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Oil clouds Bahrain's outlook even as bonds outperform on bailout

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Bahrain became a bond-market darling this year after its Gulf neighbours came to its rescue to ward off any default.

Wednesday 05, December 2018

(Bloomberg)--But falling oil prices have brought the island Kingdom’s finances into focus again.

After outperforming its Gulf peers in the third quarter, Bahrain’s dollar debt has been hurt by crude’s slump in the past two months. Investors are concerned about the Government’s ability to put its austerity plan into action, with oil prices well below what it needs to balance its budget. Bahrain’s cost-cutting targets, aimed at eliminating its budget deficit by 2022, are ambitious, Fitch Ratings said in October.

“Gulf Cooperation Council loans will help pull Bahrain back from the brink, but without meaningful fiscal reform, they just kick the can down the road,” said Brett Rowley, the Los Angeles-based managing director for emerging markets at TCW Group Inc. In addition, “a sharp drop in oil prices could jeopardize recently pledged assistance,” he said.

Still, Bahrain’s bonds remain the best performer among Gulf peers this year, returning 3.6 per cent despite the pressure from oil since early October, according to Bloomberg Barclays indexes. Its inclusion in JPMorgan Chase & Co. emerging-market bond indexes starting end-January is cushioning the blow, according Arqaam Capital, a Dubai-based investment bank.

Bahrain is the biggest beneficiary of index inclusion among its Gulf peers, said Abdul Kadir Hussain, the head of fixed income at Arqaam Capital. Based on the index weightings, flows into Bahrain will be as much as 45 per cent of its outstanding bonds, compared with as much as 30 per cent for other countries in the region, he said.

“I suspect the technicals would win out,” he said. “I would not sell or reduce Bahrain here.”

In contrast, Oman is the worst performer among Gulf peers this year because of its vulnerability to falling oil prices and a “potential re-balancing,” given the sultanate was already included in JPMorgan’s emerging-market bond indexes, Hussain said.

Despite its bonds’ relative resilience, Bahrain remains the “weakest spot” in the Gulf, said Ehsan Khoman, head of Middle East and North Africa research and strategy at MUFG Bank Ltd. in Dubai. It’s the only oil producer in the region that needs prices to climb beyond $100 a barrel to balance its budget in 2018, according to International Monetary Fund estimates.

Belt-tightening was a condition for the $10 billion financial bailout from Bahrain’s neighbours, which will be spread over five years.

The impact from oil “could have been materially worse” had it not been for the assistance, Khoman said.

TAGS : Bloomberg Barclays indexes, Ehsan Khoman, TCW Group Inc.

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