S&P cautious on economic aid

International credit agency Standard & Poor's has warned that Bahrain and Oman face further downgrades.

A US$20 billion (Dh73.45bn) economic aid package from GCC states to Oman and Bahrain may need to be bolstered, Standard & Poor's (S&P) said yesterday.

The package, announced this month, is to be divided equally between the two countries and will be used for infrastructure and housing projects.

It is also meant to provide opportunities for legions of young people whose lack of job prospects has been cited as a source of political tension.

"Protests and political instability are in our view likely to negatively affect economic performance and depress future growth prospects, particularly for Bahrain, in its role as an important financial centre," S&P said. "Oman will also likely be affected in this way. At this point, there remain questions as to whether or not GCC economic aid will be able to offset these political and reputational risks."

Nonetheless, the ratings agency said the aid could improve the creditworthiness of both countries in the longer term.

S&P has downgraded Bahrain by three notches on its ratings scale since protests and mass strikes flared there last month.

It has also put Oman on watch for a possible downgrade, in line with moves by the world's other two big ratings agencies, Moody's Investors Service and Fitch Ratings.

"We are of the view that the economic aid package, which we understand will be comprised of donations by GCC members, will not immediately affect Bahrain's and Oman's ratings or ratings outlooks," S&P said.

"That said, we believe the package could contribute positively to the sovereigns' creditworthiness over the medium to longer term."

That assessment comes as protesters in Bahrain continue to demand political reform.

GCC member states sent in troops last week at the request of the Bahraini government, a move they said was meant to safeguard critical infrastructure.

The country has also been hit by strikes, with many employees of big companies from Bahrain Petroleum to Aluminium Bahrain, a major producer, refusing to come to work.

Protests have also flared in Oman, but they have been more sporadic than in Bahrain. Yesterday, Reuters reported that about 100 demonstrators had occupied a section of Muscat that hosts government ministries.

The aid package for Bahrain represented about 40 per cent of its annual GDP, and for Oman amounted to about 16 per cent, S&P said."In our opinion, the package should give both sovereigns the fiscal flexibility to increase infrastructure spending and will implicitly address youth unemployment," the agency said.

The wave of mass uprisings that has swept across the region has resulted in sovereign downgrades in Bahrain, Tunisia, Egypt, Libya and other countries.

Companies with links to embattled governments have also come under scrutiny from credit ratings agencies.

Arab Banking Corporation, a wholesale bank based in Bahrain but owned by Libya's government investment fund, was downgraded yesterday by S&P.

It kept the company on watch for a further downgrade, citing "the risks arising from the heightened and prolonged disorder in Libya and Bahrain".

The agency also downgraded Arab Bank and Ahli United Bank in Bahrain yesterday.