Reports are indicating a steady improvement in Bahrain’s banking sector. Moody’s Banking System Outlook on Bahrain improved from negative to stable and a recent visit by the International Monetary Fund allowed them to conclude that Bahrain’s banking sector “is in good health.”

The visit was led by the IMF’s May Khamis, who observed that Bahrain had emerged relatively unscathed from recent volatility in the financial markets, adding that in Bahrain “GDP is estimated to have grown by 4.9 per cent, supported by a rebound in the hydrocarbons sector, but non-oil activity is estimated to have slowed to 2.8 per cent.”

However, Khamis had warned that fiscal adjustment should be made a priority, in order to stabilize growing government debt. “Government debt is projected to increase and become an important source of vulnerability to the economy;” she warned.

According to Moody’s, the shift from negative to stable reflects the banks’ solid funding base and capital buffers, and an economic recovery driven by increased government spending and construction activity that will support banks’ profitability and asset quality.”

However, the report also noted the risk of rising debt levels driven by increased government spending, claiming that it could create possible risks, suggesting that it might cause difficulty for the government to provide support to financial institutions in the future.    

Moody’s overall prediction is that Bahrain’s banking sector will continue to “exhibit sound deposit-funded liquidity profiles. Deposits will remain stable over the outlook period, even though the banking system remains highly concentrated toward government deposits.”

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