Credit agency Moody's Investors Service cut its ratings on Bahrain's government bonds Thursday, citing damage being done by the political turmoil in the Gulf island kingdom.
The move could further jeopardize Bahrain's status as a stable regional financial center _ a reputation that has been tarnished because of months of unrest.
Moody's said it lowered the rating because Bahrain's political outlook is "highly uncertain" following a crackdown on Shiite-led protests that began in February. The rating carries a negative outlook, suggesting the agency could be eyeing further downgrades in the future.
"The main driver underlying Moody's decision to downgrade is the significant deterioration in Bahrain's political environment. ... Political tensions in the country remain high, and there seems little prospect of the underlying causes of the unrest being peaceably resolved, at least over the short term," the agency said.
At least 30 people have been killed since protests broke out in February by Bahrain's majority Shiites, who have long complained of discrimination and are pressing for greater rights. Hundreds of demonstrators have been detained in a government crackdown that began in March and has been criticized by human rights groups.
Bahrain's government, headed by a long-ruling Sunni dynasty, is eager to repair the country's image and enticed foreign investors and tourists to return. It has announced that a period of martial law-style rule imposed in March will end on June 1, two weeks earlier than planned.
Damage has already been done. Bahrain's tourism industry, a key part of the economy, was hit hard when the kingdom called off Formula 1's season-opening Bahrain Grand Prix auto race because of the protests in February. The country is still hoping to host the event later this year.
In making its one-notch downgrade to "Baa1" grade, Moody's said the unrest has likely hurt economic growth significantly, particularly in areas such as tourism, trade and financial services. It also cited concerns about the strength of the country's banking sector and said Bahrain's oil revenue-backed budget needs higher crude prices to break even.
The bonds remain investment grade.
Haissam Arabi, chief executive and fund manager at Gulfmena Investments in Dubai, said the downgrade comes as no surprise.
"Bond prices may have already priced (in) that expectation earlier," he said. "The setback is (a) higher cost of borrowing for Bahrain in the future."