The cost of insuring Bahrain’s sovereign debt against default has jumped to near multi-year highs this week because of concern the country will lose access to international capital markets, bankers and debt traders said yesterday. Bahrain credit default swaps soared to a 19-month high of 380 basis points on Tuesday from 283 bps at the end of April. Yesterday, CDS pulled back slightly to 367 bps, implying a 23% chance of default in the next five years. Their previous peak of 405 bps was reached in February 2016, when oil prices below $35 a barrel threatened Gulf economies.
Oil is now around $80, but that is not easing worries about Bahrain.
Fund managers said CDS were driven partly by a global sell-off of emerging-market debt. But in Bahrain’s case, the selling has been magnified by weakness in the government’s finances. The International Monetary Fund estimates its budget deficit at 11.6% of gross domestic product this year and predicts its debt will exceed 100% of GDP in 2019. Ehsan Khoman, head of regional research at Japan’s MUFG, attributed the CDS leap to factors including a downgrade of Bahrain by Fitch Ratings in March to BB-minus, three notches into junk territory. “Precipitously declining foreign reserves, large fiscal imbalances, a double-notch sovereign rating downgrade by Fitch, on top of their being no coherent strategy for setting the country on a more sustainable path, have all given impetus to rising risks in Bahrain.”
The central bank’s net foreign assets hit a seven-month low of 533.2mn dinars ($1.41bn) in March, about 31 days’ worth of imports; some analysts think a safe level of reserves for emerging economies is 90 days. Foreign liabilities exceed assets for Bahrain’s retail banks by 916.9mn dinars. Last August, the IMF urged the central bank to stop lending to the government. Such lending is considered unsound by many economists because it can fuel inflation and undermine the currency. Central bank claims on the government fell sharply in September but have since resumed rising and hit 1.56bn dinars in March, suggesting the lending may have resumed.
Investors worry that Bahrain will no longer be able to finance its debt at affordable rates in international markets, said a Dubai portfolio manager. “They seem to have lost access to markets.” In March, the government paid a big premium to sell $1bn of Islamic bonds abroad, causing yields on its existing debt to spike. It scrapped plans for an issue of conventional bonds because investors demanded high yields. Then Nogaholding, an arm of Bahrain’s National Oil and Gas Authority, held investor meetings early this month before an expected issue of $500mn of seven-year bonds.That issue has not gone ahead, apparently because it was disrupted by the emerging-market sell-off.
Zeina Rizk, director of fixed income asset management at Dubai’s Arqaam Capital, said Bahrain could count on financial aid if needed from Saudi Arabia, a diplomatic ally. “We think the sell-off is overdone. Fundamentally, nothing has changed for Bahrain.” Manama has been discussing additional aid from Saudi Arabia and other rich Gulf Cooperation Council states for over a year, according to Gulf bankers and official sources. The government has declined to comment. Khoman agreed that ultimately, GCC neighbours were likely to support Bahrain because of its importance in countering Iranian influence in the region and its small size meant support would not be expensive. “However, the support track record so far, and the silence on the matter coming from Saudi and the rest of the GCC, does leave some room for doubt regarding the likelihood and/or nature of future, infinite support.”
Sources and photo-credits: Bloomberg, Gulf Times