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Standard & Poor's Ratings Services lowered its long- and short-term sovereign credit ratings on the Kingdom of Bahrain (Bahrain or the Kingdom) to 'A-/A-2' from 'A/A-1' and placed them on CreditWatch with negative implications.


At the same time, we lowered the ratings on the Central Bank of Bahrain and Bahrain Mumtalakat Holding Co., the sovereign wealth fund, to 'A-/A-2' from 'A/A-1' and also placed them on CreditWatch negative. The Transfer and Convertibility Assessment on Bahrain was also changed to 'A' from 'AA-'.

The rating actions reflect S&P's reappraisal of political risks in Bahrain. S&P expect the demonstrations that have taken place over the past month will persist, despite the government's use of force to clear the protesters from central Manama, which has resulted in six deaths and scores of injuries. The protesters, which are mainly from the Shia community, representing just over two-thirds of the Kingdom's nationals, are looking for higher social transfers or subsidies and increased political participation in the government.

Thus far, King Hamad bin Isa Al-Khalifa has requested that his son, the Crown Prince Sheikh Salman bin Hamad Al-Khalifa, start a national dialogue with all concerned parties. Prior to the protests, but following events in Tunisia, the King had also instructed the government to disburse Bahrain dinar (BHD) 1,000 ($2,660) to each of Bahrain's 136,000 households. The government has also increased social spending (inclusive of higher food subsidies) of about BHD157 million ($417 million), which was in excess of that contained in its 2011 budget. Projected higher oil prices and higher oil production volumes should help to offset this new spending, in our view. We project that general government will post deficits (net of social security surpluses of about 1.5 per cent of GDP) less than 2% of GDP this year and next if oil prices remain near $100 per barrel.

S&P expect discussions on political reforms to be more protracted than those focused on improving the social safety net. At present, the King appoints the cabinet--about two-thirds of ministers are from his own family--and the upper house of parliament. The lower house, which has fewer powers, is elected. Al Wefaq, the main opposition party, held 18 seats in the 40-seat chamber, until party members walked out in protest of the government's response to the rebellion, on Feb. 15, 2011.

Standard & Poor's aims to resolve the CreditWatch listing within the next three months. "During this time, we expect the course of political events will become clearer, as well as their impact on Bahrain as an offshore financial center and a tourist destination, two important pillars for the economy," said Standard & Poor's credit analyst Mike Noone. Quick resolution of the turmoil, with a limited effect on the economy, could result in the ratings stabilizing at current levels. On the other hand, should we find that the protests have lowered Bahrain's medium-term growth prospects because of spillover effects on the real economy or on the banking sector, we could revise both the long- and short-term ratings to a lower investment-grade level.