Gulf state seeking to bridge its budget deficit after widespread political unrest
Bahrain hired Citigroup, BNP Paribas and Standard Chartered to advise on the sale of about $1bn in Islamic bonds next month as the Gulf country seeks to bridge its budget deficit.
The island-kingdom, home to the US fifth fleet, will use the money to finance a budget deficit of about five percent of gross domestic product, Central Bank Governor Rasheed al-Maraj said in an interview Monday in Washington.
Maraj said he will seek to keep borrowing costs at between 200 basis points, or two percentage points, and 230 basis points above US Treasuries.
“Our reading into the market is that there is still growing demand for sukuk, especially from Asian markets, regional markets in the Middle East and possibly European markets,” he said. “There has been an absence of sovereign issuances of sukuk for quite some time. Now the market is ready to have a new issuance.”
Protests this year in Bahrain, instigated by the majority Shiite Muslims who are demanding more political rights from Sunni rulers, have slowed economic growth and damaged the country’s image as a regional financial center. Credit Agricole, France’s second-largest bank, has informed the central bank it was reducing its presence in Bahrain, Maraj said.
The sukuk sale follows Bahrain’s government raising the public debt ceiling by BD1bn ($2.65bn) to BD3.5bn, Maraj said. Global sales of sukuk, which pay asset returns to comply with Islam’s ban on interest, climbed to $17.4bn in 2011, compared with $10.7bn in the same period last year, data compiled by Bloomberg show.
Bahrain’s credit default swaps jumped 32 basis points to 384 today, the highest in more than two years, according to data provider CMA.
The yield on the Central Bank of Bahrain’s 6.247 percent sukuk maturing in June 2014 rose 16 basis points last week to 2.96 percent, according to data compiled by Bloomberg.
The central bank expects the economy to expand about 2 percent this year, Maraj said. That’s higher than the forecasts of the International Monetary Fund, which is predicting 1.5 percent growth in 2011 compared with 4.1 percent last year.
The political unrest has also weakened domestic demand, leading to a drop in consumer prices since March, Standard Chartered said in a report this month. Inflation will average 1 percent in 2011, according to IMF forecasts.
“The prices came down, but I don’t see it making a serious impact on economic activities in Bahrain,” Maraj said. The government will seek to increase revenue by raising natural gas prices for industries by $1 for each million British Thermal Units to $3.5 next year, he said.
Investors shouldn’t write off Bahrain’s economic and financial prospects, he said. “Bahrain has been a financial center for almost four decades. We have gone through many crises before.”