Bahrain Credit Outlook Is Downgraded

By CHIP CUMMINS

DUBAI -- Moody's Investors Service downgraded the credit outlook for the Kingdom of Bahrain on Tuesday, marking the first sovereign-rating hit to the oil-rich Persian Gulf amid tumbling crude prices and the global financial crisis.

Moody's, citing the effect of falling oil prices on the kingdom's ability to maintain spending, changed the rating outlook on Bahrain's local and foreign-currency bonds to negative from stable. Moody's, however, didn't lower any of the ratings of the country's bonds or bank deposits.

The reassessment by Moody's, which may make it more difficult for Bahrain to raise fresh capital in the international market, underscores the extent to which the current financial and economic crisis is affecting countries that just a few months ago seemed poised to ride out the turbulence.

Bahrain's economy has long been seen as more vulnerable than others in the Persian Gulf. While its oil production is small compared with that of neighbors such as Saudi Arabia and the United Arab Emirates, Bahrain's economy is still heavily dependent on hydrocarbon revenues.

At the same time, the country's years of diversification into the financial-services sector isn't expected to provide it with much of a hedge amid today's global financial shake-out.

"The global and regional economic downturn is likely to have a significant effect on Bahrain's nonhydrocarbon sectors as well," said Tristan Cooper, Moody's senior sovereign analyst in Dubai.

Bahrain holds fewer liquid assets -- such as foreign-exchange reserves or investments by government-controlled funds -- than other regional oil exporters. Elsewhere in the Gulf, those financial reserves are expected to cushion the blow.

Bahrain needs to fetch $75 a barrel for its oil to maintain last year's spending levels and keep from running a budget deficit, the International Monetary Fund estimates.

That's much higher than most of Bahrain's peers: Saudi Arabia needs $49 a barrel, and the U.A.E. just $23 a barrel.

U.S. benchmark crude settled at $48.58 on Tuesday, after soaring last year to more than $147 a barrel. Most grades of Mideast oil sell at a discount to U.S. blends.

With huge stockpiles of foreign-currency reserves stashed away, other Persian Gulf states are expected to be able to keep up government spending and to stimulate robust, though likely slowing, economic growth.

Last month, Saudi Arabia said it expects to run its first budget deficit in years, committing itself to spending heavily despite an expected fall in oil revenue.

Other Gulf economies -- in particular Dubai, a semiautonomous emirate of the U.A.E., and Kuwait -- also have been buffeted by the economic downturn.

Rating agencies have downgraded, or warned about possible downgrades, a number of Dubai government-linked corporations, and U.A.E. and Kuwaiti banks.

Analysts also have raised concerns about the high debt that Dubai's government has taken on to finance its explosive growth. Analysts say the U.A.E.'s federal government would likely support Dubai in case of a crunch.

Write to Chip Cummins at chip.cummins@wsj.com