The Daily Update - Mission to Bahrain

Bahrain's economy is expected to grow by 3.2% this year, according to the IMF’s Mission to Bahrain findings; a pick-up in oil prices and increased non-hydrocarbon sector output has supported growth. However, the nation's economy remains strained, especially versus its neighbours. The IMF warned of “a rise in fiscal and external vulnerabilities”, adding that the nation’s “deficit is projected to remain sizeable, with a rising interest bill as public debt continues to increase”; public debt stands at roughly 85% of GDP currently.

Bahrain’s FX reserves have also declined since 2015 as the nation continues to support public debt injections, they stood at only USD2.1bn in April; although there was a 46% increase in April, Bahrain’s FX reserves can still only cover roughly one month of imports, this is extremely worrying. According to its own calculations, Bahrain will need oil to spike to $115pb before it can balance its budget, Brent crude is currently trading at just above $75pb. There is also USD 750m worth of sukuk debt maturing in November which must be serviced.

Bahrain is rated B1/B+ by Moody’s and S&P and BB- by Fitch. In its last update Moody's commented that “the negative outlook reflects continued downside risks to the B1 rating, which manifest themselves in heightened government and external liquidity risks”, adding “Given the negative rating outlook, any upward movement in the rating in the foreseeable future is highly unlikely”. Aside from the rating downgrades to junk (which occurred in 2016) we have not held Bahrain since Q1’14 over concerns of the nation’s deteriorating economic fundamentals.

We had previously favoured the 6.125% 2022s which we sold at a spread of 234bps over USTs in March 2014; they are currently priced at a spread of 465bps. Having fallen nearly 10 points so far this year, these bonds are very attractive to yield-hungry investors, as they trade at a yield of 7.35%; however, we would still not touch the paper.

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