Following the sovereign downgrade, several of the country’s lenders, including BBK B.S.C. (BBK) and National Bank of Bahrain BSC (NBB), the Bahrain Islamic Bank B.S.C. (BISB) and the Khaleeji Commercial Bank B.S.C. (KHCB) have also been the subjects of downgrades by Moody’s this month, reflecting the agency’s view that the government no longer has capacity to support them.
Bahrain is receiving support from its neighbours, though. Saudi Arabia announced last Thursday that the country’s Minister of Finance had met with counterparts from the United Arab Emirates, Kuwait and Bahrain in Manama to discuss a technical report which includes a comprehensive fiscal balance programme, in coordination with the Arab Monetary Fund.
A joint official statement said: “In light of their previous announcement to consider all options to support Bahrain and to finalise an integrated programme to enhance Bahrain’s fiscal stability and economic growth, the Ministers reaffirmed their countries’ commitment to supporting the financing needs of a fiscal balance programme with targeted indicators.”
No further details of the programme have been given, but Jean-Paul Pigat, head of research at Lighthouse Research, said in response to emailed questions from Zawya that “in terms of timeliness, it would have probably been to everybody’s benefit if the GCC had extended aid earlier”.
“But as the saying goes, the aid is ‘better late than never’,” Pigat said. “The repercussions of Bahrain being forced to devalue its currency peg would be felt across the entire region, so I have little doubt that once the aid package is finally agreed, it will be comprehensive enough to avoid such a scenario.
“Depending on the extent of austerity that is asked for, it is also almost certain that economic growth will slow, as government spending plays a key role in the economy.”
Yasemin Engin, assistant economist at research company Capital Economics, said: “We have always been aware of Bahrain’s weak balance sheet, given its large fiscal and current account deficits.
“It wasn’t until the sell-off in Bahrain’s financial markets in June that the country was put under the spotlight. We believe that the financing promised by the other Gulf countries will be given on the understanding that Bahrain step up its fiscal consolidation efforts.”
In contrast to Pigat, she expressed doubts that the combined Bahraini fiscal measures and aid from its Gulf neighbours would be enough.
“Our estimates suggest that fiscal measures in the order of seven percent of gross domestic product are needed in order to stabilise the debt ratio, which Bahrain is unlikely to do,” she said.
Both Pigat and Engin were in agreement that Bahrain’s recent oil discovery would be of little help the economy in the short-term.
Engin said: “Extracting the oil will be costly and reports suggest that production won’t start for at least five years. This means that Bahrain will miss out on the higher oil prices its Gulf neighbours have enjoyed this year, as we expect oil prices to fall back from their current highs. Their current balance sheet problems require a more rapid response.”
For Pigat, the oil discovery will benefit the economy in the long term, but ‘matters little’ in the short term, he said.
The agency noted in its rating action on the banks that Bahrain’s government not only had a reduced capacity to support them, but its weakening creditworthiness weighed on the standalone credit profile of the banks themselves.
In response to questions by email, Ashraf Madani, a senior analyst and vice president of the Financial Institutions Group at Moody’s, said there is limited upside on the banks’ ratings.
“Bahraini banks’ ratings are capped by the sovereign’s issuer rating of B2 (negative) and their credit profile is closely linked to the government through their large holdings of government securities, which constitutes around 28 percent of their total domestic assets,” he said.
“This high exposure equates to 173 percent of total banking system equity. The negative outlook could be changed to stable on evidence of economic and fiscal resilience in Bahrain, but will need to be preceded by a change in the Bahraini sovereign outlook to stable.”
Bahrain’s government has been running a budget deficit since 2009, Moody’s said, reaching 15 percent of GDP last year, and is estimated at 11 percent of GDP for 2018. This has been largely financed through borrowings from banks as well as tapping international bond markets.
Banks have largely benefited from a strong growth in non-oil GDP, but this growth is largely linked to government spending, which is currently being constrained due to weaker government finances, and the country’s high debt-to-GDP ratio, which stands at 94 percent for 2018.
The downgrade of the four banks followed the downgrade of the Bahrain Government’s long-term issuer ratings from B1 to B2 by Moody’s three days earlier.
Alexander Perjessy, vice president, senior analyst, at Moody's Sovereign Risk Group, said the sovereign downgrade was driven by two main considerations - first, the rise in Bahrain’s external and government liquidity risk, constraining access to public debt market financing to a greater extent than previously envisaged.
The second consideration is that those pressures have not prompted authorities to accelerate the implementation of fiscal reforms.
The new B2 rating has been made under the assumption that support from Bahrain’s neighbours in the Gulf Cooperation Council may not be extensive enough, said Perjessy.
In response to questions by email, he said: “The B2 rating incorporates an assumption that the GCC neighbours will provide some financial support, including ahead of the ($750 million) November 22 sukuk repayment. Meanwhile, the negative outlook captures the risk that such support may not be timely and comprehensive enough to restore Bahrain’s access to international capital markets.”
The $750 million sukuk due to mature in November is part of forthcoming debt payments worth more than $2 billion, which the agency said would deplete Bahrain’s thin buffers, threatening macroeconomic stability if support from GCC neighbours is not forthcoming.
What the other agencies say:
The Moody’s downgrades followed Fitch's announcement in March that it was downgrading Bahrain's long-term foreign currency issuer default rating (IDR) to BB- from 'BB+ with a stable outlook. Fitch also cited the government’s lack of a clear medium-term strategy to tackle high deficits, and the absence of clarity on a timeline towards the development of such a strategy.
In June, S&P affirmed its B+/B long and short term foreign and local currency sovereign credit ratings for Bahrain, saying the outlook remained stable, reflecting that the central bank would be able to meet a surge in demand for foreign currency, and had potential support from neighbouring sovereigns.
However, the agency also noted the government’s slow fiscal response to past declines in oil prices and a growing stock of government debt.
(Reporting by Imogen Lillywhite; Editing by Michael Fahy)
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