DUBAI, (AFP) — International ratings agency Moody’s on Monday downgraded Bahrain’s local and foreign currency government bond ratings to A3 from A2 due to budgetary pressure, but kept a stable outlook.

The ratings action was based on a “gradual but significant rise in the breakeven oil price in the Bahraini budget over recent years,” Moody’s Investors Service said in a statement.

The oil price necessary to balance the budget in Bahrain has risen in recent years from levels of approximately 30 dollars per barrel in 2004 to almost 80 dollars a barrel in 2009, the agency said.

“While acknowledging Bahrain’s high level of GDP (gross domestic product) per capita and its good progress toward economic diversification, Moody’s believes that the government’s ability to generate revenues from the non-oil sector is hampered by its narrow tax base.”

The smallest state in the oil-rich Gulf region currently produces around 200,000 barrels per day of crude, of which 150,000 bpd come from an offshore oilfield shared with neighbouring Saudi Arabia.

Bahrain, an archipelago of 35 islands, was the first Gulf Arab country to produce oil in 1932, but it does not export crude — only refined oil products.

Oil makes up 60 to 70 percent of Bahrain’s income. The kingdom plans to raise output to 250,000 bpd in the next six years.

But Manama’s increasing reliance on higher oil prices, “together with a relatively modest level of official financial assets, has led to a divergence between the government’s fiscal flexibility and that of rating peers,” Moody’s said.

The reduced fiscal flexibility makes it more challenging potentially to meet contingent liabilities arising from Bahrain’s financial sector, it added.

Moody’s expressed “some concerns” about the performance of Bahrain’s financial sector, which is large in relation to the government’s resources.

Earlier this month, Moody’s reiterated its negative outlook on Bahrain’s banking system, reflecting the ongoing weaknesses in the domestic and regional real estate sectors, to which banks maintain significant exposure.

Moody’s has downgraded the ratings of a number of banks in Bahrain over the past two years.

It also took a number of other ratings action on Bahrain on Monday, downgrading its long-term country ceiling for foreign currency bonds to A1 from Aa3 and the long-term country ceiling for foreign currency bank deposits to A3 from A2.

The agency highlighted the country’s robust economic strength, positive international investment position and effective regulatory environment, as well as its strong ties with Saudi Arabia and the United States, as factors supporting Bahrain’s ratings.

“However, Moody’s notes Bahrain’s domestic political tensions, which could rise in the run-up to parliamentary elections scheduled in October, as well as elevated regional geopolitical risk.”