Fitch upgrades Bahrain

Fitch, the international rating agency, has upgraded the State of Bahrain’s Long-term foreign currency rating to ‘BBB’ from ‘BBB-’ (BBB minus).

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By  Massoud Derhally Published  November 27, 2001

Fitch, the international rating agency, has upgraded the State of Bahrain’s Long-term foreign currency rating to ‘BBB’ from ‘BBB-’ (BBB minus). At the same time, the State of Bahrain’s Long-term local currency rating has been affirmed at ‘BBB+’ and the Short-term rating at ‘F3’. The rating Outlook is Stable. The country ceiling for entities in Bahrain remains at ‘BBB+’.

Since Bahrain’s rating was assigned a little less than two years ago, both economic and political developments have helped improve creditworthiness. Diversification of the economy helped take real growth up to 5.3% last year from an average of 4% over the previous five years, while the strong surge in oil prices combined with tighter control of public spending to drive Bahrain’s fiscal and current accounts back into surplus for the first time since 1996. The government put almost all of the 8.7% of GDP budget surplus into a reserve for future investments rather than increasing current spending or repaying government debt. This left gross government debt, which had grown quickly in the later 1990s, at 29% of GDP, within the lowest quartile of rated sovereigns. Moreover, within this only 4% of GDP is external debt. Even though oil prices have now retreated, the revenues accumulated during the last two years will enable the government to cope with a new period of depressed prices without an unacceptable increase in its debt.

The exchange rate peg to the dollar helped keep inflation negative for a third year, while foreign exchange reserves continued to grow. The country is a substantial net external creditor, though its liquidity position – like that of any offshore centre – must rely on prudent management by the banks themselves, supported by effective supervision by the Bahrain Monetary Agency.

On the political front, the government is introducing major constitutional reforms that are leading to a more open and pluralistic society. Internal social tensions have been much reduced and greater female participation in society is being encouraged. A referendum (with male and female suffrage) has given overwhelming approval to the planned changes to the constitution, and a commission is agreeing details. A key test will be whether, after elections in 2004, the new legislature facilitates or frustrates economic reforms. Secondly, the settlement by the International Court of Justice of the 50﷓year old border dispute with Qatar offers a variety of economic possibilities, including the opening up of previously disputed territory to mineral exploration. Significant discoveries could transform Bahrain’s prospects.

The main constraints on the rating remain the heavy reliance of the budget and the trade accounts on volatile oil and gas revenues, as well as a relatively high population growth rate that puts pressure on the government to pursue and deliver high-growth policies. The government’s goal of 6% GDP growth to help employ the fast-growing population is challenging, and even more so due to the current global economic slowdown. Despite diversification and a faster privatisation programme, 70% of the economy remains in the public sector. As the private sector continues to rely heavily on expatriate workers, a more effective Bahrainisation policy would strengthen the country’s economic and social fabric and improve current account prospects over time.

As a consequence of the upgrade of the sovereign foreign currency rating, the Long-term rating of the National Bank of Bahrain has been raised to ‘BBB’ from ‘BBB-’ (BBB minus).

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