Research Update:

Kingdom of Bahrain Ratings Affirmed

At 'BBB/A-2' On Stable Growth
Prospects; Outlook Stable
Primary Credit Analyst:
Benjamin J Young, London (44) 20-7176-3574; benjamin.young@standardandpoors.com
Secondary Contact:
Elliot Hentov, PhD, London (44) 207-176-7071; elliot.hentov@standardandpoors.com
Table Of Contents
Overview
Rating Action
Rationale
Outlook
Key Statistics
Related Criteria And Research
Ratings List
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Research Update:
Kingdom of Bahrain Ratings Affirmed At
'BBB/A-2' On Stable Growth Prospects; Outlook
Stable
Overview
We continue to expect Bahrain to experience steady economic growth.
Uncertainties over the political environment persist.
We are therefore affirming our long- and short-term sovereign credit
ratings on Bahrain at 'BBB/A-2'.
The outlook on Bahrain remains stable.
Rating Action
On June 13, 2014, Standard & Poor's Ratings Services affirmed its long- and
short-term foreign and local currency sovereign credit ratings on the Kingdom
of Bahrain at 'BBB/A-2'. The outlook is stable.
At the same time, we affirmed the 'BBB/A-2' ratings on the Central Bank of
Bahrain.
Rationale
Our ratings on Bahrain are supported by the country's relatively stable growth
prospects; our view that it will likely receive Gulf Cooperation Council (GCC)
development funds; and our expectation that oil prices in 2014-2017 will
average out at about $103 per barrel, which will support public finances.
The ratings are constrained by our view of Bahrain's unresolved domestic
political tensions, which hamper economic policy effectiveness, and its fiscal
dependency on sustained high oil prices. The ratings are also limited by
stagnating real GDP per capita growth--we forecast this ratio will increase on
average by less than 1% per year between 2014 and 2017. This is low compared
with peers at similar wealth levels.
In 2013, real GDP growth improved because Bahrain resolved its oil production
difficulties. In future, we expect that headline real GDP growth will slow
slightly, but remain at around 4%. Underlying this growth, we expect public
sector capital projects and private sector consumption to increase gradually,
alongside broadly static investment growth. However, we anticipate that wealth
levels will rise only slowly because of estimated population growth. We
consider the government is likely to increase subsidies as a result.
The island's political tensions continue, in our view. Although we believe the
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government has established a post-crisis status quo, this still includes
occasional street protests, entrenched polarization between the Shia and Sunni
communities, internal communal divisions, and the relegation of economic
policymaking. We understand that various government opposition groups could
boycott the parliamentary elections scheduled for the fourth quarter of 2014.
The ongoing discussions about whether or not opposition groups will
participate indicates that political consensus remains elusive and the process
of reconciliation is uncertain.
In our view, broad economic growth and the socioeconomic targeting of the GCC
development funds could assist in the gradual normalization of the political
process. The development funds available during 2014-2017 will channel about
$4 billion of grants, mainly into housing, infrastructure, and electricity and
water projects.
Bahrain's fiscal vulnerability to oil prices remains extremely high. Oil and
gas revenues accounted for approximately 88% of total fiscal revenues in 2013.
Because the average oil price is expected to be $110 per barrel in 2014,
general government revenues should help offset the budgeted 10% increase in
expenditures. We expect key expenditure increases in wages and subsidies (6%
and 27%, respectively) will cause the deficit to widen slightly to 3% of GDP
in 2014 from 2.1% in 2013. While we anticipate that the government's fiscal
position will remain under control, should these expenditure pressures
continue in future years, they will constrain flexibility in the government's
budget. However, GCC-sponsored projects should alleviate capital expenditure.
We base our prospective deficit assumptions on oil prices gradually declining
to $95 per barrel by 2017. Even if substantial liquid assets give the
government short-term expenditure flexibility, we expect to see greater
medium- and long-term fiscal consolidation, in addition to the measures taken
thus far.
