Moody's lifted Bahrain's outlook to stable from negative, citing reduced government and external liquidity risks, and affirmed the country's issuer ratings at B2.

The country on Oct. 4 signed a deal with Saudi Arabia, UAE and Kuwait on $10 billion in financial aid for Bahrain's fiscal reforms. The rating agency said the funds will directly support Bahrain's government liquidity position and reduce the risk that the central bank foreign exchange reserves could be quickly drawn down.

"Financial support and the fiscal consolidation measures ... that are set to accompany it will support investors' confidence and help to reduce the government's financing needs," Moody's said. "In turn, this will slow a further weakening in Bahrain's public finances in a way that is consistent with a B2 rating."

Under its Fiscal Balance Program, Bahrain aims to reduce government spending relative to GDP to 19.5% in four years from about 26.6% this year, with an increase in revenue to 19.3% from 17.5%. The targets would restore budget balance by 2022, according to the debt watcher.

The ratings affirmation reflects Moody's view that, despite reduced risks, Bahrain's external vulnerability will remain elevated, with persistently low foreign exchange reserves.