Bahrain may issue bonds worth US$1.5bn

Manama : Bahrain might issue more bonds to raise US$1.5 billion according to a recent report by Bank of America Merrill Lynch (BofAML).

“After the US$0.6bn tap earlier in the year, we understand that the sovereign is likely to approach markets to raise a further US$1.5bn this year, likely in two tranches. The first tranche could consist of conventional bonds, possibly to be issued by May. The second tranche could consist of Panda bonds (Renminbi-denominated bonds from a non-Chinese issuer sold in China) or private placements to minimise the impact on the broader market of additional supply,” says the report.

It also expects other GCC countries to issue more bonds this year. The report was prepared after meeting with government, diplomatic and private sector officials in GCC.

“We anticipate a significant sovereign bond issuance pipeline this year (apart from Dubai) and expect all GCC countries to become large and regular external issuers over the next 2-3 years.”

The report added that the chances of investor appetite being diminished for these issues are remote, saying, “the better risk appetite may allow soaking up the bond supply overhang in the near-term.” Apart from fiscal deficit, Bahrain is on a strong wicket, points out BofAML.

“Bahrain continues to benefit from favourable supply-side factors: supportive human capital, mature regulatory environment and cost-competitiveness versus regional financial centres, as well as connectivity to Saudi Arabia (which is being reflected by plans for a second causeway). The main weakness on the macro side remains the large fiscal deficit and associated rapid debt build-up.” 

The efforts by the government to reach fiscal balance within next five years might be challenging, but financing the deficit through external borrowing and Saudi support will not be a tall order for Bahrain, said the report.

“At US$30/bbl, Bahrain’s pro-forma fiscal deficit of US$5.8bn could still be filled through a mixture of external (up to a total of US$2bn this year) and domestic borrowing, proceeds from subsidy reforms, under-spending and Saudi support if need be. For instance, support could take place through the temporary transfer of a higher share (currently 150,000 bpd) of export revenues from the Abu Saafa offshore oil field, jointly owned with Saudi Arabia, according to a 1958 treaty, and which may raise US$1.5bn (depending on the oil price). We see capacity to raise US$1-1.5bn in domestic debt, with the understanding that US$1bn in domestic debt needs to be rolled over this year.”

The report added that Bahrain will devalue its currency only if Saudi Arabia devalue ahead. “The severe oil price drop appears to have caused some dollarisation pick-up and capital outflows, but we understand this has subsided. Should Saudi Arabia devalue, we would expect Bahrain to follow the suit and devalue as well.”