Bahrain Credit Risk Rises as Protests Irk Investors: Arab Credit

By Donna Abu-Nasr

Bahrain’s credit risk is rebounding from a four-month low after anti-government rallies stoked foreign investor concern the Persian Gulf state won’t overcome last year’s protests.
The cost to insure Bahrain’s debt against non-payment for five years climbed six basis points, or 0.06 percentage points, since falling to 366 on March 8. A day later, demonstrators belonging mainly to the nation’s Shiite Muslim majority held one of its largest rallies on a major highway outside the capital Manama, pushing credit default swaps to 371 yesterday, according to data provider CMA. That’s double what it was before the Arab uprisings started early last year.
Protests by mostly Shiites protesters demanding equal rights with the Sunni Muslim minority underscore the kingdom’s struggle to hang on to its status as a financial center in the six-nation Gulf Cooperation Council. The smallest GCC economy is set to grow at the region’s slowest pace in 2012, estimates compiled by Bloomberg show.
“Without a viable political solution to the conflict, investor confidence will almost certainly be affected negatively,” Torbjorn Soltvedt, Middle East North Africa analyst at U.K.-based Maplecroft, a global risk adviser, said in an emailed response to questions March 9. “Although the Al Khalifa family has attempted to give the impression that stability has returned to Bahrain, political unrest continues to present a threat to macroeconomic stability.”

Political Crisis

The country’s bonds rallied after the Feb. 14 anniversary of anti-regime riots passed relatively calmly, with demonstrators failing to retake the Pearl Roundabout, focal point of last year’s rallies. The yield on the government’s 5.5 percent dollar bonds due March 2020 plunged 40 basis points from that day to a seven-month low of 5.797 on March 2. It has since climbed to 5.81 percent yesterday.
Protests against the government escalated in the weeks leading up to Feb. 14, with demonstrators holding unlicensed rallies and starting a campaign against police. Shiites make up about 70 percent of the population according to U.S. government data. Tensions led to road closures and traffic disruptions in several areas, including the capital and the diplomatic area that houses the central bank and the finance ministry. The March 9 demonstrations were licensed.

‘False Sense of Calm’

Anniversary demonstrations were limited by police tactics, Jane Kinninmont, a senior research fellow for the Middle East and North Africa at the Chatham House foreign-policy institute in London, said in response to e-mailed questions on March 9.
“The relatively quiet passing of the anniversary may have given a false sense of calm,” Kinninmont said. “Kettling protesters inside their villages were quite effective ways to suppress the symptoms of the continuing political problem.”
Bahrain, which holds Standard & Poor’s second-lowest investment-grade rating of BBB, has the Middle East’s fourth- highest credit risk after Egypt, Lebanon and Iraq according to CMA, which is owned by CME Group Inc. and compiles data from the privately-negotiated market.
Its contracts are up 196 basis points since Jan. 14, 2011, when Tunisian President Zine El Abidine Ben Ali stepped down amid a popular uprising demanding his resignation.

Economic Fallout

Ben Ali’s defeat after 23 years in power sparked popular uprisings that ousted leaders in Egypt, Libya and Yemen. Over the same period, default risk of Dubai has fallen 42 basis points to 358 yesterday. Dubai is one of seven sheikhdoms that form the United Arab Emirates, which emerged mostly unscathed by regional upheaval.
Protests in Bahrain hurt tourism, undermined confidence in the country as a financial hub and prompted the central bank to cut its forecasts for economic growth last year by two percentage points to 3 percent.
Tensions have persisted in the tiny island nation of about 1.2 million even after the government quashed last year’s protests with help from armed forces from neighboring Gulf states, including Saudi Arabia. At least 35 people were killed and hundreds detained during the February and March protests last year and an ensuing crackdown. Low-level protests are still held daily in Shiite villages.
Bahrain’s $22 billion economy may grow 2.9 percent in 2012, the second-slowest pace of growth since at least 2001, according to the median estimate of 11 economists surveyed in January by Bloomberg. The economy expanded 2.4 percent in the third quarter of last year, statistics center data show. Bahrain will have a “better year” economically, Central Bank Governor Rasheed Al-Maraj said told reporters on March 7.

‘Right Direction’

New companies are setting up in Bahrain, he said. “Things are moving in the right direction now,” Al-Maraj said. “We’ve seen recovery in many of the sectors, so we’re more optimistic.”
At least three companies announced plans last year to leave Bahrain, including France’s Credit Agricole SA (ACA), Robeco and Societe Generale SA. While he conceded that “there is some restructuring in some companies,” Al-Maraj said in many cases it was linked to circumstances in their home countries.
“Many companies, especially financial services companies, because of the new regulations, because of the problems they have in their home countries are retrenching,” he said.

Wary Investors

Most of this year’s growth will stem from government spending and higher oil revenues, rather than a strong recovery in the private sector, Ayham Kamel, Washington-based Middle East analyst at Eurasia Group, said in a telephone interview from Dubai on March 9. “Bahrain is on a steady path, but there’s nothing that signals that foreign investors are beginning to return.”
Foreign direct investment into Bahrain dropped 39 percent in 2010, according to data of the World Bank (FDIVBHR) compiled by Bloomberg. That compares with a 55 percent jump in foreign investment into Oman, the second-smallest Gulf economy, the data show. Businesses are likely to remain wary of making long-term plans in Bahrain without settlement to the crisis, Kamel said.
“The credibility of Bahrain as a business and financial hub is at stake and it will take much longer for investors to feel confident about entering the market or expanding operations there once again,” he said.
To contact the reporter on this story: Donna Abu-Nasr in Manama at dabunasr@bloomberg.net
To contact the editor responsible for this story: Riad Hamade at rhamade@bloomberg.net