MENA Asset Management Survey 2012 - National Bank of Abu Dhabi

Bahrain
Economic Developments
Challenging Background
Bahrain’s economy has been adversely impacted in recent years by a number of factors
including domestic unrest and the retrenchment of European financial institutions leading
to a relative erosion in its positioning as a regional business hub. The country’s
population is estimated to have declined by 2.7% in 2011 according to data from
Central Informatics and Telecommunication Organisation. This would be the first time the
country experienced a population decline according to population data from the
International Monetary Fund which stretch back to 1980.
In August 2010, Moody’s cut Bahrain’s FX issuer rating from A2 to A3 citing a higher
fiscal breakeven oil price, lack of large FX cushions comparable to the country’s
neighbours, and reduced fiscal flexibility to potentially meet liabilities arising from the
financial sector. Standard and Poor’s was the first 1 agency to cut Bahrain’s FX long term
debt rating citing unrest in February 2011 to A- from A and to BBB (two notches above
speculative grade) in March. In February 2011, Fitch also cut Bahrain’s long term FX
issuer rating to BBB, down from A in February 2011, citing the adverse impact of unrest
on the economy and the policy response of increased government spending. Bahrain
had last been rated BBB by Fitch in 2001 when the average price of crude oil was
US$ 22.8 per barrel. Given that the debt metrics in that period were not substantially
worse than now, the rating appears to have been driven by an appraisal of the political
dimension. Moody’s cut the country’s rating in May 2011 to Baa1 (three notches above
speculative grade).
Budget deficits despite record revenues
In 2012, Bahrain budgeted expenditures of US$ 9.75 billion (+28.5%) and a deficit of
US$3.04 billion. One policy response to domestic unrest was to raise current
expenditures sharply in 2012 including some one off items. In 2013, spending mix will tilt
to project expenditures with US$ 2.6 billion budgeted (+122% y-o-y). Budget is forecast
1 However, S&P’s rating for Bahrain had been a notch above that of Moody’s after
August 2010.
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