A selloff in Bahrain’s bonds is pushing its borrowing costs to levels last seen during the nation’s 2018 crisis, when its wealthier Middle East allies stepped in with a financial rescue.
The heavily indebted Gulf state is grappling with the fallout from the Iran war just as surging US Treasury yields drive up its debt-servicing costs. That combination has lifted yields on Bahrain’s dollar bonds due 2028 to a six-year high of 8.99%, up 1.6 percentage point since late August, when the Treasury turmoil began.
Over that period, Bahrain’s dollar debt has been among the worst performers in emerging markets, losing 4.2%, while its sukuk Islamic finance instruments have declined 3.5%. Shorter-dated borrowing costs have risen the most, suggesting investors are bracing for more near-term stress.
The rout is reviving memories of Bahrain’s last funding crunch, which followed the 2014 oil-price slump and ultimately prompted Gulf Cooperation Council members Saudi Arabia, the UAE and Kuwait to commit more than $10 billion in support. Investors say the GCC is likely watching the latest signs of stress closely.
“The selloff in Bahrain eurobonds is issuer-specific and extends beyond a general weakness in EM high-yield credits,” said Fady Gendy, a fixed-income portfolio manager at Arqaam Capital in Dubai. “We would expect Gulf Cooperation Council support to become more explicit and broad-based on any large and sustained market weakness.”
Even before the war, Bahrain was considered one of the more fiscally fragile emerging-market borrowers, with a budget deficit equal to 10.5% of gross domestic product and public debt surpassing 140% of GDP, according to World Bank data. It’s also the only GCC member to have a junk credit rating from all three major credit rating firms.
The war has deepened the strains, disrupting exports, slashing crude output and damaging infrastructure. The economy could contract 6.6% this year, according to the median estimate in a Bloomberg News survey. Bahrain’s sovereign risk premium over Treasuries is now well above pre-war levels, a Bloomberg index shows.
The pressure is concentrated at the front end, with spreads on the 2028 issue widening more than on securities due 2035. Bahrain’s yields now exceed Egypt’s despite a Moody’s rating two notches higher, while its credit-default swaps are also more expensive.
Investors say the nation probably still can access bond markets, pointing to its successful $1 billion debt sale in June, just hours after being targeted by missiles. But with Treasury yields now around 5% and investors demanding roughly another 3.5 percentage points to hold Bahrain risk, fresh issuance would be prohibitively expensive.
Should yields rise further, a Gulf financial backstop could become increasingly urgent.
“For both the UAE and Saudi Arabia, Bahrain’s security and geopolitical stability is viewed as an extension of their own,” said Mahdi Ghuloom , a fellow at Observer Research Foundation Middle East. “An economically dire situation will only increase the risk of instability in Bahrain, which could have ramifications for its neighbours.”
Ahead of the GCC’s 2018 rescue, Bahrain’s hard-currency reserves were so depleted, they covered just 1.5 months of non-oil imports, according to the International Monetary Fund. While the latest figures aren’t available, the fund estimated in January that reserves covered just over two months of non-hydrocarbon imports.
For now, Arqaam’s Gendy expects Bahrain can muddle through, using private placements, domestic funding and sukuk issuance to meet its obligations. That could make the shortest-duration securities attractive once the US bond selloff eases, he said.
“This is attractive carry to earn without taking extensive duration risk,” he added.