Credit ratings agency Moody's Investors Service placed Bahrain's A3 government rating on review for possible downgrade on Wednesday as the tiny kingdom grapples with anti-government protests that have already toppled two entrenched leaders in other Arab countries.
Rival Standard & Poor's also cut its rating for Bahrain-based Arab Banking Corp. amid worries over its exposure to Libya _ the country's central bank holds an almost 60 percent stake.
Announcements from the major agencies are coming thick and fast as the region reels from popular uprisings that have already brought down the governments in Egypt and Tunisia and are threatening the regime of Libyan leader Moammar Gadhafi.
As anti-regime unrest has ripped through the Arab world, ratings agencies have aggressively cut their assessments for various countries and banks, casting a cloud over the investment climate in a region that was in the midst of a solid rebound from the global economic meltdown in 2008. Agencies have cut ratings for several Arab nations, including Egypt, Bahrain, Libya and Tunisia.
Moody's said its decision to put Bahrain's ratings on review stemmed from "concern that the ongoing political turmoil in Bahrain has sharpened fiscal and broader economic downside risks."
The agency said that while the Bahrain protests are fueled by sectarian feuds between the Sunni minority in power and the Shiite majority, "the intensity of the protests has been amplified by the influence of the uprisings in Tunisia and Egypt."
It noted worries over the country's public finances even thought it's still unclear whether overtures by Bahrain's king to appease the protesters would succeed.
Moody's said Bahrain's expansionary budget requires a break-even oil price of between $97 to $100 per barrel. That level is a little shy of double the oil price on which some other Gulf oil producers have pegged their budgets.
Unlike Saudi Arabia, the United Arab Emirates or Qatar, Bahrain is neither an OPEC member nor a significant oil exporter. The country, instead, has pinned much of its growth on its financial sector, with Bahrain emerging as an Islamic banking center.
But even here, there is cause for concern.
Moody's said it was worried about the size of Bahrain's banking sector, relative to the government's resources. It said total bank assets were about 11 times Bahrain's national income and noted that the "potential liabilities stemming from the banking sector in a systemic crisis could ... present a significant challenge to the authorities."
In a parallel announcement, Standard & Poor's cut its long-term counterparty credit rating on the Arab Banking Corp. to BBB from BBB+, citing the Central Bank of Libya's 59.4 percent ownership stake in the Bahrain-based bank. The rating refers to ABC's overall creditworthiness.
That cut came a day after S&P lowered its rating on Libya to BBB+ from A-, and warned that another downgrade is possible some time in the next three months as the North African OPEC member appeared on the brink of civil war.
"The actions follow those on Libya, which reflect our reappraisal of political risks in the country," S&P credit analyst Goeksenin Karagoez said.
The downgrade of ABC highlights some of the worrying links to which Bahrain's financial sector is exposed.
S&P said that while Libya had pumped in $2.1 billion into the bank's capital over the past couple of years, the recent downgrade of Libya's ratings "means that we no longer factor into the ratings on ABC the likelihood of timely and sufficient extraordinary support from Libya for the bank."
The protests that have hit Libya have been the most violent since the mass demonstrations first erupted in Tunisia, triggering a domino effect in other Arab countries.
Libya, however, is the only OPEC member to face a significant uprising, and the violence there has sent oil prices surging, while fueling worries that the country will collapse into civil war.
Though Libya has a sovereign wealth fund with about $70 billion in hand, the lack of clarity in the political situation and the expectation that the nation will undergo sweeping changes irrespective of whether Gadhafi remains in power, have served to underpin and accentuate the sense of insecurity.
On Tuesday, S&P also raised questions about three other Bahrain-based banks, Ahli United Bank and BMI Bank. The agency said the move reflects its view of "the risk of a deterioration of the sovereign's creditworthiness."
It also placed the ratings on Al Baraka Banking Group B.S.C. on CreditWatch with negative implications, citing earlier ratings actions on Tunisia, Jordan, Bahrain and Egypt, where the Bahrain-based bank operates.