Bahrain - Political to Economic Risk

Unrest in Bahrain started since February is not any more political fiasco; it actually put a heavy toll on Bahrain's economic growth & its perception in the outer world. If the ongoing "National Dialogue" fails then Bahrain will be emerged as more unstable, for both domestic & international business communities. On the other hand, Dubai & Doha will gain the most in case Bahrain's National Dialogue fails & instability prevails in Bahrain.

The 'National Dialogue' initiative started in Bahrain. The main Shia opposition Al-Wefaq also decided to participate.

About 300 people have been invited to attend the forum, which will meet three times a week until the end of July. They include political parties, civil and non-governmental organizations, opinion leaders and prominent figures. Surprisingly, there is a relatively lesser shia opposition representation, only twelve percent in National Dialogue moot. Out of 300 invitees, 35 are identified with the Shia opposition bloc while the single largest party, Al-Wefaq before resignations had 18 representatives in the 40 member Bahraini parliament, have only five representative seats.

Chairman of the National Dialogue who is a Parliament Speaker as well, Khalifa bin Ahmed al-Dhahrani said ”Discussions at the forum will revolve around four main themes: politics, economy, social and legal issues. The participants’ recommendations will be forwarded to the king, who will then issue an order to the executive and legislative authorities to take the necessary action”

Al-Wefaq, which is focusing its demands on a fully elected government, says recommendations should be put to a referendum. “We are heading toward dialogue, but we will not give up our demand for a government that represents the will of the people and a fair system of election,” said Ali Salman, al- Wefaq’s secretary-general.

Considering not enough representation of shia opposition groups in National dialogue raises the question on the serious attempt to resolve the political deadlock. There are also news reports of opposition harassment & suppression.

Therefore, it seems unlikely (or have low probability) that “National Dialogue” will resolve the Bahrain’s political crisis in an amicable manner.

Going forward, by-election in Bahrain, scheduled for 24^th September & 1^st October 2011 will be significant event to watch, a face-off between pro government independents & Al-wefaq.

 Damages to the Economy & 2H2011 forecast:

• Bahrain Bourse All Share Index, third smallest stock exchange in the MENA region, having market capitalization of USD 19.6billion, is plunged by 8.0% year-to date to 1,317. Trading volume also slowed down to 0.2 million as of today, in comparison to year-to date average of 2.1 millions
• Bahrain 5 year credit default swap (CDS); form of insurance that protects the lender in case of loan default, surged by 21.0% year-to date to 219 bps, third highest increase in the region after Egypt & Saudi Arabia. 
• International credit rating agencies, Standard & poor’s, Moody’s & Fitch have cut Bahrain’s sovereign credit ratings, now the lowest among GCC countries.
• Bahrain is the worst performer among the region’s dollar bonds, with maturities of 10 years as yields on Bahrain’s 5.5 percent bond maturing in March 2020 rose to 5.88 percent from 5.25 percent at the end of 2010, peaked 6.84 percent in mid March.
• Bahrain’s money supply growth - M2 was the lowest in 1Q2011 among GCC countries, rose 0.5% against the GCC average of 4.1%
• Bahrain’s banking sector deposit growth was the lowest among GCC countries, recorded just 0.1%  QoQ in 1Q2011, in comparison to the GCC average of 4.0% QoQ while even YoY basis it’s 10.5% growth was lower than GCC average of 11.8%
• Contrary to other GCC countries, Bahrain’s interbank rates, 3 month BHIBOR increased by 98% to 1.25 since the start of the year.
• Bahrain’s credit to private sector turned red , -0.8% in 1Q2011, in comparison to GCC average of 1.8%
• The hotel occupancy rate in Manama, slumped to 33% in 1Q2011, the lowest in the MENA region, with occupancy estimated at only around 5-10% at the peak of the crisis in March. Revenue per available room decreased 54% YoY, also the region’s worst performance
• Capital outflows & professionals relocated to other regional countries continues
• In a recent HSBC business confidence GCC survey, 54% of Bahrain’s firms consider the political environment unstable which is four times more than the regional average.

Economic growth measured by GDP will be slowdown in 2011 to ~3.0% while inflation will increase because of international commodity prices surge which leads to surge in prices throughout 2011. On the fiscal side, Bahrain looks strong as its major share of revenue linked to oil which rose by 55 percent YoY. However, as oil prices will cool off, fiscal balance could turn to negative as stable revenue stream & high expenditure equation because of higher social spending initiatives, in the wake of unrest. Higher oil prices will support the external account, however pressure could be seen on services account as tourism and financial services slowdown.

Hour of the need is to resolve the political deadlock in an amicable manner. As early as it will be resolved, sooner economy will be on the right track again and confidence of domestic and international business communities will be restored.

Source: Central Bank of Bahrain, GCC central banks, IMF, HSBC & Bloomberg 


Muhammad Irfan Khaliq is an Investment Analyst, can be reached at hakaiun@gmail.com