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S&P downgrades Bahrain on weak external liquidity

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S&P downgrades Bahrain on weak external liquidity

S&P Global Ratings lowered Bahrain's long-term foreign and local currency sovereign credit ratings to B+ from BB- with a stable outlook, saying the country's external liquidity has become extremely weak.

The rating agency said Bahrain's gross international reserves are low and have become more volatile throughout 2017, covering less than one month's current account payments and about 50% of the monetary base at the end of the year.

In July, reserves coverage fell to a low of 30%, with reserve levels reaching historic lows in that month.

"We expect continued volatility in this ratio throughout the coming years, in the absence of a substantial inflow of foreign currency," S&P said.

Bahrain's low gross international reserves increases financing risks if its access to external liquidity deteriorates sharply, S&P said, noting that the country's gross external financing needs are among the highest across rated sovereigns.

According to S&P, the ratings are constrained by Bahrain's continued fiscal dependency on oil revenues, rapid accumulation and high stock of government debt, unresolved domestic political tensions, and the economy's weak performance in real GDP per capita.

The stable outlook on the ratings reflects potential financial support from Bahrain's neighboring sovereigns, and risks that its central bank would be unable to meet a surge in foreign currency demand or to soften the impact of a significant decline in investor sentiment over the next 12 months.

S&P said it could consider raising the ratings if Bahrain's net external asset position improves or if its government takes additional steps to improve its structural fiscal position and slow its debt accumulation.

A negative rating action could be considered if fiscal and external pressures intensify, the coverage of external liabilities by liquid external assets falls more sharply than expected, or if support from neighboring sovereigns does not come when needed, S&P said.

S&P Global Ratings and S&P Global Market Intelligence are owned by S&P Global Inc.