Thursday 24, May 2018 by Jessica Combes

Cost of insuring Bahrain's debt jumps at increasing deficit jitters

 

The cost of insuring Bahrain’s sovereign debt against default has jumped to near multi-year highs this week

There is concern the country will lose access to international capital markets, bankers and debt traders said on Wednesday, according to Reuters, adding that Bahrain credit default swaps soared to a 19-month high of 380 basis points on Tuesday from 283 bps at the end of April. On Wednesday, CDS pulled back slightly to 367 bps, implying a 23 percent chance of default in the next five years.

According to Fund managers CDS were driven partly by a global sell-off of emerging-market debt. But in Bahrain’s case, the selling has been magnified by weakness in the government’s finances. Ehsan Khoman, head of regional research at Japan’s MUFG, attributed the CDS leap to factors including a downgrade of Bahrain by Fitch Ratings in March to BB-minus, three notches into junk territory, Reuters said.

Khoman added that swiftly declining foreign reserves, large fiscal imbalances,‎ a double-notch sovereign rating downgrade by Fitch‎, on top of their being no coherent strategy for setting the country on a more sustainable path, have all given impetus to rising risks in Bahrain.

Zeina Rizk, director of fixed income asset management at Dubai’s Arqaam Capital, said Bahrain could count on financial aid if needed from Saudi Arabia, a diplomatic ally.

Khoman agreed that Bahrain’s GCC neighbours were likely to support it because of its importance in countering Iranian influence in the region and its small size meant support would not be expensive, but a closer look at the support track record so far, and the silence on the matter coming from Saudi and the rest of the GCC, suggests the likelihood and/or nature of future support may not be indefinite.

Reuters reported that Manama has been discussing additional aid from Saudi Arabia and other rich Gulf Cooperation Council states for over a year, according to Gulf bankers and official sources, although the Government has declined to comment.

Last August, the IMF urged the central bank to stop lending to the government. Such lending is considered unsound by many economists because it can fuel inflation and undermine the currency. IMF estimates its budget deficit at 11.6 percent of gross domestic product this year and predicts its debt will exceed 100 per cent of GDP in 2019.

Central bank claims on the government fell sharply in September but have since resumed rising and hit 1.56 billion dinars in March, suggesting the lending may have resumed, Reuters said.

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