Bahrain gets 'A-' rating as it sets up IIFM

Standard & Poor's (S&P) Ratings Services said yesterday [September 4, 2002] it assigned its single-'A'-minus foreign-currency senior unsecured debt rating to the Kingdom of Bahrain's third issue of Islamic Leasing Sukuk (bonds) offered on Aug. 29, 2002.

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By  Massoud Derhally Published  September 5, 2002

Standard & Poor's (S&P) Ratings Services said yesterday [September 4, 2002] it assigned its single-'A'-minus foreign-currency senior unsecured debt rating to the Kingdom of Bahrain's third issue of Islamic Leasing Sukuk (bonds) offered on Aug. 29, 2002.

The third issue of the Sukuk amounts to $80 million, carries a five-year maturity, and has a rental return of 4% per year paid half-yearly in February and August.

Bahrain started to issue Islamic government bills known as Sukuk Al-Salaam in the middle of 2001, worth $25 million on a monthly basis. It had also offered five-year Islamic leasing bonds worth $100 million, the first offered by any central bank in the area.

The Sukuk, which were issued by the Bahrain Monetary Agency (BMA) on behalf of the Government of Bahrain, are registered and traded on the Bahrain Stock Exchange.

"The Sukuk are direct obligations of the Government of Bahrain itself rather than a special-purpose vehicle," said Ala'a Al-Yousuf, S&P’s director of sovereign ratings in the Middle East and Africa.

"Nevertheless, the Government of Bahrain has guaranteed these Sukuk through a binding agreement to continue renting the underlying real-estate assets according to the rental contract and to buy them back at the end of the five-year period at par value," added Al-Yousuf.

S&P said that Bahrain's ratings are supported by the government's prudent fiscal policy that has seen government budget deficits below 2% of GDP. In 2000 and 2001, however, the budget was in surplus as oil revenues were higher-than budgeted, while expenditures were broadly within original budget allocations. This year, extra-budgetary spending for capacity expansion at the offshore Abu Sa'afa oil field, however, is likely to push the overall fiscal position into a small deficit of about 0.6% of GDP. Moreover, higher capital expenditures in 2003 are likely to widen the overall deficit to about 4.7% of GDP, although this should narrow to 2% in 2004 as capital spending declines and oil revenues increase.

The rating agency also pointed to the Kingdom’s relatively low debt burden. Central government debt at year-end 2001 was 30% of GDP, of which only 5% of GDP was external debt, all to regional development funds. Interest payments are relatively small at about 5% of revenues, said S&P. The general government had a net asset position in 2001 of 50% of GDP, which compares favourably with similarly rated sovereigns.

S&P also highlighted that Bahrain’s monetary stability and robust financial system. Bahrain's fixed exchange rate underpins price stability. In addition, a robust financial system has enabled it to diversify economic activity and maintain a relatively deep and liquid market for government securities. The BMA has a good reputation as a banking supervisor, with standards in line with international best practice, reducing the risk of financial instability and the government's contingent liability.

At the same time, the rating agency pointed out that Bahrain's ratings are constrained by a narrow base for government revenues. Oil revenues, virtually all from Abu Sa'afa, account for about 67% of total revenues. This share is expected to exceed 70% after 2004 as oil production is slated to increase by 50%. Ownership of Abu Sa'afa is shared equally with Saudi Arabia, but in 1996 Saudi Arabia agreed to grant its half share of oil production to Bahrain. S&P’s ratings of Bahrain are predicated on the understanding that this agreement will hold for the foreseeable future and that the oil reserves are sufficient to last for several decades at projected rates of extraction. Although the government is likely to continue to assume a conservative oil price in the budget, the government's high reliance on oil revenues from a single offshore field is a source of vulnerability.

S&P also called attention to what it described as a lack of transparency in public finances. The published accounts of the central government are neither comprehensive nor presented according to international standards, said the agency. Implicit subsidies to public utilities are not transparent; nor are transfers to the oil company and the aluminium smelter, the two largest nonfinancial public enterprises, with combined debt estimated to reach about 37% of GDP by 2004 increasing the contingent liability of the government.

The stable outlook the agency said reflects it's view that the Bahraini government will maintain macroeconomic stability and a low debt burden, while it might not make sufficient or early progress on improving the transparency of public finances and implementing structural reforms.

On August 11, Bahrain's King Sheikh Hamad bin Issa al-Khalifa issued a decree setting up a financial centre to help meet the needs of international Islamic banks and financial institutions. The decree allows Bahrain’s International Islamic Financial Market (IIFM) to start operations that will cater to the needs of some 200 Islamic banks and financial institutions around the world. Many Islamic bankers welcome the recent move by the Kingdom, indicating that the IIFM will help them manage their liquidity needs on a day-to-day basis in what is estimated to be US $200 billion market.

The setting up of the IIFM followed an agreement signed in 2001 between Bahrain, Indonesia, Malaysia, Sudan and the Saudi-based Islamic Development Bank to set up the organisation.

The Islamic banking industry has emerged as one of the fastest growing banking segments with 15-25% annual growth.

There are 18 Islamic banks and financial houses operating in Bahrain. The Kingdom also has 20 commercial banks and 48 offshore banking units with combined assets of more than $100 billion.

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