Bahrain, UAE added to 'at risk' debt list for 2010

The UAE and Bahrain have been added to a list of countries most at risk of suffering a sovereign debt crisis in 2010, according to a new report by the Royal Bank of Scotland Group plc.

The report, entitled ‘Predicting Sovereign Debt Crises: 2010 Update’, is used to “try and predict sovereign debt crises” and looks at areas such a country’s liquidity, solvency and issues such as GDP growth, inflation and exchange rate volatility.

“The inclusion of some credits in the Middle East (Bahrain, Qatar and UAE) as potentially at risk does perhaps come as something of a surprise, albeit perhaps less so after recent developments in Dubai,” Timothy Ash, head of Europe, Middle East and Africa research at RBS.

Some of the new countries added to the ‘crisis prone’ list for 2010 include Bahrain, Iceland, Lebanon, and the UAE.

“Bahrain’s relatively low foreign exchange reserve cover is though perhaps a reflection of the strong implicit support it continues to enjoy from Saudi Arabia; albeit admittedly in the aftermath of the Dubai saga the quality of implicit support assumptions is now subject to serious review,” Ash says in the report of the risks for Bahrain.

The report believes the UAE situation is more complex as Dubai still remains “vulnerable,” but it adds that “the UAE central bank, with the support of Abu Dhabi, still has ample resources to back the UAE Dirham exchange rate regime.”

However, Ash does add that “recent large scale external borrowing by quasi-sovereign entities” was the reason for the UAE being added to the list of countries that may potentially face debt problems this year.

Qatar was on the risk list in 2009 but it has been removed as the RBS researchers believe Qatar’s large scale borrowings last year to fund investments in hydrocarbon production facilities will come online this year and will lead to a rise in exports.