S&P says the Bahraini government asked the agency to prepare a rating 'some time ago'. The rating is not directly linked to Bahrain's $600 million sovereign loan that was signed in June (MEED 12:4:02).

S&P analyst Navaid Farooq says the main positive factors affecting the rating are the low debt burden and prudent fiscal policies, as well as the strong track record of the Bahrain Monetary Agency (central bank) in ensuring monetary stability and overseeing the extensive banking system. He also cites as a positive element the peaceful transition to democratisation.

The rating, announced on 15 July, is constrained by the government's heavy dependence on revenues from a single oil field, a lack of transparency in public finances, and uncertainties over regional and domestic political developments, S&P says.

The agency says that the budget deficit has typically been held at below 2 per cent of gross domestic product (GDP). High oil prices resulted in budget surpluses being realised in 2000 and 2001, however. Extra-budgetary spending for capacity expansion at the offshore Abu Safah field is likely to push the overall fiscal position into a deficit of 0.6 per cent of GDP in 2002, and plans for a sharp rise in capital spending are likely to push the deficit to 4.7 per cent of GDP the following year. The gap should narrow to 2 per cent of GDP in 2004, says S&P.

Central government debt at the end of 2001 was 30 per cent of GDP, of which only 5 per cent of GDP was external debt, all owed to regional development funds. S&P says interest payments account for a relatively modest 5 per cent of total revenues.

The agency notes that the government has a narrow revenue base, with oil income, virtually all from Abu Safah, accounting for 67 per cent of total revenues. Abu Safah is shared equally with Saudi Arabia, but since 1996 the Saudi share of production has been allocated entirely to Bahrain. S&P says the rating is predicated on the understanding that this arrangement will continue for the foreseeable future, and that Abu Safah has sufficient reserves for several years of extraction.

The one significant criticism in the rating related to the lack of transparency in public finances. 'The published accounts of the central government are neither comprehensive nor presented according to international standards,' S&P says. 'Implicit subsidies to public utilities are not transparent; nor are transfers to the oil company [ Bahrain Petroleum Company] and the aluminium smelter [ Aluminium Bahrain], the two largest non-financial public enterprises, with combined debt estimated to reach about 37 per cent of GDP by 2004 increasing the contingent liability of the government.'

The agency finally notes that the political reforms, based on the election of a lower chamber of parliament, will introduce an element of uncertainty about the policy agenda, although S&P says the new regime is expected to bring about greater political stability.

S&P has declined to comment on why there is such a large discrepancy between its rating and that of Moody's. The Moody's rating was assigned in 1996, and has not been changed since that date.

S&P has a policy of only assigning sovereign ratings on a solicited basis. With Bahrain, the number of Arab states rated by S&P is nine, including three GCC states.