Bahrain’s Default Risk Climbs to 6-Month High Before Election: Arab Credit
Bahrain’s default risk climbed to the highest since March, at the height of confrontations between government troops and protesters, amid concern tensions may flare up before Sept. 24 parliamentary elections.
The cost to insure Bahrain’s debt against default rose to 328 yesterday from a post-crisis low of 219 on July 22, according to five-year credit default swaps from data provider CMA, which is owned by CME Group Inc. The contracts surged to 359 on March 15 as Bahrain declared a three-month state of emergency and Gulf troops arrived to help quash the one-month rallies by mostly Shiite protesters.
The protests, by the mainly Shiite majority, left 35 people dead, hurt tourism and spurred the central bank to cut its forecasts for economic growth this year by two percentage points to 3 percent. Standard & Poor’s and Moody’s Investors Service reduced Bahrain’s credit ratings. Credit Agricole SA (ACA), France’s second-largest bank by assets, is relocating its regional headquarters out of Bahrain, two bankers familiar with the matter said last month.
“Political explosion aggravates credit risk,” Sergey Dergachev, who helps manage the equivalent of $8.5 billion in emerging-market debt at Union Investment Privatfonds in Frankfurt, said in an emailed response to questions Sept. 19. “Risk for more CDS rising will be much higher” if the government and mostly Shiite opposition don’t reach a compromise, he said.
U.S. Fifth Fleet
Bahrain, home to the U.S. Fifth Fleet, holds special elections on Sept. 24 to fill seats vacated by 18 lawmakers who belong to al-Wefaq, the country’s largest Shiite party. The parliamentarians left to protest the government’s crackdown on the demonstrators. The group has said it will boycott the vote and won’t field any candidates.
Shiites represent about 70 percent of the country’s population of 1.2 million, according to the U.S. State Department, and have long demanded rights equal to those of Sunnis, including appointments to senior government and military posts. In the 1990s, Bahrain was shaken by violence stemming from Shiite disaffection.
Full-scale protests have stopped, though tensions persist, with almost daily, low-level rallies in Shiite villages that government troops respond to with tear gas and rubber bullets. Checkpoints prevent the demonstrators from marching toward the city and the Pearl Roundabout, the epicentre of the February and March protests. The circle has been destroyed by the government and replaced with an intersection.
“We’re probably gearing up for a more violent end of year for Bahrain,” Ahmad Alanani, Dubai-based head of fixed-income sales for the Middle East and North Africa at Exotix Ltd, said in a phone interview from Dubai yesterday. “It’s a problem that’s going to continue growing and it’s going to continue to put pressure on the economy and continue to put pressure in terms of foreign direct investment coming to Bahrain.”
Bahrain’s default risk is the fifth-highest in the Middle East, according to CMA, which is owned by CME Group Inc. and compiles prices quoted by dealers in the privately negotiated market. Swaps in Egypt, where a popular revolt toppled the country’s long-time leader, Dubai, which was at a brink of default in 2009, Lebanon and war-torn Iraq, trade higher.
Economic growth this year won’t exceed 1.6 percent, Standard Chartered Plc said in an e-mailed report yesterday. Growth was 4.1 percent last year. The number of tourists in the first quarter declined 36 percent and hospitality output slumped 29 percent, followed by a drop of 30 percent in the second quarter, the bank said.
‘Cautious on Bahrain’
“We are cautious on Bahrain from a credit perspective,” Philippe Dauba-Pantanacce and Victor Lohle wrote in the report. “Bahraini issuers -- both sovereign and corporate -- will find it difficult to tap international capital markets in the current environment.”
The Island nation’s 5.5 percent bond maturing in March 2020 has risen 24 basis points, or 0.24 of a percentage point, to 5.92 percent since this quarter’s low on Aug. 1, according to prices on Bloomberg. The rate on sovereign debt in the Middle East has declined 12 basis points in the period to 4.67 percent yesterday, according to the HSBC/NASDAQ Dubai Middle East Conventional Sovereign US Dollar Bond Index.
Bahrain’s situation is slated to become tenser as online organizers of the “Blockade Bahrain” campaign are calling on anti-government demonstrators to use their cars to block main roads and highways around the capital, Manama, starting today. The Information Affairs Authority said in a Sept. 19 e-mail that those “who engage in this activity will not be acting out of civil disobedience but instead will be breaking the law.”
Officials in the country, which became a monarchy in 2002, have accused Shiite-led Iran of supporting the protesters, an allegation al-Wefaq denies. Saudi Arabia, a Sunni kingdom linked to Bahrain by a causeway, is a rival to Iran for influence in the region.
“These fights in Manama only underline the problem that the political impasse is already there,” said Dergachev.
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