Standard & Poors Ratings Services has lowered its long- and short-term local and foreign currency sovereign credit ratings on the Kingdom of Bahrain to BBB/A-3 from A-/A-2.
The ratings remain on CreditWatch with negative implications, where they were initially placed on Feb. 21, 2011. At the same time, S&P lowered the ratings on the Central Bank of Bahrain and Bahrain Mumtalakat Holding Co., the sovereign wealth fund. Those ratings also remain on CreditWatch with negative implications. The transfer and convertibility (T&C) assessment on Bahrain was changed to 'BBB' from 'A'.
"The lowering of Bahrain's long-term sovereign rating reflects our view that its political and economic environments are fundamentally more challenging as a result of the events of the last three weeks," Standard & Poor's credit analyst Mike Noone said.
Notwithstanding the Bahraini government's announcement of several reforms to improve living standards and provide additional social transfers and the GCC's pledge to grant Bahrain US$10 billion over ten years for infrastructure projects, the demonstrations by the largely Shia community have resulted in increasing violence. We believe that the arrival of mainly Sunni troops and police from the rest of the GCC, and the Bahraini government's declaration of martial law, could polarize both sides instead of stabilising what is a highly-charged political situation. It is our opinion that the current strife will likely inflict damage to Bahrain as a tourist destination and, more importantly, as an offshore financial center in relation to other competing cities in the Gulf.
Standard & Poor's aims to resolve the CreditWatch listing within the next three months. The ratings could be removed from CreditWatch and stabilise at current levels if there is a reconciliation that in our view starts restoring the social contract and drawing a line under the damage done to Bahrain's economic model. On the other hand, we could lower Bahrain's ratings further if the political turmoil destabilises its financial system or escalates into greater violence.
