The cost of insuring Bahrain’s sovereign debt against default is at an historical high, amid continuing concerns over the country’s ability to tap international markets to stave off a potential financial crisis.
Bahrain’s credit default swaps went up to 413 basis points last week, surpassing previous peaks of 412 basis points in February 2016, when oil prices were at around $30 per barrel, and a peak of around 400 basis points in early 2012, in the aftermath of the political uprising of the previous year.
A decline in oil prices over the past few weeks, from around $80 per barrel in mid-May to $74 on Sunday, has lifted the CDS of Saudi Arabia and Qatar by 7 bps and 10 bps, respectively. Bahrain’s CDS soared 82 points since mid-May.
Bahrain is less resilient to market volatility than its wealthier Gulf neighbours given its large budget deficit and declines in foreign reserves. Its international bonds have been battered during recent volatility in emerging markets.
The International Monetary Fund estimates Bahrain’s state budget deficit at 11.6 per cent of gross domestic product this year and predicts a current account gap of $1.20bn.
Bahrain, which market sources believe can count on support from Saudi Arabia should its finances deteriorate further, has been discussing additional aid from Saudi and other Gulf Cooperation Council (GCC) states for over a year, according to Gulf bankers and official sources. The government has declined to comment.
According to a research note by Jean-Michel Saliba, MENA economist at Bank of America Merril Lynch, Bahrain received unofficial financial support last April.
Saliba mentions a $500m bond privately placed to a non-resident entity and a $2.8bn deposit by a regional social security fund, deposited in retail banks.
Bahrain’s central bank did not immediately respond to Reuters requests for comment on this financial help.
“Explicit and conditional GCC support” could be pushed to 2019, said Saliba. “Alternatively, a GCC deal could be announced prior to November maturity to ensure market access, leaving reforms to be fleshed out in 2019.”
Access to international markets has been crucial for the country, which has borrowed extensively to offset lower revenues due to a slump in oil prices.
But earlier this year Manama was forced to scrap plans for an issue of conventional US dollar-denominated bonds because of the high yields demanded by investors, and it paid a big premium to raise $1bn in Islamic bonds.
Last month, a Bahraini state-owned oil company, Nogaholding, held a planned $500m debt issuance because of unfavourable market conditions, creating further jitters among Manama’s debt investors.