Tumbling oil prices are battering Bahrain’s Shariah-compliant bonds.
The Gulf nation’s dollar-denominated sukuk that mature in 2018 have dropped 1.3% since the end of September, compared with an average 0.8% gain for more than 30 Islamic sovereign dollar bonds tracked by Bloomberg. Only the five-year $1bn sukuk issued by Pakistan have performed worse.
The decline underscores how oil’s 45% slide since last year is hurting a country where Standard & Poor’s estimates crude accounts for 65% of fiscal revenue and yet has oil reserves that are less than 0.1% of neighbouring Saudi Arabia’s. The retreat threatens to jeopardise some of the $30bn of infrastructure projects the government is planning to sustain economic growth, according to Commerzbank.
“Bahrain is a bit more sensitive because they don’t have a lot in reserves as Saudi or others to keep supporting their projects,” Apostolos Bantis, a credit analyst at Commerzbank in Dubai, said by phone on December 17. “They will have to cut costs and stop some of the projects they’re working on.”
Low oil prices will “exacerbate” structural weaknesses in Bahrain’s public finances and may lead to a 10% decline in government revenue next year, S&P said in a December 12 report, revising the country’s debt outlook to negative from stable.
Bahrain requires an average oil price of about $120 a barrel to balance its budget, according to S&P. The smallest crude oil producer in the Gulf, Bahrain witnessed some unrest in the region amid turmoil triggered by revolutions in Tunisia and Egypt.
Last month the island state held parliamentary elections. “Many of the newly elected members of the parliament are not seen as bureaucrats as they are not former government officials and come from different backgrounds, which means they come fresh to the role with no added baggage,” Hassan Jarrar, chief executive officer of Standard Chartered Bahrain said in an e-mail on December 3. The new government can be “a force” in moving infrastructure plans forward, he said.
Bahrain plans to invest “up to $30bn” in public projects over the coming years across a range of industries including transport, housing, manufacturing, energy, healthcare and education, according Jarmo Kotilaine, a chief economist at the Manama-based Bahrain Economic Development Board who projects growth of more than 4% in 2014.
“Mounting infrastructure spending is an important driver while even the oil sector has surprised on the upside,” he said by e-mail on December 21.
Among its plans, Bahrain is spending $743mn for three power plants, $82mn on a 120-bed oncology centre and constructing more than 4,000 residential homes.
The yield on Bahrain’s 2018 Islamic notes jumped 54 basis points to 2.7% in the quarter through December 19, compared with an average 17 basis-point increase to 4.4% for Middle East sukuk, according to JPMorgan Chase & Co indexes.
Bahrain and Oman will be the countries in the Gulf Co-operation Council most susceptible to lower oil prices, Moody’s Investors Service said in its report this month. Bahrain has reserve assets of about $5.4bn, including gold and foreign currencies, compared with $745bn for Saudi Arabia, government data show. Its deficit may widen to more than 7% of gross domestic product next year, Moody’s said.
“Running a deficit for one year is not a big deal and manageable,” Bantis said. “But if they keep running deficits then they will be in big trouble.”
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