Bahrain ‘needs aid to avert debt crisis’
US firm Franklin Templeton Investments has cut back its debt holdings in Bahrain, citing the “very serious” threat that the cash-strapped nation will experience an economic crisis in the next 12 months if financial aid from neighbours does not come through.
Templeton’s exposure is “much reduced today” because the government seems to lack a credible reform plan, said Mohieddine Kronfol, the firm’s chief investment officer for global sukuk and Middle East and North Africa fixed income. At the same time, he is holding onto a small stake in the nation’s bonds, in case Bahrain gets support from its Gulf Arab allies.
The island kingdom has lagged other Gulf nations such as Saudi Arabia in implementing reforms after the oil-price slide that began in 2014.
Despite a rebound in crude in 2018, the nation’s dollardenominated bonds have taken a battering, with bonds maturing in 2029 falling to a record this week. Traders are the most bearish on the dinar in more than five months, currency derivatives show.
“The market and Bahraini authorities shouldn’t be too sanguine about the situation. It’s pretty serious,” Kronfol said in an interview in Dubai.
“Some show of support may be warranted to avoid headline risks and pressure on the currency, or even talk about the peg being sustainable.”
Bahrain was said to have asked Saudi Arabia, the United Arab Emirates and Kuwait for financial assistance in 2017 as it sought to avert a devaluation. “Ultimately, anything that affects one member of the GCC [Gulf Co-operation Council] will indirectly impact other members,” Kronfol said.
Central Bank governor Rasheed Al-Maraj said in May the country had enough foreign reserves to maintain the currency’s peg, as a recovery in oil prices helped ease pressure on its public finances.
The cost to insure Bahrain’s debt against default for five years rose to 404 basis points on Wednesday, the highest since June 2016, based on creditdefault swaps. Bahrain is the only Gulf oil producer that needs prices to climb beyond $100 a barrel to balance its budget in 2018, according to IMF estimates.