The agency has simultaneously affirmed Bahrain’s country ceiling at "BBB+" and short-term foreign currency IDR at "F3". The resolution of the RWN and affirmation of the rating reflects Fitch’s view that the near term risks to the political and economic outlook have abated. The stable outlook reflects Fitch’s judgment that the fiscal and economic damage inflicted by the events of Q1, 2011, and the worsening of Bahrain’s political climate, which is likely to prove long-lasting, are adequately reflected in its "BBB" rating.“Fitch believes that the time horizon for political reform is likely to be extended,” Purvi Harlalka, director in Fitch’s Middle East and Africa Sovereign Ratings Group, said. A 40 percent y-o-y increase in the average price of oil in Q1, 2011 points to an improvement in external finances. Fitch expects high oil prices to lift the current account surplus for the year as a whole to 11.2 percent of GDP from 2.6 percent in 2010. The fiscal accounts are also set to benefit from higher oil sector receipts, which provided nearly 85 percent of Bahrain’s total revenue collections in 2010. However, Bahrain needs the increased revenue to mitigate the impact of the planned fiscal expansion under which current and total expenditure will rise by 33 percent and 18.5 percent, respectively, in 2011. This will cause the budget break-even oil price to increase to $119 per barrel in 2011 from $97 in 2010, increasing Bahrain’s exposure to future oil price shocks.The deepening of social divisions will weigh on the budget beyond 2011 as the government tries to assuage them with higher social spending. The $10 billion in aid from neighbors over the coming decade will reduce Bahrain’s financing requirements, but increase its dependence on its neighbors. Bahrain has also suffered reputational damage, which could affect the fortunes of its financial sector, 20 percent of GDP in 2010. Together with the near tripling of public debt levels to 46 percent of GDP in 2011, from 16 percent in 2008, these factors have materially weakened Bahrain’s credit quality since the beginning of the year. A substantial worsening in the security situation and/or a significantly larger deterioration in public finances than Fitch is currently projecting would result in renewed downward pressure on the rating. By contrast, genuine political reform would lead to a sustainable improvement in Bahrain’s political environment, with positive consequences for the fiscal and economic outlook and the rating.
