Dubai: Moody’s has downgraded the Bahrain government’s long-term issuer ratings to B2 from B1, and maintained its negative outlook.

The ratings firm said on Thursday evening that the new rating assumes Gulf Cooperation Council members will provide some financial support to Bahrain, but the negative outlook reflects the risk that the support will not be timely or comprehensive enough to maintain Bahrain’s rating at B2 through forthcoming debt repayments, including a $750-million (Dh2.75 billion) sovereign sukuk due on November 22.

At the same time, Moody’s lowered Bahrain’s long-term foreign-currency bond ceiling to Ba3 from Ba2 and long-term foreign-currency deposit ceiling to B3 from B2.

30% of GDP to be needed for Bahrain’s financing in 2018-20

In a note explaining the change, Moddy’s wrote, “Despite higher oil prices over the past year, the government’s gross borrowing needs remain very high and foreign exchange reserves very low. Meanwhile, heightened external and government liquidity pressures have not prompted the authorities to accelerate the implementation of fiscal reforms, which Moody’s expects to remain very slow.”

Furthermore, Moody’s said, it estimates that “Bahrain’s financing needs amount to more than 30 per cent of GDP in 2018-20, a very high level internationally. Relatedly, Moody’s continues to expect Bahrain’s debt burden to rise to around 100 per cent of GDP at the turn of the decade, from just under 90 per cent in 2017.”

In its note, the ratings firm said, “The GCC has in the past provided funds for some investment projects in Bahrain, as part of the GCC Development Fund, although disbursements have been slow.

“In the absence of such support, Bahrain’s creditworthiness would be significantly weaker as forthcoming debt payments would further deplete very thin buffers, threatening macroeconomic stability.”

Last month the IMF warned Bahrain required comprehensive economic reforms, its executive board noting, “Despite planned fiscal consolidation measures, fiscal and external deficits are projected to continue over the medium term, due to the large and growing interest bill.”

Among the IMF’s recommendations were introducing direct taxation, including a corporate income tax, containing the public wage bill and targeting subsidies to the poorest citizens.

During the first quarter, Bahrain’s economy shrank for the first time in seven years. Bahrain’s offical statistics agency, announcing the contraction in July, said it was a consquence of lower oil production.

Moody’s also lowered long-term foreign-currency bond and deposit ceilings for Bahrain - Off Shore Banking Center to Baa2 from Baa1, while the short-term foreign-currency bond and deposit ceilings remain unchanged at Prime-2.

The short-term foreign-currency bond and deposits ceiling remained unchanged at Not Prime. Bahrain’s long-term local currency country risk ceilings were lowered to Ba2 from Ba1.