Factbox: Key political risks to watch in Bahrain

MANAMA Tue Mar 1, 2011 12:21pm EST

MANAMA (Reuters) - Mass protests by Bahrainis, mainly from the majority Shi'ite community, have shaken the stability of the Gulf Arab kingdom that is home to the U.S. Fifth Fleet, since uprisings toppled veteran rulers in Tunisia and Egypt.

Thousands of protesters, emboldened by uprisings in Egypt and Tunisia, have held rallies in Bahrain raising the .

Seven people have been killed and hundreds wounded in protests since a "Day of Rage" on February 14 to demand more say in the Gulf Arab kingdom. The Shi'ites complain of repression by the Sunni ruling elite.

Here are some of the main political risks in Bahrain:

POLITICAL TENSION

Sectarian tension has long simmered in Bahrain, where the Shi'ite majority complains of unequal access to state jobs, housing and healthcare, which the government denies.

The Sunni al-Khalifa family rules 1.2 million people, about half of them foreigners. Shi'ites want Bahrain to stop trying to change the demographic balance by granting citizenship and jobs in the military and security services to Sunnis from elsewhere.

King Hamad bin Isal al-Khalifa fears the current unrest could destroy harmony between different sectors of the population, Social Development Minister Fatima al Balooshi, said in Geneva on March 1.

Wefaq, the main Shi'ite party with 18 of parliament's 40 seats, competes with Sunni Islamist groups and the secular group Waad. It walked out of the assembly on February 17, demanding a more democratic constitution for the tiny island kingdom.

The introduction of a new constitution and parliamentary elections a decade ago helped calm Shi'ite discontent, but the assembly's lack of influence revived tension in a youthful population, half of whom are aged below 30.

Shi'ite street protests before a parliamentary election in October 2010 led to a crackdown by the Sunni rulers.

Bahrain relies on limited oil and gas revenue, which gives it a per capita gross domestic product just below that of South Korea. It has tried to diversify into trade and finance.

In the long term, the government needs to phase out subsidies, cut public spending and introduce taxes to pare its fiscal deficit and meet the cost of infrastructure investment.

It may find it hard to enact economic reforms without granting more political participation.

WHAT TO WATCH:

- Continued protests and efforts to contain them.

- Any decision by Wefaq to boycott future elections.

IRAN CONFLICT

The United States and Saudi Arabia, the world's biggest oil exporter, see Bahrain, home to the U.S. Navy's Fifth Fleet, as a bulwark against neighboring Shi'ite power Iran.

Gulf Arab states fear Iran's rising influence and share Western suspicions that it is seeking a nuclear arms capability. Tehran says its nuclear program is for civilian use only.

Bahrain has close political and commercial ties with Saudi Arabia, a Sunni Arab power which is particularly wary of Iran.

Yet Iran's influence in Bahrain is limited because Bahraini Shi'ites look more to clerics in more moderate centers such as Kerbala and Najaf in Iraq than to those in the Islamic Republic.

Bahrain, with its U.S. naval base, could be a target of Iranian reprisals if the United States or Israel attacked Iran.

The Manama naval base lets the U.S. military protect Saudi oil installations and the Gulf waterways used to transport oil, without any sensitive presence of Western troops on Saudi soil.

WHAT TO WATCH:

- Status of nuclear talks between Iran and the West.

- Any sign of military strike against Iran.

ENERGY

Bahrain, like its Gulf Arab neighbors, has seen a rapid increase in natural gas consumption as its economy has grown.

It consumed 1.3 billion cubic feet of gas per day (cfd) in 2007 and expects consumption to rise to 2 billion cfd in less than a decade. It produces about 1.7 billion cfd.

Plans to import gas have been hampered by political tension with regional producers Qatar and Iran, threatening growth.

Aluminum Bahrain (Alba), for example, raised $338 million in an initial public offering in November 2010 but has had to postpone expanding output partly due to lack of energy.

Talks on importing 1 billion cfd of gas from Iran have faltered since 2009 when an Iranian official made comments that appeared to question Bahrain's sovereignty.

Oil markets fear a wave of popular unrest that has already toppled the leaders of Tunisia and Egypt could spread further in the Gulf Arab region, which accounts for 40 percent of global oil production. Such worries helped push Brent crude prices to a 28-month high of $104 a barrel on February 17.

WHAT TO WATCH:

- Status of gas talks with Iran.

- Status of plans to build facility to import liquefied natural gas.

BANKING

Bahrain's status as a regional banking, trading and Islamic finance center is also at risk with $10 billion parked in mutual funds in the kingdom.

Bahrain has made itself a regional banking hub for the Gulf's oil wealth. Its banks hold assets of about $211 billion.

The cost of insuring Bahrain's debt against default could also rise further. Debt insurance costs hold near 20-month highs in the five-year credit default swap market.

Contagion fears could spread to regional sovereign debt and potential capital outflows could put pressure on Bahrain's currency peg to the dollar. The central bank said in February that the country saw no major capital flight.

Standard & Poor's cut Bahrain's sovereign rating by one notch to A minus in February, while Moody's put it on review for possible downgrade.

WHAT TO WATCH

- Short term decline in business until the situation improves

- Bahrain's sovereign rating

- Capital outflows

(Editing by Paul Taylor)

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