Moody's Investors Service downgraded Bahrain's government bond ratings by one notch to Baa1 from A3 on Thursday and assigned a negative outlook on concerns over the fallout from the crushing of Shiite-led protests earlier this year. "The main driver underlying Moody's decision to downgrade is the significant deterioration in Bahrain's political environment since February," the ratings agency said.
"The government of Bahrain has forcibly suppressed an uprising by the Shiite-led opposition with the backing of an intervention of armed forces from other member states of the Gulf Co-operation Council (GCC), most importantly from its neighbour Saudi Arabia.
"Political tensions in the country remain high and there seems little prospect of the underlying causes of the unrest being peaceably resolved, at least over the short term. The political outlook is therefore highly uncertain," it added. "Moody's believes that these events are likely to have damaged economic growth significantly, especially in services sectors such as tourism, trade and financial services."
The ratings agency said the Sunni ruling family's efforts to appease public anger among the kingdom's Shiite majority by boosting spending had also affected public finances. "In February, the government announced cash transfers to families, and in May the parliament approved an expansionary budget for 2011-12. The resulting rise in current expenditure is reducing fiscal flexibility."
Moody's also expressed concern about a weakening of the fundamental strength of Bahrain's large banking sector. It said that the one mitigating factor was the likelihood of continued strong political and financial support for Bahrain from Saudi Arabia and other GCC neighbours.