February 10, 2011 / 4:27 PM / in 8 years

IFR: Bahrain Set To Test Egyptian Contagion

LONDON, Feb 10 (IFR) - Immediate reaction to inaccurate speculation over Saudi monarch King Abdullah bin Abdul-Aziz’s health yet again demonstrated how heightened the markets are to the risk of possible contagion from Tunisia and Egypt to the oil-rich Persian Gulf states, with Bahrain widely seen as the most vulnerable one despite the government’s sudden attempts to win over the public.

The official confirmation that “King Abdullah is alive and in excellent health” did not help to improve the sentiment in the region as the Saudi five-year CDS jumped 19bp to 128bp reviving debates of possible succession in the world’s largest oil exporter.

“Conditions in each state of the Gulf are different and Bahrain is one of the more liberal countries in the region where likelihood of the state compromising is higher,” said a Middle East politics professor at a London university.

In fact, Bahrain is the only Arab country in the Gulf to have an active opposition.

The planned demonstration for Monday, February 14, in Bahrain by the Shiite-led al-Wefaq National Islamic Society is less likely to gather momentum than the one in Egypt where one million protested against President Hosni Mubarak’s rule in Cairo’s Tahrir Square.

The island nation of less than a million people, ruled by a Sunni royal family, has only around 1,500 active opposition members.

“The very mix of Bahrain’s majority Shiite population and a Sunni-led autocracy led to many market participants seeing it as one of the more vulnerable states if revolutionary contagion spreads through the region,” said Gavan Nolan, credit research director at Markit in London.

In a move to stem street protests the government quickly announced an increase in food subsidies and social welfare payments of BD155.2m (US$409.66m) to be added to the 2011-12 draft budget, which will increase the current spending by 3.7% and raises the average deficit by 0.8 percentage points of gross domestic product.

However, in the A3/A/A rated Kingdom’s capital Manama, it is business as usual as the elite continues to dine at classy restaurants, shop at luxury malls and drive expensive sports cars. Unlike other countries in the region, alcohol is sold in shops while elsewhere in the Gulf sales are limited to hotels.

Monday’s demonstration plans to demand release of political prisoners, increased political participation and put an end to discrimination against the Shiites despite the government’s announced reforms. The latent tensions among religious groups in Bahrain could resurface and heighten political risk, wrote Barclays Capital emerging markets research team in its latest note.

Locals believe only a handful will show up for the al-Wefaq’s protest with only 30 registered on the group’s Facebook page, yet another demonstration of a large contrast between Egypt and oil-rich Arab states of the Persian Gulf.

“Authorities in Bahrain are not as authoritative and restrictive like in Saudi Arabia but there are no signs of active citizenry in Bahrain, not even active on social networking sites reminiscent to Egypt, but it does not mean Bahrainis are not glued to their televisions to watch the revolution unfold on Tahrir Square,” said the professor.

Bahrain has seen its standing in the credit markets deteriorate significantly after political unrest erupted in Tunisia and Egypt. According to Markit’s Nolan, the cost of five-year CDS was trading between 173-178bp at the start of the year until protests erupted in Cairo on January 25 after which it rose rapidly hitting a high of 248bp on February 3 before easing to 233bp currently.

“Bahrain’s small and relatively weak economy meant that it already traded wider than its neighbours,” explained Nolan. The cost of protection reached its highest level of 716bp on February 17 2009 and it is lowest mark of 147bp was recorded on October 20 2009.

Bankers who work with Bahraini clients, on the other hand, believe there is very little impact from the ongoing protests in Egypt as in what they describe a “short-lived knee-jerk reaction”.

Elsewhere in the Gulf region, activists, known as Fifth Fence on Twitter, have called a demonstration in Kuwait, a home to three million people, for March 8 against what they called “undemocratic practices by the state”.

In Saudi Arabia’s capital Riyadh, a few women took to the streets on February 5 to demand release of prisoners that government says are “linked to militants” while a Facebook group calls on the state to create more jobs despite a number of social incentives introduced to decrease unemployment in the nation of 26 million people where 70% of under 30s are jobless.

Following the street protests in the Middle East, Saudi five-year CDS nearly doubled from its pre-Egyptian crisis levels of 72bp-76bp. Its absolute minimum quote since January 1 2009 was recorded at 65bp on April 29 2010 and the highest mark of 333bp was reached on February 18 2009.

Bahrain seems undeterred by the recent protests in Tunisia, Egypt, Yemen and Syria and earlier this month sent requests for proposals for a US$1bn-plus Eurobond for which bids were due this Monday. Bahrain, which usually issues one international offering a year during March and April, plans to complete a longer-term debt to help fund the deficit for 2011.

With a reputation for a prudently-run economy among investors, Bahrain priced its US$1.25bn 5.5% 10-year bond at 200bp over U.S. Treasuries on March 24 2010, which attracted a book of US$6bn from 350 global accounts.

0 : 0
  • narrow-browser-and-phone
  • medium-browser-and-portrait-tablet
  • landscape-tablet
  • medium-wide-browser
  • wide-browser-and-larger
  • medium-browser-and-landscape-tablet
  • medium-wide-browser-and-larger
  • above-phone
  • portrait-tablet-and-above
  • above-portrait-tablet
  • landscape-tablet-and-above
  • landscape-tablet-and-medium-wide-browser
  • portrait-tablet-and-below
  • landscape-tablet-and-below