Photographer: Kristian Helgesen/Bloomberg

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Nice Oil-Find, Bahrain. Shame About the Ballooning Credit Risk

  • Debt default risk is higher than for Argentina and Egypt
  • Investors need clarity on size of oil find, Dergachev says

Bahrain’s biggest-ever oil discovery couldn’t have come at a more crucial time, but anyone expecting a sudden revival in the country’s financial fortunes is likely to be disappointed.

The two-year slide in oil prices that began in 2014 has sapped the Gulf nation’s foreign-currency reserves and left its debt risk, as measured by five-year credit-default swaps, at the highest in 15 months, making insurance against a bond-payment failure more expensive than for Argentina and Egypt. Energy sales accounted for 87 percent of the government’s total income for 2016.

The shale oil and natural gas discovered in a deposit off the island state’s west coast “is understood to dwarf Bahrain’s current reserves,” Bahrain News Agency reported Monday. Yet the investment and time needed to extract the oil and the impossibility of predicting at what level prices will be when it’s recovered will mitigate any immediate optimism from the announcement.

"It’s definitely positive news and raises hopes that the Bahraini fiscal burden might be eased in the future," said Sergey Dergachev, who helps oversee about $14 billion in assets at Union Investment Privatfonds in Frankfurt. "That said, we need more clarity on how large the oil and gas findings are, by when these reserves will be extracted, how much will it cost to develop this field and when they will generate cash flows to support the budget."

— With assistance by Netty Idayu Ismail

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