Thursday, 17 February 2011
"Revolution in Egypt was shrugged off too easily by Gulf markets," said Hashem Montasser, managing partner at Frontlane Capital, a Dubai-based asset management firm.
"Markets were mispriced in the sense that risk premiums have gone up, but equities prices didn't reflect that. Bahrain has become the catalyst to now re-price Gulf equities."
Etisalat DB, a joint venture of India's DB Group and Etisalat, has been caught up in the corruption probe into whether mobile phone licences and radio spectrum were sold at below-market prices in return for kickbacks.
Last November, India's telecoms ministry sent notices to five firms that were given 85 telecoms licences in 2008, asking why their licences should not be cancelled after a government auditor found they were not eligible for them.
"Etisalat DB has provided a complete response to their concerns and expects the Department of Telecommunications to withdraw the notices and refrain from taking any further action against Etisalat DB," the company said in an emailed statement.
Is it episode three -- after the Tunisia and Egypt crisis -- in the bloody show of MENA revolutions? With police in Bahrain shooting dead at least three protestors in the capital on Thursday morning, the development has certainly sparked market fears the Gulf regime is next in line to fall.
Here's the market fallout:
The cost of insuring Bahrain's debt against default rose 24bp to 285bp, an 18-month high on Thursday, according to Markit, triggering a broad sell-off in the region's CDS markets. Saudi Arabian CDS rose 3bp at 127bp, Israel 5bp at 146 bp, and Egypt 9bp to 350bp, according to Markit.
Bahrain early in the month had sent requests to budding lead managers for a prospective $1bn Eurobond, possibly for launch in March or April, to help plug the country's 2011 deficit. However, there has been no word from the issuer since last week and the bond is likely to be delayed, said a banker pitching to manage the debt sale.
Bahrain successfully priced a $1.25bn 5.5 per cent 10-year bond at 200bp over US Treasuries on March last year, attracting $6bn from 350 accounts. However, if markets are pricing in a higher risk of default, the issuer will no doubt have to pay a higher-than-expected interest rate for a new debt sale.
Bahrain only has $2bn of outstanding bonds, unlike its more liquid brethren Qatar, which has $14bn of outstanding debt. The Bahrain sovereign cash bond market is less liquid than the likes of Qatar and Abu Dhabi. As a result, Bahrain CDS has underperformed the cash bond market as foreign investors bet the country's credit profile is now under severe pressure.
The economic fallout could be severe too. In August, Moody's downgraded the credit rating of Bahrain one notch to A3, the lowest in the six Gulf states, citing the increased dependence on oil to finance spending. The country's increasing reliance on its dwindling share of oil to plug the deficit, with the government forecasting 0.8 per cent this year, and political risks will serve to undermine its creditworthiness.
Writing in Citigroup's Emerging Markets Daily, MENA economist Farouk Soussa argued that escalating protests – the most serious confrontation between the Shia majority and Shia-dominated government -- are unlikely to result in a bloody revolution:
...street protests and political tensions (including parliamentary boycotts) are not uncommon in Bahrain, where a Shia majority (estimated at between 60%-70% of the population) has been calling for decades for greater social, economic and political representation in a system dominated by the Sunni minority and the Royal family. The Shia community claims it is discriminated against when it comes to government jobs and housing, and is marginalised in society, despite representing the majority.
The current king, Sheikh Hamad ibn Isa Al Khalifa, has been moving the country closer to a constitutional monarchy since ascending to the throne in 1999 and more concessions to the Shia community can be dished out to ease tensions, he said. Concessions, according to Soussa, could include further political reform, the release of some of the 450 activists, and further measures to relieve economic hardship.
Saudi Arabia is likely to come to the Royal family's rescue due to its geo-political and commercial interests, said the Citi economist.
Ties between the two kingdoms and royal families are very close, and we would expect Saudi Arabia to seek to prevent what it would likely perceive as an extension of Iranian hegemony into the Gulf should the status quo fall in favour of representational democracy (and hence Shia dominance) in Bahrain. Moreover, Saudi Arabia is likely to have concerns about any possible spread in unrest to other Shia communities within the GCC, most importantly within its own eastern provinces, where Saudi's oil production is concentrated.
