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.
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