The Tragedy And Density Of Bahraini Finance

Its rare to get a second chance in capital markets, but Bahraini’s credentials will ensure the island survives political unrest.

Bahrain emerged as a financial centre in the Gulf in the mid 1970’s just as OPEC’s petrocurrency bonanza hit the Euromarkets, Saudi Arabia’s construction boom created a market for offshore banking and Saudi riyal syndicated lending in Manama and Beirut lost its role as the Levant’s gold trading and foreign exchange hub in the bloody opening round of the Lebanese civil war. International finance proved to be a windfall for Bahrain. With $217 billion in assets, 27 per cent of GDP, offshore banking was a major generator of high value jobs for educated citizens in the 400 financial institutions based on the island.

Bahrain emerged as a global Islamic banking, asset management and insurance hub, second only to Kuala Lumpur and London in the global league tables. Unfortunately, the last three months have been traumatic for Bahraini finance as international banking hubs cannot coexist with protracted political risks, street riots and military intervention. Bahrain’s status as the oldest, preeminent financial centre of the Gulf is at risk if social and political wounds do not heal fast.

Standard and Poors and Fitch have both downgraded Bahrain’s sovereign credit risk rating. The credit ratings of the Central Bank and Mumtalakat were also cut. International banks closed branches when the protests reached the Financial District and Bahraini dinar forwards swooned in the foreign exchange market. Political risk is a sword of Damocles in financial markets that recoil from uncertainty. This is a worst-case scenario for dollar funded offshore banks and local investment/Islamic banks, where debt restructuring and even default risks will only escalate. While there is no evidence of bank depositor panics, global banks have slashed interbank credit lines to some local banks and Western banks have relocated expats to Dubai until the unrest settles down.

Bahrain’s $20 billion economy is the first post-oil economy in the Gulf. Tourism was a natural victim of the tragic events since March. The Spring of Culture festival and the Formula One Grand Prix motor race, the crown jewels of the social season were both postponed. Several finance and banking conferences and industry exhibitions have been cancelled. Saudi tourist traffic across the King Fahd Causeway has plunged, which affects local hotels, shopping malls, restaurants and cinemas.

The foreign office travel advisory for British citizens not to travel to Bahrain was a cruel blow for an island financial centre that depended on the City of London’s banking, shipping, insurance and brokerage constellation as its umbilical cord in the Gulf. Despite stratospheric prices for crude oil and aluminum, the finance/tourism hit could trigger a Bahraini recession, though the $10 billion GCC reconstruction fund may prevent economic contraction, a banking shock and a credit crunch. However, with a 60 per cent fall in property prices since 2008, Bahraini bank NPL ratios will continue to rise since one third of their loan books are concentrated in property and construction loans.

Bahrain’s economic success was due to its traditional culture of social tolerance and the cosmopolitan values of its merchant elite. Hopefully, the Bahraini government and the protestors will achieve rapprochement, move beyond the tragic past and salvage the island’s future as the Gulf’s financial and services hub. Bahrain has a stellar track record as a host regulator and central bank supervisor that must not be sacrificed lest the current foreign bank exodus from the island reach the point of no return.

In the post-Lehman world of Arab black swans and credit ugly ducklings, hot money moves across the digital netherworld of the global capital market at the speed of light. There are few second acts in international finance but I believe Bahrain can and will make a financial renaissance.