Moody's downgrades Bahrain's credit rating

The Bahrain credit rating falls to "A3" but it remains one of the agency's highest.

Moody's Investors Service, the global credit ratings agency, downgraded its view of Bahrain's creditworthiness today because of rising government spending and less oil savings to fall back on than its peers in the Gulf. The ratings agency cited a "gradual but significant rise in the breakeven oil price in the Bahraini budget" in recent years, as well as a "relatively modest level of official financial assets" as contributors to the downgrade to "A3" from "A2".

Unlike Abu Dhabi, Saudi Arabia, Kuwait and Qatar, all of which have sovereign wealth funds worth tens of billions of dollars, Bahrain has few official reserves outside of its Mumtalakat Holding Company. Mumtalakat had assets worth 4.8 billion Bahraini dinars ($12.7bn) at the end of last year, according to its financial statements. "Bahrain's cushion of official financial assets is thinner than that of other investment-grade commodity exporters," said Tristan Cooper, the head analyst at Moody's for governments in the Middle East. "This exposes the country's public finances to a degree of risk that, in Moody's opinion, is better reflected by an A3 rating."

Increased spending by the government despite having a relatively small savings buffer has "led to a divergence between the government's fiscal flexibility and that of its ratings peers", Moody's said. "This reduced fiscal flexibility makes it more challenging potentially to meet contingent liabilities arising from Bahrain's financial sector, which is relatively large compared with the government's resources."

Despite a recent rise in global crude prices that has bolstered government revenues across the Gulf, many governments have seen their so-called "oil breakeven" prices increase because they are spending at an even more rapid rate on long-term infrastructure and economic development projects. The breakeven price, or the price above which a government runs a budget surplus, has been estimated at more than $60 for Abu Dhabi, which holds almost all of the UAE's oil. Analysts have put forth similarly high breakevens for Kuwait and Saudi Arabia. In Bahrain's case, Moody's estimated the breakeven rose from about $30 in 2004 to almost $80 last year because of rising government spending.

While one notch lower than its previous rating, an "A3" mark is still one of the agency's highest. Following the downgrade, Moody's said its outlook for Bahrain's ratings was "stable". [e-mail]