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Sep 15 2014

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Bahrain’s return to the international market with a USD 500 million bond underscores the Gulf state’s determination to shrug of political challenges and focus on economic reform.
The debt issue also reflects the kingdom’s need to seek additional financing, despite aid from its Gulf allies, as it tries to regain its position as a regional business centre amid political unrest which erupted in 2011.
After subdued growth in 2011 and 2012, the country’s economy shed its lethargy to grow 5.3% in 2013. Bahrain’s GDP is projected to grow 4.7% this year, although first quarter showed a modest 3.1% gain.
Given the economic fundamentals, Bank of America Merrill Lynch is advising its clients to invest in the 30-year bond.
The country has the “the highest yielding MENA investment grade credit and Saudi support provides a floor despite the weak fiscal position,” said Jean-Michel Saliba, analyst at BAML in a note to clients. “Bahrain’s new long-end bond is attractive versus the curve and regional peers, in our view.”
Growth in the small oil producer was driven primarily last year by the oil sector while the non-oil sector disappointed with a 3% growth, primarily due to weak investment and project execution delays.
Reboot

The authorities hope the non-oil sector will rebound with USD 3.4 billion worth of projects in housing, utilities and education scheduled for completion by 2017, including new housing units, two transmission stations, and upgrade of airport and road infrastructure, according to The Bahrain Economic Development Board.
“Increased spending on infrastructure projects (financed through Bahrain’s internal budget and its USD 10 billion allocation in the GCC Development Fund) will drive non-oil growth in 2014,” said KIPCO Asset Management (KAMCO).
Of the billions worth of projects approved to date, 10 tenders, worth USD 1.4 billion, have been awarded, although work has only commenced on two of these projects, Maria Malas-Mroueh, director at Fitch Ratings said in a note, adding that the remaining awarded tenders should be launched before the end of 2014.
The newly announced USD 5 billion King Hamad Causeway linking Saudi Arabia and Bahrain should boost Saudi tourist numbers. The King Fahd Causeway Authority is also set to complete a Saudi-Bahrain rail study by September 2014.
Early indicators show the non-oil sector is gathering steam. Transportation and communications sector grew 4.4%, hotels and restaurants 5.9% and retail 3.3% in the first quarter of the year, according to the Bahrain EDB.
Budget worries
In addition to supporting non-oil growth, GCC funding will result in budget savings by relieving pressure on capital expenditure.
The recent fall in crude oil prices means the hydrocarbons’ sector is likely to underperform this year. Brent crude prices below USD 100 per barrel would put pressure on Bahrain’s budget, which needs USD 130 per barrel next year to breakeven, according to estimates by Fitch Ratings agency.
Bank of America Merrill Lynch has a lower breakeven price of USD 125 per barrel for Bahrain, but it’s still higher than it Gulf peers, which have a breakeven budget of well under USD 95 per barrel.
The higher breakeven price was needed due to structural budget rigidities and increased social spending in 2011 — the height of protests by members of the Shi’ite Muslim majority demanding reforms and a bigger role in the Sunni-led government.
The trade and current account balance have remained positive, but volatile in the past few years, as high debt levels have increased vulnerability to oil price fluctuation, according to KAMCO.
The fiscal balance has been negative since 2009 and stood at a deficit of USD 2.2 billion in 2013. This deficit is likely to widen to USD 2.4 billion in 2014, as oil revenues remain flat and may even decline if oil price weakness persists.
The government aims to reform its finances, but faces resistance to cuts in generous welfare payments amid continued domestic political tension.
“We remain pessimistic about the prospects for an imminent political reconciliation and expect low-level demonstrations, occasional violence and the country’s deep political divisions to persist,” the Economist Intelligence Unit said.
The November elections are set to bring both political and economic issues to the fore as talks between the government and opposition have so far failed to defuse tensions.