Global credit ratings agencies are voicing fresh concern about the stability of Bahrain's US$20.6 billion (Dh75.66bn) economy as political tensions escalate.
While the kingdom's history is littered with conflict between its Shia majority and ruling Sunni minority, this week's protestshave closed businesses and forced many foreign workers to leave. The protests have also cast an even darker cloud over Bahrain's financial position.
"The intensity and determination of the current anti-government protests are novel and have been amplified by events elsewhere in the Arab world, particularly the uprisings in Tunisia and Egypt," the ratings agency, Moody's Investors Service, said in a note yesterday.
"Against this context, there is a substantial risk that Bahrain's credit fundamentals will be impaired by the present crisis, notwithstanding the short-term benefits of rising oil prices."
Anti-government protesters have thronged the tiny kingdom's streets for weeks and occupied its central Pearl roundabout for days at a time. They are demanding sweeping political reforms and a transition to a constitutional monarchy.
But as the political situation grew more tense with the imposition of a three-month state of emergency and the arrival of GCC troops this week, Moody's said medium-term financial risks across the region had reached a new plateau.
"Our monitoring of political developments across the Middle East region could result in further rating actions if we are convinced that the deteriorating political situation is likely to endure and that it presents a significant threat to particular countries' medium-term credit fundamentals," the agency said.
Moody's assessment follows aggressive downgradings of companies in Bahrain as well as of sovereign ratings for Egypt and Tunisia, where mass uprisings have toppled former presidents Hosni Mubarak and Zine el Abidine Ben Ali this year.
Moody's downgraded Egypt's sovereign bonds on Wednesday, citing "prolonged political uncertainty" that is straining its fiscal position and damaging its "broader economic performance", as well as the threat of a spillover from war-ravaged Libya. Standard & Poor's, another ratings agency, also downgraded Tunisia on Wednesday, although it held out greater hope for a smooth transition to democracy there.
Moves by credit ratings agencies are closely watched by investors. While agencies' actions are often reactive rather than predictive, their ratings of countries and companies are widely used as a gauge of risk.
Downgradings reflect general perceptions of instability, and can translate into higher borrowing costs while causing investors to flee.
Echoing concerns voiced by Moody's, Fitch Ratings, the third major global ratings agency, said on Tuesday the creditworthiness of Bahrain's government had been impaired by the recent upheaval. Fitch downgraded Bahrain's currency by two notches on its ratings scale.
"The two-notch downgrade reflects further material escalation in political risk in recent days, following significant violent domestic protests, military intervention by Gulf nations and the imposition of a state of emergency by the Bahraini royal family," said Purvi Harlalka, a director in Fitch's Middle East and Africa sovereign ratings group.
"The spectrum of possible political outcomes has widened and downside risks to political stability and sovereign creditworthiness have increased significantly."
On Wednesday, Fitch also downgraded Mumtalakat Holding, a Bahrain government-owned company that serves as its main investment vehicle for economic growth and diversification.
Those ratings moves are just some of a flurry of responses by investors, analysts and financial institutions to unrest in the region. They come as the cost of insuring against the default of government debt of Bahrain, Tunisia, Egypt and other hot spots has soared. Oil prices are at elevated levels, and the region's stock markets have taken a beating.
In its note yesterday, Moody's said the escalation in Bahrain could have wider implications for financial stability across the Middle East.
The main question, the agency said, was whether the problems in Bahrain and the introduction of Saudi troops as part of a GCC force would lead to a stand-off with Iran, which has denounced the intervention.