Reuters: Fitch Revises Bahrain's Outlook to Negative; Affirms at 'BBB-'
2015-12-05 - 7:52 p
Bahrain Mirror (Reuters): Fitch Ratings has revised Bahrain's Outlook to Negative from Stable and affirmed its Long-term foreign and local currency Issuer Default Ratings (IDR) at 'BBB-'and 'BBB', respectively.
The issue ratings on Bahrain's senior unsecured foreign and local currency bonds have also been affirmed at 'BBB-' and 'BBB', respectively. The agency has simultaneously affirmed Bahrain's Country Ceiling at 'BBB+' and Short-term foreign currency IDR at 'F3'. KEY RATING DRIVERS The revision of the Outlook to Negative reflects the following key ratings drivers and their relative weights: HIGH Fitch's lower oil price forecasts are outweighing the effects of a greater policy response than previously anticipated on Bahrain's fiscal position. Fitch forecasts a wider double-digit deficit of 12.5% of GDP in 2015 and 10.7% of GDP in 2016, remaining in high single digits by 2017, up from 5.5% of GDP in 2014.
This adds to recorded fiscal deficits every year since 2008. Fitch estimates a break-even oil price of USD122/b in 2015 and USD118/b in 2016 versus average oil price assumptions of USD55/b in both 2015 and 2016 and USD65/b in 2017.
Fiscal adjustment measures introduced so far have proven insufficient to offset lower oil prices, as social and competitiveness constraints hinder the pace of policy response. As a result, total revenues will fall to 17% of GDP in 2015 and 2016, from 24% of GDP in 2014. Fitch expects double-digit fiscal deficits to lift general government debt substantially to 58.6% of GDP in 2015 and 65.2% of GDP in 2016, from 46.1% of GDP in 2014. This is well in excess of the 'BBB' median of 42.8% of GDP in 2015.
The affirmation also reflects the following factors Real growth has been relatively resilient to lower oil prices. Fitch forecasts favourable growth of 3.3% in 2015 and 3% in 2016 and 2017, somewhat below 4.5% in 2014 as oil production remained flat in 2015. GCC projects have been ramped up significantly this year and will continue to be so over the forecast horizon. Growth will be supported by the non-hydrocarbon sector expanding by 4.4% in 2015, and remaining around 3.5% in 2016 and
2017 underpinned by manufacturing, construction, tourism and social and personal services. Bahrain's external balance sheet remains stronger than its 'BBB' rated peers. The net external creditor position of 56% of GDP compares with a peer median of -4.2% of GDP.
A small current account deficit of 2.3% of GDP is forecast in 2015 recovering to surplus in 2016. Although gross oil exports are over 40% of current external receipts (CXR), Bahrain also imports oil
from Saudi Arabia to refine for export products, meaning net oil exports are around 20% of CXR. Governance indicators are below the peer median. There has been no progress in resolving the political stalemate since the opposition Wefaq party boycotted the elections of November 2014.
The boycott appears to have lost Wefaq support and the government does not seem inclined to deal with the party's current leadership. Sporadic low-level violence continues in some Shia villages, but the government has this under control and there is no disruption to business activity.
A USD1.5bn bond issuance this year highlights continuing financing flexibility after a USD1.25bn issuance at a 30-year maturity in August 2014. Bahrain is a regular Eurobond issuer and benefits from good domestic financing access, which provides the main source of its funding.
Active conventional and Islamic issuance programmes also supports flexibility with a 10-year domestic sukuk issued in January 2015. GDP per capita and broader human development indicators exceed the 'BBB' median and the business environment is favourable. The strong regulatory framework and local skill base, combined with low costs, are key supports to the financial sector.
RATING SENSITIVITIES The main factors that could lead to a downgrade are: - Failure to reduce the fiscal deficit sufficient to stabilise the government debt-to-GDP ratio. - Severe deterioration of the domestic security situation. The rating Outlook is Negative. Consequently, Fitch does not currently anticipate developments with a material likelihood of leading to an upgrade. However, the following factors could lead to positive rating action: - Implementation of fiscal measures which reduce the budget deficit and are consistent with the stabilisation and then decline of the government debt-to-GDP ratio in the medium term. - A broadly accepted political solution that eases political unrest. - A recovery in oil prices that improves public finances.
KEY ASSUMPTIONS Economic and fiscal forecasts are based on Brent crude averaging USD 55/b in both 2015 and 2016, increasing to USD 65/b in 2017, compared with forecasts of USD65/b in 2015 and USD75/b in 2016 at the time of the previous rating review in June 2015. Fitch assumes that Bahrain will continue to benefit from savings through the implementation of GCC development projects financed by Kuwait, Saudi Arabia, and the UAE. Lower oil prices are not assumed to impact the flow of funds from these countries.
Fitch assumes there will be no challenge to the rule of the royal family or the current succession. Fitch assumes no material deterioration in the internal security situation but also does not expect a comprehensive political solution to be achieved in the near term. Bahrain is in a volatile region, and existing tensions and conflicts are expected to continue. Fitch assumes that regional geopolitical conflicts will not directly impact Bahrain or its ability to trade.
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