.. we would expect Saudi Arabia to provide logistical and military support to the Bahraini monarchy if needed. The two countries are linked by a causeway, meaning the Saudi army is but a short drive away. In our view, the threat of Saudi military intervention alone is likely to limit the scale of protests and expedite a dialogue between the government and the Shia community in which the government retains the upper hand.
However, in a research note, Eurasia Group's Middle East analyst Ayham Kamel was more bearish:
It is uncertain whether the security forces of the al Khalifa regime, lacking training in domestic crowd control, would be willing or able to contain mass protests. The use of live ammunition would only exacerbate an already volatile situation. Moreover, the government's ability to stifle dissent by expanding subsidies and financial incentives is more limited than any of its GCC counterparts. Bahrain oil revenues are dwindling and income disparities along sectarian lines remain pervasive. In the last couple days the king pledged $2,650 to each family. So far this has failed to stem the protests.
Saturday could be make-or-break for the regime, Kamel concluded:
Looking forward, a key signpost that investors should watch is demonstrations planned for this Saturday, Feb 19. The success of demonstrations in attracting bigger numbers and maintaining a robust presence in Manama's main square is critical. Further, confrontations with the army/police that lead to casualties amongst protestors will adversely impact Bahrain's security.
Investors are “de-risking due to the events in Bahrain mainly,” said Mahdi Mattar, head of research at Abu Dhabi-based CAPM Investment PJSC, an investment banking company. “Both local and the few international investors might want to reduce their exposure” amid the unrest and as most markets are shut.
Bahrain’s police fired teargas at protesters this morning after hundreds gathered yesterday at the funeral of a demonstrator who died in clashes on Feb. 15. Protesters are demanding democracy and the ouster of Prime Minister Sheikh Khalifa bin Salman al-Khalifa, a member of the Sunni Muslim royal family who has held the post for four decades. The Bahrain Youth Society for Human Rights said in an e-mailed statement today that two people were killed in clashes overnight.
It is as though past oil shocks never happened. It is as though thousands of rioters take to the streets in Bahrain every weekend. It is as though Egypt is now a safe and secure democracy.
The stock markets of the world are incredibly complacent in the face of unrest across the Arab World. This is a threat to the security of the whole world and in particular the vital energy supplies of the Gulf.
The world's leading oil exporter and custodian of more than 260 billion recoverable barrels -- around a fifth of the world's stock -- Saudi Arabia has long held sway over markets and governments with its ability to add or subtract crude at a turn of the spigots.
It has repeatedly said the world will for decades to come need the fossil fuels that in the short term are by far the most profitable.
Fitch Ratings and Moody's Investors Service issued reports on Dubai Holdings Commercial Operations Group (DHCOG) highlighting its property problems.
DHCOG is a unit of the Dubai Holding conglomerate, which is owned by Sheikh Mohammed bin Rashid, Vice President of the UAE and Ruler of Dubai.
The former executive vice president and veteran geologist was disappointed by the news stories, asserting that the American diplomat in Dhahran who sent the cable had not understood the technical industry terminology and that the press had sensationalized the communique in the interest of selling newspapers.
Al-Husseini consented to an exclusive interview with Arab News in order to set the record straight and assure the world that he had no doubt that Saudi Arabia will continue to be the world's largest supplier of crude oil for many decades to come.
"I'd like to stress that our relations with the UAE are brotherly," Chechnya's Kremlin-backed leader Ramzan Kadyrov told a visiting delegation late on Tuesday. "Economic, sport and cultural ties link us."
Kadyrov proposed 17 investment projects for the region of just over 1 million people, totalling 68.89 billion roubles ($2.35 billion), his press service said. It said the bulk of investments would go towards hydropower plants.
He said executives of the two bourses had been meeting about their planned merger with the country's regulator waiting to hear back from them about where their talks stand.
"We are waiting for their reply, both markets," said Al Turaifi. "They have different companies, different boards, different strategies. If they think it is good for the UAE, or good for them as companies, we will support it."
Sure, the thousands of protesters in Tahrir Square have gone home; shops have reopened and the capital’s traffic is reassuringly chaotic once more. Ignore the tanks and armoured personnel carriers, and the sprawling city of 15m does have an air of normalcy.
Yet a worrying trend has erupted that is threatening attempts to revive an economy paralysed during the 18-day uprising: a wave of unrest by workers who see the dramatic changes in Egypt as an opportunity to improve their lot.