Bahrain: Credit rating agency warns Bahrain

Moody's credit rating agency put deficit issued by Bahrain on watch on Friday, warning of a possible downgrade because the country could face strains over its deficit given the weak outlook for oil prices.

Bahrain is a Gulf oil-producing country, but Moody's warned that it could be entering a period of making a loss on each barrel of oil produced.

The agency as well warned that political and social tension could undermine confidence and increase prospects.

The rating agency highlighted "the country's rising government deficit burden, which introduces uncertainty into the country's longer-term deficit sustainability."

Saying that it had placed "Bahrain's Baa1 government issuer rating on review for possible downgrade", Moody's said that the oil price needed by Bahrain to make a profit was rising and that this would have an result on the budget.

The agency gave three reasons for its rating decision.

Initial, "the fiscal implications of Bahrain's high and rising break-even oil price".

Secondly, "the outlook for lower trend economic increase in the country over the medium term."

And finally, "the impact of a low-increase, high government spending and weaker oil price scenario on Bahrain's long-term deficit sustainability."

The review of the rating would focus on the extent to which the structure of the economy in Bahrain had been weakened, and the outcome of the study was expected within three months.

However, Moody's added that it expected the rating attributed to Bahrain to remain within the range of investment grade ratings.

Moody's said that although Bahrain's budget deficit in 2012 was 2.6 % of gross domestic product, which it described as "moderate", and was smaller than the deficits in 2009 and 2010, the International Monetary Fund had estimated that the price of oil needed by Bahrain to cover production costs was $118.70 per barrel.

This, Moody's said, was "above our estimate of $106 per barrel for the average oil price in 2013."

The benchmark price of oil, for light sweet crude for delivery in July, fell by 21 cents to $96.48 in trading in Singapore on Friday. The price of Brent North Sea crude for August delivery fell by 33 cents to $104.62.

The result of the relationship between prices and costs in Bahrain could be to raise the public deficit ratio to 4.0-5.0 % in 2013 and 2014, the IMF had calculated.

This meant that the finances of Bahrain were less able to absorb a shock than were other regional oil producing nations.

In addition, although the economy of Bahrain was additional diversified than other economies within the Gulf Cooperation Council, "Bahrain's economy remains dependent on the oil and financial sectors, both of which have uncertain increase prospects."

Moody's as well warned that "continued political and social tensions may dampen confidence and investment in the economy."