Dubai: Ratings agency Moody's Thursday changed the outlook of Kuwait's Aa2 sovereign ratings from negative to stable, after parliament passed long-awaited economic laws, the agency said.

Moody's Investors Services said the decision affects the government's Aa2 foreign and local currency bond ratings and the Aa2 country ceiling for foreign currency bank deposits.

"The outlook on the Aa2 country ceiling for foreign currency bonds remains stable," it said in a statement, adding that Kuwait's local currency ceilings remain at Aa2.

Moody's last assigned a negative outlook to Kuwait in June 2009, but said at the time that it would change it to stable if ties between the government and parliament improved, the statement said.

"In Moody's opinion, this condition has been met," it added.

Tensions between parliament and the Kuwaiti government over the years delayed key economic laws from being voted by lawmakers but the situation changed after a new government was formed in June 2009.

Since then "a number of important pieces of economic legislation have been passed by the Kuwaiti parliament," said Tristan Cooper, Moody's chief analyst for Middle East Sovereigns.

Privatisation law

He said the new legislation included a privatisation law, a four-year development plan, a capital markets law and a labour law.

"Moody's believes that these laws, despite some limitations, should help to develop the country's limited private sector and attract foreign investment," the statement said.

Cooper said that Kuwait continues "to post impressive fiscal and external current account surpluses despite some adverse effects from the recent global financial crisis."

He also noted that Moody's "currently has a negative outlook for Kuwait's banking system, reflecting concerns regarding some elements of Kuwait's financial sector" including investment companies.

"However, from a sovereign perspective, these weaknesses are offset by the very strong financial position of the government, which can afford to provide substantial support to Kuwait's banking sector in case of systemic difficulties," Cooper said.

"Despite deteriorating asset quality, Kuwait's commercial banks continue to have overall comfortable levels of capitalisation and liquidity," he added.

Manama (Reuters) The outlook for Bahrain's banking system remains negative as more losses loom mainly due to exposure to local and regional real estate, rating agency Moody's said yesterday.

The agency said in a statement it expected non-performing losses to rise and that "the severity and timing of real-estate-related losses (was) still uncertain".

Bahraini retail banks such as Ahli United Bank have weathered the crisis relatively well, posting lower profits due to bad loans and provisions.

But the country's investment sector with companies such as Ithmaar and Gulf Finance House has been badly hit by a freeze in regional investments and a sharp real-estate correction that started late in 2008.

"Our current assessment is that although real-estate loan quality has generally remained robust so far, continued weakness in this sector will eventually feed through to banks' loan portfolios...", George Chrysaphinis, analyst at Moody's said.