Fitch Ratings has affirmed on Thursday Bahrain's long-term foreign currency Issuer Default Rating (IDR) at ‘A' and Long-term local currency IDR at ‘A+', both with stable outlooks. The agency has also affirmed Bahrain's Country Ceiling at ‘A+' and Short-term foreign currency IDR at ‘F1'. Fitch has simultaneously assigned Bahrain's forthcoming $500 million, five-year sovereign Sukuk issue a ‘A' rating, in line with its Long-term foreign currency IDR. “Bahrain can finance higher fiscal deficits resulting from the downturn in world oil prices without undue strain on its debt ratios, while the wholesale and domestic banks have for the most part been resilient to financial shocks,” said Charles Seville, associate director in Fitch's Sovereign team. Fitch last affirmed Bahrain's ratings in December 2008, while awaiting the announcement of a budget for 2009 and 2010 which would clarify the government's fiscal response to falling oil prices. The agency also noted, at that time, the uncertainty over the future performance of the wholesale and domestic banking sectors amid the global economic slowdown and financial crisis. The lower oil price has negatively impacted Bahrain's public finances. Despite some mild adjustment in spending in the 2009-10 budget, the fiscal deficit is forecast by Fitch to be wider than the ‘A' median. However, the agency believes that the Bahraini government will be able to finance wider fiscal deficits in 2009-10. At the budget oil price assumption of $40/barrel, and assuming some government underspending, the deficit would be 7 percentof GDP in 2009, pushing up the debt burden to 26 percent of GDP in 2009. At an average oil price of $50/barrel, the deficit would be closer to 4 percent of GDP. The agency believes that the general government debt burden will remain below the ‘A' median in 2009-10, but Fitch cautions that if oil prices stay relatively low beyond 2010, a further fiscal adjustment will likely be necessary to stabilize the debt burden. If Bahrain failed to take action, under this scenario, Fitch believes it would be negative for the rating. The agency believes that political risk is higher in Bahrain than elsewhere within the Gulf Cooperation Council (GCC). Although wider political participation has been positive for Bahrain's rating, it could make cutting spending more difficult. The wholesale banking sector appears to be weathering the global banking crisis, but medium-term concerns persist. Given the weakness of the global financial industry, it may be some time before Bahrain recovers its 2004-2008 average growth rate of 7 percent per year. However, the biggest wholesale banks are already rethinking their business models. They have received a capital injection from their mainly sovereign owners and are not a contingent liability for the government. Domestic lenders' exposure to falling real estate markets, and a slowdown in lending following a boom, will cause their balance sheets to weaken. However, official stress tests still show that they would be, on average, resilient to a severe shock to non-performing loans, with capital well above regulatory norms. The need for government fiscal support thus seems unlikely. However, the government is a significant shareholder in some leading banks and could therefore have to contribute to capital raising if required. By adding to the debt burden, this would have negative rating implications for the sovereign ratings. External financing is less of a concern. Foreign exchange reserves, backing the exchange rate peg to the US dollar, fell during 2008 but have increased this year. Meanwhile, Bahrain All Share Index has closed 1,610.48 points on Thursday, marking a decrease of 3.12 points below the previous closing. The decrease was due to the fall in the commercial banks and investment sectors. Results indicated that 77 transactions took place with a volume of 1,142,681 worth BD220,042. Investors traded mainly in the commercial banks sector represented 45 percent of the total value of shares traded. __
