Bahrain yesterday became the first Gulf state to have its credit rating lowered since the onset of the financial crisis. Moody's Investors Service cited a "gradual but significant rise in the break-even oil price in the Bahraini budget" in recent years, as well as a "relatively modest level of official financial assets".
The credit ratings agency downgraded Bahrain to "A3" from "A2". Until yesterday, the only country in the Middle East to see its ratings reduced was Jordan, which Standard & Poor's downgraded in March. Ratings turmoil has so far been confined mainly to Europe, where Greece, Ireland, Portugal and Spain were downgraded following the continent's hardest struggle with high government debt levels in decades.
"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." Bahrain produces just 48,560 barrels of crude oil per day, according to the US Energy Information Administration, and imports more of the commodity than it exports. The country's modest oil wealth, however, has not prevented it from budgeting billions of dollars for development projects as it jockeys for position as a centre for banking, Islamic finance and asset management in the region.
High spending led to a US$1.2 billion (Dh4.4bn) budget deficit last year, according to figures released in May. Unlike Abu Dhabi, Saudi Arabia and Kuwait, which have sovereign wealth funds worth hundreds of billions of dollars, Bahrain has few official reserves outside of its Mumtalakat Holding Company, the fund that owns about 30 per cent of the UK's Formula One giant McLaren Group. Mumtalakat had assets worth 4.8bn Bahraini dinars (Dh46.75bn) at the end of last year, according to its financial statements.
The reduced flexibility from lower savings "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," Moody's said. Despite a recent rise in global crude prices that has bolstered revenues across the Gulf, many governments have seen their so-called "oil break-even" prices increase because they are spending at an even more rapid rate on long-term infrastructure and economic development projects.
The break-even price, or the price above which a government runs a budget surplus, has been estimated at more than $60 a barrel for Abu Dhabi, which holds almost all of the UAE's oil. Analysts have advanced similarly high break-evens for Kuwait and Saudi Arabia. In Bahrain's case, Moody's estimated the break-even rose from about $30 in 2004 to almost $80 last year because of rising government spending. With miniscule reserves compared to its regional peers - the Abu Dhabi Investment Authority is estimated to control assets worth $500bn, and the Saudi Arabian monetary agency and Kuwait investment authority are thought to have hundreds of billions of dollars of their own - the agency said the spending rise was exerting an excessive strain on the country's public finances.
The lower "A3" rating covers Bahrain's government bonds and serves as a guide for investors on the risk that the country might default. Lower ratings typically mean a borrower must pay higher rates of interest to entice investors. While one notch lower than its previous rating, an "A3" mark is still the agency's seventh-highest. Following the downgrade, Moody's said its outlook for Bahrain's ratings was "stable".