Since 2008, government debt has risen significantly. By the end of 2013,
central government debt was just over 40% of GDP--nearly 43% more than the
2010 level. At the general government level, Bahrain had a net asset position
of 12% of GDP in 2010, which we expect will have moved to a net debtor
position of 6% of GDP in 2014. The general government position is stronger
than the central government position because of consistent surpluses at the
social security level.
Although debt has continued to increase in nominal terms, we expect its ratio
as a proportion of GDP to remain stable over the forecast period (see table).
This stabilization is partly because of prefunding over 2013 and partly
because of our expectation that the pace of debt increase will remain below
headline economic growth. However, we anticipate that the government's net
indebtedness will increase as the proceeds of 2013's issuance are used for
2014 debt service.
We expect the current account to remain in surplus, although we forecast that
it will decline in line with our oil price assumptions given the expected
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Research Update: Kingdom of Bahrain Ratings Affirmed At 'BBB/A-2' On Stable Growth Prospects; Outlook
Stable
static services balance. The services balance is related to the profitability
of the financial sector. However, Bahrain's external stock position could be
significantly overstated because it is clouded by statistical discrepancies
and the size of the financial system, much of which has limited bearing on the
domestic economy.
Despite Bahrain's relatively large financial sector and large number of
majority-government-owned companies, we consider sovereign contingent
liabilities to be limited. We expect that competition will continue to strain
the profitability of the Bahraini retail banks, encouraging further
consolidation. Although the size of the overall banking system has declined,
our base-case scenario assumes that outflows, in terms of both external
funding and the physical presence of international banks, will be contained.
We also view the sovereign as a potential source of support for wholesale
institutions not covered by parent entities or home countries, but still
important from a systemic or reputational standpoint. Similarly, we include
all wholesale banks' external liabilities in our assessment of the country's
external financing needs.
Outlook
The stable outlook reflects our opinion that the fiscal position will remain
broadly stable despite a gradual decline in oil prices. Meanwhile, large-scale
public investment and greater hydrocarbon production should support growth
prospects.
We could lower the ratings if there were an unexpected escalation in political
tensions, such that economic prospects were weakened or external and fiscal
performances were threatened. Similarly, if oil prices were to fall below our
expectations for a sustained period, difficulties arose in implementing GCC
development funds, or other government expenditure pressures weakened the
fiscal profile, we could lower the ratings.
We could raise the ratings if a credible political process emerges and a
renewed social contract appears likely. In addition, if the boost in public
investment improves Bahrain's growth prospects beyond our expectations, we
could raise the ratings.
Key Statistics
Table 1
Kingdom of Bahrain - Selected Indicators
2007 2008 2009 2010 2011 2012 2013e 2014f 2015f 2016f 2017f
Nominal GDP (bil. US$) 22 26 23 26 29 30 33 36 39 42 46
GDP per capita (US$) 20,908 23,299 19,465 20,930 24,304 24,595 26,050 27,486 28,863 30,527 32,286
Real GDP growth (%) 8.3 6.2 2.5 4.3 2.1 3.4 5.3 4.0 3.5 3.8 3.7
Real GDP per capita growth
(%)
0.1 0.1 (4.0) 0.1 5.0 0.1 2.2 1.0 0.5 0.7 0.7
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Research Update: Kingdom of Bahrain Ratings Affirmed At 'BBB/A-2' On Stable Growth Prospects; Outlook
Stable
Table 1
Kingdom of Bahrain - Selected Indicators (cont.)
