Running a state budget deficit and facing a prolonged period of unrest, Bahrain is not in the same league for investors as the Gulf’s wealthier oil exporters. But good timing and strong demand for regional assets in general mean a planned bond issue by the tiny kingdom is likely to go well.
Bahrain was sounding out investor appetite at roadshows last week for a possible issue of an international, conventional bond. Bankers said Bahrain’s first conventional debt offering since 2010 would be open to qualified investors in the US and elsewhere, and might be as large as $1.25bn.
Bahrain last tapped the international market in November with a $750mn, seven-year sukuk (Islamic bond), which was largely sold to investors in the Middle East. The upcoming issue will not be able to count on interest from a deep pool of Islamic investment money in the Gulf, so it will be a tougher test of market confidence in Bahrain.
Bankers said Bahrain was eyeing a seven- or 10-year issue, which should appeal to institutional investors in the West, who have been showing interest in Gulf debt as a safe haven while the financial crisis has hurt other markets around the world.
“The timing is very good for Bahrain; this issue has been rumoured for a long time now and we are seeing GCC (Gulf Cooperation Council) credit markets trading at some of the tightest yields for years,” said Thomas Christie, sales trader at Rasmala Investment Bank in Dubai.
“Combined with the fact that the market is very liquid currently and searching for yield, we should see any Bahrain issue do well.”
With oil prices sliding, Bahrain’s state finances may come under pressure. Brent crude oil fell to an 18-month low of $91 a barrel on Thursday, from above $120 early this year; the oil price which Bahrain needs to balance its budget jumped to $114 in 2011, the highest level in the Gulf, from just $80 in 2008, the International Monetary Fund said in April.
The government’s budget deficit shrank to $83mn in 2011, the lowest shortfall in three years and well below a projected gap of $3.3bn, because oil prices were higher than expected. But with oil now sliding, this year’s deficit may be larger than last year’s.
Another issue for investors is the social unrest, which has continued for over a year. They have not prevented the economy from resuming growth after a brief contraction early last year, but it is not clear how the political problem may be resolved in the long term.
For now, however, the signs are that investors will happily accept these risks. One positive is that the country’s absolute level of external debt is still very low, at 14% of gross domestic product, according to Bahrain’s bond prospectus.
Perceptions that Saudi Arabia will do what is necessary to support Bahrain, fuelled by a Saudi proposal in recent months for a closer union of Gulf States, are also important.
The bond prospectus said that although a $20bn fund planned by wealthy Gulf Arab states last year to aid Bahrain and Oman had not yet been capitalised, Bahrain expected to receive an allocation soon, which would come in addition to money already earmarked in its budget for priority projects.
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