CAIRO, Egypt (AP) — Bahrain’s sovereign rating outlook has been downgraded to negative by a leading investor’s service, reflecting growing concerns about the country’s ability to weather a global financial crisis that has also fueled worries about its wealthier Gulf Arab neighbors.
The downgrade by Moody’s Investors Service made Bahrain the first of the six Gulf Cooperation Council nations to see its sovereign ratings outlook cut amid the economic meltdown.
“The change in outlook was prompted by the steep decline in oil prices well below Bahrain’s fiscal break even level,” Tristan Cooper, Moody’s vice president and senior analyst in Dubai, United Arab Emirates, said in a statement. The ratings outlook was lowered from stable to negative.
“Compared with similarly rated oil exporters, Bahrain has more limited reserves of liquid financial assets that can be tapped to finance fiscal deficits and ease adjustment.”
According to IMF estimates, Bahrain needs crude at about $75 per barrel, a level far higher than the current front-month U.S. contract’s price of about $48.
Analysts have repeatedly said the GCC region was well poised to weather the current financial crunch, largely due to massive oil-derived budget surpluses.
But even major producers — of which Bahrain is not one — have felt a pinch as oil prices tumbled from highs of nearly $150 per barrel last July.
Layoffs have been announced in the United Arab Emirates, Saudi Arabia is projecting its first budget deficit since 2002 and Moody’s and Standard & Poor’s have highlighted varying concerns about banks and companies in some of the GCC nations.
Bahrain is a minor exporter compared to the Kuwait, the UAE and Saudi Arabia. But it still relied on crude and gas for 80 percent of its government revenue in 2007 while the oil sector comprised 25 percent of its gross domestic product, according the a research note released Wednesday by Standard Chartered Bank in Dubai.
“The reason (Moody’s) has done this is that Bahrain doesn’t have the cushion that the rest have,” said Mary Nicola, an economist with Standard Chartered. “It’s all about can they pay their debt back, and that’s what they’re looking at.”
Standard Chartered said that while Bahrain’s accounts are healthy, its exports will “take a hit” and, like the rest of the region, the country will face difficulties this year. The bank projects GDP to fall to about 3.5 percent.
In its statement outlining the outlook downgrade on Tuesday, Moody’s said the global economic crisis was likely to have an impact on Bahrain’s non-oil sector, as well, and noted that despite diversification in its economy, Bahrain “has tended to focus on sectors that are also cyclical and vulnerable to fluctuations in external demand.”
Moody’s also noted that the Gulf state’s politics are “more fractious and potentially prone to instability in the even of a prolonged economic downturn.”
Bahraini lawmakers last week were the only ones in the GCC to float the idea of using oil as a weapon in Israel’s assault on Gaza. Joining them days later was a leading officer within Iran’s elite Revolutionary Guard.