Change in general government
debt/GDP (%)
(0.9) (1.2) 7.2 10.6 5.0 4.9 5.3 1.7 1.2 2.3 3.6
General government
balance/GDP (%)
4.0 7.8 (0.9) (2.3) 1.6 (0.7) (2.1) (3.0) (3.5) (3.5) (3.5)
General government
debt/GDP (%)
15.8 12.1 20.8 29.2 30.8 34.4 36.8 35.6 34.1 33.6 34.4
Net general government
debt/GDP (%)
(23.2) (25.0) (22.5) (11.9) (6.9) (1.9) 0.0 5.7 7.8 9.3 12.0
General government interest
expenditure/revenues (%)
2.9 1.8 2.3 3.5 3.5 4.4 4.4 4.9 5.2 5.0 4.9
Oth dc claims on resident
non-govt. sector/GDP (%)
53.1 64.2 71.4 67.7 68.9 70.0 68.4 68.0 68.5 69.2 69.9
CPI growth (%) 3.3 3.5 2.8 2.0 (0.4) 2.8 3.3 3.3 3.3 3.3 3.3
Gross external financing
needs/CARs +use. res (%)
540.5 650.7 914.7 724.9 485.5 456.9 429.3 405.4 386.9 367.9 350.6
Current account balance/GDP
(%)
13.4 8.8 2.4 3.0 11.2 7.3 7.7 7.9 6.3 5.9 5.5
Current account balance/CARs
(%)
10.5 8.0 3.2 4.0 10.9 8.6 9.3 9.5 7.6 7.2 6.8
Narrow net external
debt/CARs (%)
(22.1) (25.3) (68.6) (74.8) (70.3) (63.6) (82.3) (79.0) (80.9) (84.0) (85.8)
Net external liabilities/CARs
(%)
(47.1) (54.2) (92.1) (87.6) (68.8) (47.0) (53.4) (40.1) (30.5) (23.3) (13.6)
Other depository corporations (dc) are financial corporations (other than the central bank) whose liabilities are included in the national definition
of broad money. Gross external financing needs are defined as current account payments plus short-term external debt at the end of the prior
year plus nonresident deposits at the end of the prior year plus long-term external debt maturing within the year. Narrow net external debt is
defined as the stock of foreign and local currency public- and private- sector borrowings from nonresidents minus official reserves minus
public-sector liquid assets held by nonresidents minus financial sector loans to, deposits with, or investments in nonresident entities. A negative
number indicates net external lending. CARs--Current account receipts.
The data and ratios above result from S&Ps own calculations, drawing on national as well as international sources, reflecting S&Ps independent
view on the timeliness, coverage, accuracy, credibility, and usability of available information.
Related Criteria And Research
Related Criteria
Sovereign Government Rating Methodology And Assumptions, June 24, 2013
Methodology For Linking Short-Term And Long-Term Ratings For Corporate,
Insurance, And Sovereign Issuers, May 7, 2013
Criteria For Determining Transfer And Convertibility Assessments, May 18,
2009
Related Research
Sovereign Defaults And Rating Transition Data, 2013 Update, April 18,
2014
In accordance with our relevant policies and procedures, the Rating Committee
was composed of analysts that are qualified to vote in the committee, with
sufficient experience to convey the appropriate level of knowledge and
understanding of the methodology applicable (see 'Related Criteria And
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Research Update: Kingdom of Bahrain Ratings Affirmed At 'BBB/A-2' On Stable Growth Prospects; Outlook
Stable
Research'). At the onset of the committee, the chair confirmed that the
information provided to the Rating Committee by the primary analyst had been
distributed in a timely manner and was sufficient for Committee members to
make an informed decision.
After the primary analyst gave opening remarks and explained the
recommendation, the Committee discussed key rating factors and critical issues
in accordance with the relevant criteria. Qualitative and quantitative risk
factors were considered and discussed, looking at track-record and forecasts.
The chair ensured every voting member was given the opportunity to articulate
his/her opinion. The chair or designee reviewed the draft report to ensure
consistency with the Committee decision. The views and the decision of the
rating committee are summarized in the above rationale and outlook.
Ratings List
Ratings Affirmed
Bahrain (Kingdom of)
Central Bank of Bahrain
Sovereign Credit Rating BBB/Stable/A-2
Senior Unsecured BBB
Bahrain (Kingdom of)
Transfer & Convertibility Assessment BBB+
CBB International Sukuk Co. (No. 2)
Senior Unsecured* BBB
CBB International Sukuk Company (No.3)
Senior Unsecured* BBB
*Guaranteed by Kingdom of Bahrain.
Additional Contact:
SovereignEurope; SovereignEurope@standardandpoors.com
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Research Update: Kingdom of Bahrain Ratings Affirmed At 'BBB/A-2' On Stable Growth Prospects; Outlook
Stable
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