Bahrain became the first Gulf state to have its credit rating lowered since the onset of the financial crisis. Moody’s Investors Service cited a “gradual but significant rise in the break-even oil price in the Bahraini budget” in recent years, as well as a “relatively modest level of official financial assets”. The credit ratings agency downgraded Bahrain to “A3” from “A2”.


High spending led to a US$1.2 billion budget deficit last year, according to figures released in May. Bahrain has few official reserves outside of its Mumtalakat Holding Company, the country’s sovereign wealth fund.


The reduced flexibility from lower savings “makes it more challenging potentially to meet contingent liabilities arising from Bahrain’s financial sector, which is relatively large compared with the government’s resources,” Moody’s said.


The lower “A3” rating covers Bahrain’s government bonds and serves as a guide for investors on the risk that the country might default. Lower ratings typically mean a borrower must pay higher rates of interest to entice investors.

While one notch lower than its previous rating, an “A3” mark is still the agency’s seventh-highest.


August 23, 2010



Analysis and Forecast: Increasing Risk


The action by Moody to cut Bahrain’s rating reflects a concern raised by Political Capital last year about rising oil break-even prices. After the start of the global economic crises, GCC governments have generally increased their public spending, particularly on infrastructure projects in an effort to accelerate economic diversification.


At the end of 2009, Political Capital estimated that Bahrain’s oil break-even price was US $ 70 a barrel. Increased spending now puts this at close to $80 a barrel. In other words, with oil prices forming the majority of income, the budget would be in deficit if oil prices were under $80 a barrel. The downgrading by Moody’s confirms a wider concern about the inability of Bahrain to sustain its level of development, without significant support from Saudi Arabia. Although there is no risk of further downgrades imminently, the action confirms a trend of increased pressure on the Bahrain economy.


The figure below shows an estimate of the current break-even oil price for GCC countries.

The figure below shows the make-up of the Bahraini economy. Although there are no reliable estimates, the income from oil revenue is estimated to form over 70 percent of income.