Bahrain’s Contradictory Conference Agendas

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Bahrain stocks, on a 20% roll through April on the MSCI Frontier index, looked for further grounding as the oil and offshore banking hub will host a regional economic development conference with the long-awaited US aid and diplomatic blueprint for Mideast peace as a centerpiece. It was chosen in part as a relative success story with commodity diversification after launching a global financial services sector decades ago recently reinforced with a new bankruptcy law and full foreign ownership scope. The state aluminum company is a heavyweight accounting for 5% of GDP, on 5% unemployment with two-thirds of workers in the private sector. A government fund offers loans to startup small businesses, as migrants are increasingly steered to low-wage jobs nationals shun. However official positions continue to pay a premium and the Shia majority demand entry as a chronic source of sectarian violence and tension against the ruling Sunni elite. Oil is still half of exports and two-thirds of budget revenue, as last year’s deficit topped 10% of GDP, with neighboring Saudi Arabia leading a $10 billion rescue to seal the hole. A 5% value added tax was introduced in the package, but corporate and income levies and utility subsidy cuts are largely off the table for fear of social unrest. The island ranks high in the Gulf in the World Bank’s Doing Business list with manageable bureaucracy, but education and skills training lag for technical services professionals, according to human resources surveys.

In May MSCI began elevating Saudi stocks to the core index, but large global funds hesitate to raise exposure beyond a fraction of assets, with price-earnings ratios at 20 times and lingering human rights and geopolitical concerns. BlackRock and HSBC unveiled dedicated vehicles at an April gathering in Riyadh, which marked the end of boycotts since the killing of international journalist Khashoggi. It was organized in part to drum up excitement for the Aramco $12 billion external bond instead of the original equity placement, with the proceeds to go toward buying a 70% stake in listed petrochemical giant Sabic. The offer was ten times oversubscribed, but the price fell soon after launch as overseas debt hit 30% of GDP. With the load accumulating local retail investors are new targets for sukuk issuance despite unfamiliarity with the product. With Gulf sovereign bonds now in the benchmark EMBI index after an admission wheeze by sponsor JP Morgan, attention has turned to the trade’s other side, with portfolio managers taking short positions in Oman and Qatar in particular as well in credit default swaps.

Jordan shares were slightly in the red through May, after the country met with donors in London and agreed to extend the $725 million IMF program another year. The King dismissed the previous prime minister and cabinet last June after anti-austerity street protests, and despite a tax amnesty the fiscal deficit will come in over 4%, with public debt at 95% of GDP on continuing state electricity and water company losses. A 10% current account gap leaves usable reserves at $15 billion, and dependence on $10 billion in bilateral and multilateral lines through 2020 alongside Eurobond taps. As host to a million and a half refugees outside the original Palestinian displacement, it looks to an unlikely conference breakthrough to create an alternative   economic and political stability hub.

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