Bahrain's Ba2 credit rating with a negative outlook is supported by the country's high wealth levels, a diversified economy and the positive net international investment position, Moody's Investors Service said in a report.

However, the sovereign also faces credit constraints, including the sharp deterioration in government finances since 2009, a trend intensified by lower oil prices, explained the annual update "Government of Bahrain -- Ba2 negative: Annual Credit Analysis". The research is an update to the markets and does not constitute a rating action.

The negative outlook on the rating reflects heightened government and external liquidity risks and the government's so far slow and incremental response to lower oil revenues, the report said.

"The government's ability to continue managing its debt and deficit levels will determine the sovereign's rating trajectory in the coming years," said Steffen Dyck, a Moody's vice president -- senior credit officer and co-author of the report.

"In the absence of significant revenue and expenditure reforms, and given our expectation that oil prices will remain range-bound between $40-$60 per barrel over the coming years, Bahrain's fiscal deficits will stay wide and government debt will rise to 85 per cent of GDP by 2020."

Moody's expects Bahrain's growth performance to moderate in the coming years, on the back of stagnant oil and gas output and the expected negative impact on growth from fiscal consolidation.

As such, Moody's forecasts average real GDP growth of slightly more than 3 per cent in 2011 to 2020, which is broadly in line with Oman, but relatively lower than other GCC member countries, such as Kuwait, Saudi Arabia and the UAE.

In the absence of more aggressive measures, Moody's expects that Bahrain will continue to post large fiscal deficits over the coming years.

Following an already very wide deficit in 2015 - estimated at 18.4 per cent of GDP -- Moody's estimates that it narrowed only gradually to 16.5 per cent in 2016 and will remain sizable at 9.8 per cent in 2017.

The negative outlook could return to stable if there is evidence that a clear and credible fiscal and economic policy response is likely to stabilize government debt at levels below 80 per cent of GDP, and would be accompanied by a strengthening of fiscal and external buffers, the report said. – TradeArabia News Service