Bahrain Sukuk Mauled as Oil Drop Imperils Spending Plans

Tumbling oil prices are battering Bahrain’s Shariah-compliant bonds.

The Gulf nation’s dollar-denominated sukuk that mature in 2018 have dropped 1.3 percent since the end of September, compared with an average 0.8 percent gain for more than 30 Islamic sovereign dollar bonds tracked by Bloomberg. Only the five-year $1 billion sukuk issued by Pakistan, where Islamic militants have killed more than 50,000 people since 2001, have performed worse.

The decline underscores how oil’s 45 percent slide since last year is hurting a country where Standard & Poor’s estimates crude accounts for 65 percent of fiscal revenue and yet has oil reserves that are less than 0.1 percent of neighboring Saudi Arabia’s. The retreat threatens to jeopardize some of the $30 billion of infrastructure projects the government is planning to sustain economic growth and becalm protests by the majority Shiite population, according to Commerzbank AG.

“Bahrain is a bit more sensitive because they don’t have a lot in reserves as Saudi or others to keep supporting their projects,” Apostolos Bantis, a credit analyst at Commerzbank in Dubai, said by phone on Dec. 17. “They will have to cut costs and stop some of the projects they’re working on. There is a risk of political unrest.”

Low oil prices will “exacerbate” structural weaknesses in Bahrain’s public finances and may lead to a 10 percent decline in government revenue next year, S&P said in a Dec. 12 report, revising the country’s debt outlook to negative from stable.

Protest Deaths

Brent crude, the benchmark grade for more than half the world’s oil, sank to $59.27 a barrel last week, the lowest since May 2009. Prices reversed gains of as much as 2.6 percent to drop 0.2 percent at 12:52 p.m. in London. Bahrain requires an average oil price of about $120 a barrel to balance its budget, according to S&P.

Home to the U.S. Navy’s fifth fleet and the smallest crude oil producer in the Gulf, Bahrain witnessed some of the worst popular unrest in the region amid turmoil triggered by revolutions in Tunisia and Egypt.

Shiites, who make up a majority of the nation’s 1.3 million people, demanded rights equal to those of Sunnis, including appointments to senior government and military posts. To help avoid further discord, the government embarked on a series of public spending projects. Last month the island state held parliamentary elections, which Bahrain’s largest Shiite Muslim opposition group boycotted.

“Many of the newly elected members of the parliament are not seen as bureaucrats as they are not former government officials and come from different backgrounds, which means they come fresh to the role with no added baggage,” Hassan Jarrar, chief executive officer of Standard Chartered Bahrain said in an e-mail on Dec. 3. The new government can be “a force” in moving infrastructure plans forward, he said.

Government Spending

Bahrain plans to invest “up to $30 billion” in public projects over the coming years across a range of industries including transport, housing, manufacturing, energy, healthcare and education, according Jarmo Kotilaine, a chief economist at the Manama-based Bahrain Economic Development Board who projects growth of more than 4 percent in 2014.

“Mounting infrastructure spending is an important driver while even the oil sector has surprised on the upside,” he said by e-mail yesterday.

Among its plans, Bahrain is spending $743 million for three power plants, $82 million on a 120-bed oncology center and constructing more than 4,000 residential homes.

The yield on Bahrain’s 2018 Islamic notes jumped 54 basis points to 2.7 percent in the quarter through Dec. 19, compared with an average 17 basis-point increase to 4.4 percent for Middle East sukuk, according to JPMorgan Chase & Co. indexes.

Structural Weakness

Bahrain and Oman will be the countries in the Gulf Cooperation Council most susceptible to lower oil prices, Moody’s Investors Service said in its report this month. Bahrain has reserve assets of about $5.4 billion, including gold and foreign currencies, compared with $745 billion for Saudi Arabia, government data show. Its deficit may widen to more than 7 percent of gross domestic product next year, Moody’s said.

“Running a deficit for one year is not a big deal and manageable,” Bantis said. “But if they keep running deficits then they will be in big trouble.”

Before it's here, it's on the Bloomberg Terminal.