"The outlook revision reflects our view of Bahrain's stable growth, the likelihood of no further deterioration in the political environment, the inflow of Gulf Cooperation
Council (GCC) development funds, and our medium-term assumption of higher oil prices of about USD 111/barrel,' S&P said in a statement.
It also affirmed its long- and short-term foreign and local currency sovereign credit ratings on Bahrain at 'BBB/A-2'.
"Our ratings on Bahrain are supported by the country's strong external and fiscal positions, both of which are underpinned by hydrocarbon resources. The ratings are
constrained by our view of continuing domestic political tensions and the fiscal dependency on sustained high oil prices and international donor support.
"The ratings are also constrained by stagnating real GDP per capita growth, which we forecast at about 1 percent in 2013-2015. This is low compared to peers at similar wealth levels," said.
"Though Bahrain's 2011 political crisis weakened growth potential and damaged the country's reputation as a business services hub, we believe a post-crisis status quo has been established.
"However, this still includes violent street protests with occasional fatalities, entrenched polarisation between the two sectarian communities, internal communal divisions, and the relegation of economic policymaking".
The rating agency said that tensions are largely outside the main centres of economic activity: in the suburbs of Manama, in villages, and in online forums.
"Despite some government initiatives, no broader political process that could change the status quo appears to be on the horizon", it said.
According to S&P, Bahrain's fiscal vulnerability to oil prices remains high. Given an average oil price of USD 111 a barrel in 2012, the general government deficit was negligible.
However, transfers to the state-owned airline, Gulf Air, and valuation changes raised net general government debt by an estimated 3.7% of GDP, it said.
"Assuming similar oil prices, we forecast deficits of roughly 2 percent of GDP for 2013-2015. Oil and gas related revenues account for 88 percent of total central government revenues, making the budget highly sensitive to declines in price or volume.