S&P Global Ratings has affirmed its 'B+/B' long- and short-term foreign and local currency sovereign credit ratings on Bahrain with a stable outlook. The transfer and convertibility assessment on Bahrain remains at 'BB-', it added.

The stable outlook reflects the balance between the risk that the central bank would be unable to meet a surge in demand for foreign currency over the next 12 months and potential financial support from neighbouring sovereigns, stated the top ratings agency.

S&P said it would raise the ratings if Bahrain's net external asset position improves, perhaps due to a significant inflow of foreign currency, or the government undertakes additional steps to improve its public finance position in order to slow or reverse further increases in government debt.

"We would lower the ratings if fiscal and external pressures intensify, the coverage of external liabilities by liquid external assets falls more sharply than expected, or we reassess our assumption that support for Bahrain's
exchange rate arrangement from neighboring sovereigns would be forthcoming," the top ratings agency said in its review.

These ratings on Bahrain are supported by the country's net external asset position and modest level of economic wealth, it added.

According to S&P, the ratings are also supported by its opinion that financial support for Bahrain's exchange rate arrangement from neighbouring sovereigns would be forthcoming, if needed.

"The ratings are constrained by our view of Bahrain's continued budgetary dependency on oil revenues, its rapid accumulation and high stock of government debt, and its unresolved domestic political tensions, which in our view hamper the effectiveness of the sovereign's economic policy. The ratings are also limited by the economy's weak trend growth in real GDP per capita," it added.

According to S&P Global, the government access to international capital markets has proven crucial in supporting the central bank's low level of foreign currency reserves.

"However, in our view, the central bank is currently meeting demand for foreign currency from the domestic market and there is no apparent strain in the domestic economy," it stated.

Bahrain's gross international reserves are low, covering less than one month's current account payments and about 40 per cent of the monetary base over the first quarter of 2018, according to the S&P ratings.

They have also been volatile, in the absence of a substantial and sustained net inflow of foreign currency, it added.

Government external bond (and sukuk) issuance has been the main support for the Central Bank of Bahrain's (CBB's) gross international reserves in 2017 and continuing into 2018. This funding was followed by an average $280 million drain on reserves in the subsequent months.

The base level of reserves has been trending lower after each sustained decline before the government issues more bonds, said the top ratings agency.

According to S&P Global estimates, the gross international reserves had been $2.8 billion at the end of 2017.

"As of April this year, we estimate the reserves are at about $2.5 billion. We assume this includes proceeds from the $1-billion sukuk issued in April," said the ratings agency in its review.

"Our forecasts for the CBB's gross international reserves at year-end over 2018-2021 are broadly flat with a slight drain, as we expect the Bahraini authorities will continue the strategy of raising external government debt for fiscal deficit financing purposes, which at the same time supports CBB reserve levels," it added.-TradeArabia News Service