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Thu 24 Feb 2011 06:28 PM

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Bahrain saw 'no major capital flight' after unrest

Planned $1bn bond issue will go ahead when costs are reasonable, says head of central bank

Bahrain saw 'no major capital flight' after unrest
BAHRAIN UNREST: Bahrain has not seen any major capital flight following its political unrest the Gulf Arab kingdoms central bank governor said on Thursday (Getty Images)

Bahrain has not seen any major capital flight following its political unrest and a planned $1bn bond issue will go ahead when costs are reasonable, the Gulf Arab kingdom's central bank governor said on Thursday.

The small non-OPEC crude producer has been gripped by the worst unrest since the 1990s after protesters emboldened by popular uprisings in Tunisia and Egypt took to the streets last week. Seven people were killed as security forces clamped down.

"So far there is no indication of a major capital flight from the island," Maraj said in an interview.

Major capital outflows could put the country's currency peg to the US dollar under pressure and become a challenge for the central bank, whose foreign currency reserves are limited.

Before Shi'ite-led protests erupted, the Sunni government had planned to issue the bond by the end of March to cover a rising fiscal deficit spurred by higher expenditures on social items, partly to contain public anger.

However, the turmoil that has also spread to Libya sent costs of insuring debt up across the Gulf, while yields on government bonds rose and stock markets in the world's top oil exporting region suffered.

Moreover, Standard & Poor's downgraded the sovereign rating of Bahrain, a regional financial centre, by one notch to A minus this week over concerns that the political unrest and demonstrations will persist.

"The plan is still on," Maraj said. "I think we need to time it in such a way that we can access the market with a reasonable level of cost of borrowing."

He also said the central bank would maintain its interest rate policy for now and that it still expected Bahrain's economy, where nearly $10bn in mutual funds is parked, to grow by 4-5 percent this year.

The central bank's repo rate, which it uses to inject liquidity into the system via purchases of deposit certificates or government bonds, has stood at 2.25 percent since September 2009. The one-week deposit rate is at 0.5 percent.

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