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Sat 12 Feb 2011 02:52 PM

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Bahrain bonds to rise as Egypt contagion fades, says Al Khalifa

Bahrain’s 6.2 percent five-year Islamic bonds due in June 2014 have lost 1.9 percent since Egyptian crisis began

Bahrain bonds to rise as Egypt contagion fades, says Al Khalifa
BONDS REBOUND: Bahrain is embracing political reform, cutting the unemployment rate and focusing on economic growth

Bahrain’s Islamic bonds will rebound as soon as next week after tumbling when anti-government protests in Egypt started, said Shaikh Mohammed bin Essa Al Khalifa, chief executive of the nation’s Economic Development Board.

“This is a classic case of ‘buy the rumor, sell the fact,’” Al Khalifa, 41, said in an interview on Saturday at Bloomberg’s headquarters in New York before President Hosni Mubarak resigned. “People are fearing that this will spread to Bahrain from Egypt. What many people don’t understand is we actually have one of the most liberal societies in the Gulf. It spiked, but it will come back down.”

Bahrain’s borrowing costs rose as investors speculated tension between the country’s Shiite majority and the Sunni minority ruling party would increase as political turmoil spread in the region. Bahrain’s 6.2 percent five-year Islamic bonds due in June 2014 have lost 1.9 percent since Jan 25, when Egyptian protesters began demanding Mubarak’s ouster. The country’s dollar bonds due in 2020 declined, pushing yields up 99 basis points, or 0.99 percentage point, to 6.08 percent, the highest since its issuance in March.

The debt selloff will be temporary because Bahrain is embracing political reform, cutting the unemployment rate and focusing on economic growth, said Al Khalifa, who heads the public agency responsible for supporting growth in Bahrain.

 “It’s always difficult to predict the future, but we honestly believe each country is different,” Al Khalifa said. “We have a good story domestically.”

Bahrain, with an economy one-tenth the size of Egypt’s, will expand gross domestic product 5 percent this year after a 4 percent gain in 2010, Al Khalifa said. The unemployment rate has declined to about 4 percent from 16 percent six years ago, he said.

In Egypt, the economy will slow to 3.4 percent this year, Vice President Omar Suleiman told the state-run Middle East News Agency on Feb 9. Egypt’s unemployment is 8.9 percent, while consumer prices increased at an annual pace of more than 10 percent, which five times more than Bahrain’s.

Higher borrowing costs haven’t changed the country’s financing plans, according to Al Khalifa. Bahrain is home to the world’s largest number of Islamic banks. Albaraka Banking Group, Bahrain’s biggest publicly traded lender, halved planned sales of Islamic bonds from as much as $500m, chief executive officer Adnan Ahmed Yousif said in an interview Feb 8.

Bahrain, the smallest oil producer among the six Gulf Arab states, wants to reduce its reliance on oil and gas production, Al Khalifa said. Non-oil products, such as aluminum, now account for two thirds of the country’s exports in volume, he said.

Stocks rose across the world on Saturday after Mubarak handed power to the military and bowed to the demands of protesters who have occupied central Cairo for the past 18 days.

The yield on five-year Islamic bonds rose to 3.1 percent on Saturday from 2.45 percent on Jan 25. The cost of insuring Bahrain’s debt for five years with credit-default swaps advanced to 257 basis points on Feb 4, the highest level since August 2009, before dropping to 243 on Saturday, CMA prices in London show.

Arrests last year of 25 activists belonging to the Shiite opposition party led to widespread protests, according to Human Rights Watch’s 2010 report on Bahrain. Shiites complain of discrimination by Sunnis, who make up 30 percent of Bahrain’s citizens. Shiite parties won 18 of 40 seats in parliamentary elections Oct 23, up from 17 in the 2006 elections, according to the Elections Supreme Committee.

“People often confuse civil disturbance for political opposition,” Al Khalifa said. “We have a political process where there’s opposition in parliament. We have four political parties. The fact you can protest and go back home is a plus.”

Al Khalifa said the gender gap in Bahrain is driven in part by cultural customs.

“Labor participation rates of women are not as high as we would like,” he said. “There are still some cultural issues. Some women don’t want to work.”

Women account for 20 percent of the private workforce and 43 percent of government workers, he said. The difference is driven by the amount of hours the jobs require. The workday for government employees ends at about 2 pm, while private companies keep workers until 5 pm or 6 pm, he said.

The number of women working is likely to increase because about 70 percent of the students in university are female, he said.

Al Khalifa, who studied economics at American University and the London School of Economics, said he’s focused on investing in education and health care.

“The key message for all of us is that this is you have to reform,” said Al Khalifa of Egypt. “You have to work to meet the needs of the people. As a region, we’ve been moving too slowly. For people are pro-reform like me, this is an exciting time.”

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