Counting the Costs in Bahrain

Even as peaceful street protests continue, an unusual period of unrest in Bahrain has given way to political negotiations. The Crown Prince has initiated a National Dialogue and most interested parties have made constructive contributions to the ongoing debate about reforming the country’s political system. As welcome as this development is, its urgency cannot be stressed enough as the focus shifts to the mounting economic costs of the crisis.

The immediate cost of the disruptions is difficult to measure as the available information is large anecdotal. With a national GDP of $20.59 in 2009 (IMF), Bahrain has an estimated daily output of some $80 million per working day (assuming a six-day week). It is clear that significant numbers of people have missed work for at least some period of time. Similarly, there have been severe disruptions to the operations of a number of shopping malls and restaurants in the important Seef commercial district adjacent to the Pearl Roundabout which has been the geographic focal point of the protests. Tourism is markedly down and currency exchanges have reported a 20 per cent fall in transactions.

Assuming that a quarter of the normal daily output has been lost since the ‘Day of Rage’ on 14 February, this would translate into an aggregate loss by now of some $320m. An even more concrete blow came from the decision to cancel Bahrain’s Formula 1 Grand Prix. An independent study of the economic benefits of the 2008 race put the total economic benefits of the event at some $600m. Even if this may be something of an overestimate, we do know that the 2008 race drew 100,000 spectators who spent $116.8m in the Kingdom. Right now, this looks like a major net loss, although these costs will obviously be mitigated if Bahrain turns out to be able to host the race later during the season.

The greatest source of concern from the macroeconomic perspective is naturally Bahrain’s large financial sector. The combined assets of banks domiciled in the country total some 11 times the GDP and the sector makes up a quarter of the Kingdom’s GDP. The Dinar has not come under significant pressure – highlighting the credibility and established reputation of the Dollar peg – although benchmark bond yields have edged up above 6 per cent and credit default swaps roughly doubled. At this point, these trends are not out of the ordinary by the standards of previous economic shocks in the region (eg Dubai World), let alone the turmoil in the Euro-zone. Moreover, the national bourse has remained fairly resilient, albeit in very shallow trading. Losses during the year to date were 3.83 per cent as of 3 March, behind most of the rest of the region. Perhaps most importantly, Central Bank Governor Rasheed al Maraj recently stated that the unrest has had little impact of capital outflows.

In spite of this relative resilience, anxiety is mounting among financial sector professionals concerned about the liquidity implications of potentially drawn-out instability. Bahrain has built its reputation as a haven of investor-friendly and high-quality regulation which has allowed it to emerge as a financial centre of international importance. Financial centres elsewhere have faced trouble in the past (e.g. the Hong Kong handover) and emerged stronger after a while but Bahrain needs to worry also about its regional competitiveness in the face of challenges from Dubai, Doha, and Riyadh, among others. Any weakness in the financial sector would have major knock-on effects on the country’s major real estate boom.

The greatest anxiety at the moment indeed relates to the way forward. The costs of the crisis will almost certainly continue to mount even after stability is restored. The Kingdom and some local banks have come under review by international credit rating agencies. Downgrades would complicate any normalsation, although the Central Bank has for now signaled its intention to proceed with a planned one billion dollars government bond issue by the end of March. The government’s room for maneuver is unusually limited by regional standards, given Bahrain’s limited oil wealth. The country’s budget requires a regionally high break-even price of $97-100 and, while the higher oil prices offer a respite, the government is also planning to significantly increase spending. New fiscal initiatives will almost certainly be a key element in any settlement.

Bahrain faces a potentially uncomfortable balancing act between wanting to minimise the disruptions from the stalemate while ensuring that a robust and sustainable resolution to the crisis. The negotiations between the different parties must be allowed to run their course in order to gain widespread consensus for the key elements of the settlement. Trust is a key part of the process which, consequently, cannot be hurried too much. But the clock is ticking and best is the worst enemy of good. All the interested parties must live up to their overriding commitment to Bahrain and its people. Ensuring economic stability and the preconditions for growth is a key element of this. In that sense, as historic as the opportunity is, compromise must never be far from people’s mind. We can only hope that a pragmatic approach can be found to create the basis for a near-term solution and ongoing constructive debate in the future. The challenge for Bahrain is to turn the crisis into an opportunity. As difficult as this is, history shows that it is not impossible.

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