S&P Global Ratings lowered Bahrain's long-term foreign and local currency sovereign credit ratings to 'B+' from 'BB-' on Friday, prompting Bahrain's central bank to reaffirm the country's currency peg to the US dollar. S&P Global Ratings said the rating cut was due to weak external liquidity and increasing financial risk due to more limited access to international capital markets.
The Central Bank of Bahrain said in a statement received on Saturday that the kingdom "remains committed to maintaining a fixed rate regime with the US dollar" for its dinar currency, adding that the IMF has endorsed this policy. "Despite the current low oil price, the economy continues to grow with low inflation reflecting the Government's ongoing initiatives to foster sound fiscal and economic policies," the statement said.
"Notwithstanding the rating agency's action, the economic situation in Bahrain remains robust supported by a strong banking system," it added. S&P said its outlook on Bahrain was stable, reflecting an expectation of financial support from neighbouring sovereigns, despite the risk of the central bank not meeting a surge in foreign currency demand or tempering the effects of a worsening of investor sentiment, S&P said.
In November, Fitch Ratings revised Bahrain's outlook to 'negative' from 'stable'. The government has yet to identify a clear medium-term strategy to combat high deficits and rising government debt ratio, Fitch said last month. In September, Moody's had assessed that Qatar and Bahrain were "most exposed" to the diplomatic row in the Middle East which was credit negative for all Gulf Cooperation Council (GCC) states after GCC members launched an economic boycott of Qatar in June.
Last month, some of Bahrain's dollar-denominated bonds fell to their lowest levels since January following Saudi Arabia's anti-graft purge and government turmoil in Lebanon.