Bahrain suffers collateral economic damage from Qatar crisis

Published in GSN, 21 September 2017

Coast Guard Commander Commodore Alaa Siyadi said on 18 September that three Bahraini boats with 16 fishermen on board had been detained by Qatari security forces in the previous three days. Such incidents have often occurred in Gulf waters, and Qatar tried to defuse the row, saying any fishermen entering its waters illegally were detained as a matter of course; they are generally released after a few days while their boats were impounded pending the outcome of court proceedings. However, despite the soothing tone, in the current climate such incidents have the potential to grow into bigger problems (GSN 1,042/9).

The Bahrain fishing industry may be a unwilling pawn in the regional diplomatic game, but it is not the only one caught up in the crisis. The signs are that Bahrain’s whole economy is suffering a case of collateral economic damage. In a report issued on 13 September, ratings agency Moody’s Investors Service warned the dispute was credit negative for all Gulf Co-operation Council (GCC) countries, but that Qatar and Bahrain were the most exposed. Some countries on the dispute’s fringes have been able to benefit from providing Qatar with a new trade outlet to the rest of the world – most notably Oman – but there is no such opportunity for Bahrain.

There have been a slew of actions by ratings agencies over the summer months as the crisis has taken hold. On 2 June, Standard & Poor’s changed the outlook on its BB- rating for Bahrain from stable to negative. On 12 June, Fitch Ratings did the same with its BB+ rating. On 28 July, Moody’s downgraded the Bahrain sovereign from Ba2 to B1, also with a negative outlook. Three days later Moody’s downgraded four local banks, to B1: Bank of Bahrain and Kuwait (BBK), National Bank of Bahrain (NBB), Bahrain Islamic Bank and Khaleeji Commercial Bank.

This is not just happening because of the Qatar crisis, which began in June. Bahrain’s credit rating has been on the slide since 2013. In April, the International Monetary Fund (IMF) warned Manama that “a sizable fiscal adjustment is urgently needed to restore fiscal sustainability”. The IMF has repeated that warning since then; in August it noted that, despite the introduction of some reforms, the budget deficit was running at nearly 18% of gross domestic product (GDP), government debt had risen to 82% of GDP, the current account deficit widened to 4.7%, and international reserves had declined.

The country has been struggling from lower oil revenues since 2014 and a shortage of non-oil income – problems common to all the GCC countries but worse in Bahrain because it doesn’t have much in the way of savings to fall back on. The current crisis has added to the pressures and observers doubt whether the government will be able to push through the fiscal reforms needed to balance the budget.

For now Manama is able to plug any gaps with debt. In mid-September, Bahrain issued a $3bn bond. The package of debt included a $1.25bn, 12-year tranche priced at 6.75%, a $900m, 30-year tranche priced at 7.5% and a $850m, seven-and-a-half year sukuk at 5.25%. BNP Paribas, Citigroup, Gulf International Bank, JP Morgan and NBB acted as book runners.

Demand for the debt was strong – subscriptions totalled $15bn – but that doesn’t mean Bahrain should rely on international investors indefinitely. Moody’s senior credit officer Steffen Dyck said the deteriorating credit profile and Bahrain’s limited ability to absorb shocks made it susceptible to any reassessment of risk by foreign investors. Manama may be able to turn to Riyadh and Abu Dhabi for help, as it has done in the past, but it is not clear how that process will work, how quickly any additional aid will arrive or in what quantities.

Manama may not be entirely realistic in its fiscal planning either. The cabinet approved the 2017 budget in June, almost seven months behind schedule. It assumed revenues of BD2.2bn ($5.8bn), based on an average oil price of $55/bbl, which is higher than average prices for the past two years and above many forecasts for this year. With total spending of BD3.5bn, that leaves a deficit of BD1.3bn or 10.4% of GDP. Dubai-based Emirates NBD, which takes a more conservative view of likely revenues, suggests the shortfall will be 14.7%.

The authorities are doing their best to put an optimistic sheen on events. In its most recent update, published in early August, the Economic Development Board pointed to 2.9% annualised growth in Q1 2017, with non-oil growth running at 4.4%. That is in part because of project spending funded by the GCC. However, the IMF predicts GDP growth will slow to 2.3% this year and 1.6% next year. Others forecast growth of 2%-2.5% over the next few years. The end of the Qatar crisis won’t cure Bahrain of its problems, but it would make life easier. On the other hand, the longer it goes on the higher the risk that the investors Bahrain relies on will get spooked.