.

As such, Moody's forecasts average real GDP growth of slightly more than 3% in 2011 to 2020, which is broadly in line with Oman, but relatively lower than other Gulf Cooperation Council (GCC) member countries, such as Kuwait, Saudi Arabia and United Arab Emirates.

In the absence of more aggressive measures, Moody's expects that Bahrain will continue to post large fiscal deficits over the coming years. Following an already very wide deficit in 2015 - estimated at 18.4% of GDP -- Moody's estimates that it narrowed only gradually to 16.5% in 2016 and will remain sizable at 9.8% in 2017.

The negative outlook could return to stable if there is evidence that a clear and credible fiscal and economic policy response is likely to stabilize government debt at levels below 80% of GDP, and would be accompanied by a strengthening of fiscal and external buffers.