The political turmoil in the Middle East and North African region has kept everyone guessing with Bahrain being the latest victim of uprising, causing rating downgrades and raising market players’ concerns.
The troubles have hit the Bahraini financial sector badly on the ratings front, with Standard & Poor’s Ratings Services (S&P) lowering the long- and short-term credit ratings on the Central Bank of Bahrain and its Mumtalakat sovereign wealth fund to ‘A-‘/’A-2’ from ‘A’/’A-1’. S&P has also warned of possible further cuts to come.
This was followed by individual ratings cut on two Bahraini banks, Ahli United Bank and BMI Bank. In addition, Al Baraka Banking Group and two Takaful companies, Bahrain Kuwait Insurance and Takaful International’s credit ratings have been placed on Creditwatch Negative.
Moody’s Investor Services (Moody’s) has also placed the Bahraini government bonds and three banks, National Bank of Bahrain, BMI Bank and Bank of Bahrain of Kuwait, under review for a possible downgrade owing to potential economic disruption and unrest. Moody’s had earlier downgraded rating of ABC from ‘A3’/prime to ‘Baa3’/’Prime3’.
The kingdom is placed in the top tier of the world with a GDP per capita of US$40,000, but dissatisfaction from the Shiite population against the Sunni leaders of the country has fueled the recent uprisings.
The political crisis has impacted the yields on Bahrain’s sovereign bond with the yield on the 10-year bond climbing to a record high of 6.79%. In addition, the cost of insuring Bahrain’s debt climbed to its highest level since August 2009 with five-year credit default swaps rising 13% in two days to 275 basis points.
The crisis has also jeopardized diversification efforts to reduce the kingdom’s dependency on oil, as well as raised concerns over its future as a financial hub. Moritz Kraemer, managing director of sovereign ratings for the Middle East, Europe and Africa at S&P said Bahrain’s diversification, especially into the financial sector which is sensitive to shocks, will be a challenge for a kingdom that depends highly on oil but is not an oil superpower like Saudi Arabia with reserves for many years to come.
Bahrain is heavily dependent on oil revenue which accounts for up to 80% of the government’s exchequer. The oil reserves in the kingdom are small compared to its Gulf neighbors — Bahraini oil reserves account for 0.01% of the world’s reserves whereas Saudi Arabia’s make up 19.8% and the UAE 7.3%.
With a limited volume of oil, Bahrain has not much funds to spend on alleviating social problems. However, the government announced last week that it would increase social spending by an extra BHD157 million (US$417 million), including on higher food subsidies, in excess of that allocated in the 2011 budget.
Earlier, Bahrain’s diversification strategies initially led to the establishment of a financial industry in the 1980s that helped to make it a hub for regional offshore banking and Islamic finance services. The kingdom saw tremendous growth in the financial and banking sector with banking assets tripling between 2002 and 2008 to reach US$252 billion, almost 10 times the GDP of the Gulf nation. Currently, the kingdom has US$10 billion parked in mutual funds with the financial sector contributing 25% to the GDP of the country.
The country’s economy is grappling with the turmoil and the financial sector has not seen the worst. According to Sven Richter, managing director and head of frontier markets at Renaissance Asset Managers, there are still no signs of money leaving the country and the stock markets have remained flat. However, with the Bahraini dinar pegged to the US dollar, its US$3.77 billion in foreign exchange and gold reserves could quickly be depleted if the situation gets worse.