Franklin Templeton Sheds Bahraini Bonds and Warns of Crisis
(Bloomberg) -- Franklin Templeton Investments has cut back its debt holdings in Bahrain, citing the “very serious” threat that the cash-strapped nation will experience an economic crisis in the next 12 months if financial aid from neighbors doesn’t come through.
Templeton’s exposure is “much reduced today” because the government seems to lack a credible reform plan, according to Mohieddine Kronfol, the firm’s chief investment officer for global sukuk and Middle East and North Africa fixed income. At the same time, he’s holding onto a small stake in the nation’s bonds, in case Bahrain gets support from its Gulf Arab allies.
The island kingdom has lagged other Gulf nations like Saudi Arabia in implementing reforms after the oil-price slide that began in 2014. Despite a rebound in crude this year, Bahrain’s dollar-denominated bonds have taken a battering, with bonds maturing in 2029 falling to a record this week. Currency derivatives show traders are the most bearish on the dinar in more than five months.
“The writing’s on the wall,” Kronfol said in an interview in Dubai. “The market and Bahraini authorities shouldn’t be too sanguine about the situation. It’s pretty serious. Some show of support may be warranted to avoid headline risks and pressure on the currency, or even talk about the peg being sustainable.”
Bahraini officials have repeatedly said they don’t plan on abandoning the peg to the dollar.
Bahrain was said to have asked Saudi Arabia, the United Arab Emirates and Kuwait for financial assistance last year as it sought to replenish foreign reserves and avert a devaluation. Doing away with the peg in Bahrain would raise doubts that other members of the six-nation Gulf Cooperation Council can sustain their currency policies.
“Ultimately anything that affects one member of the GCC will indirectly impact other members,” Kronfol said. He’s hoping “some financial commitment or support for Bahrain is announced, because at this stage it looks like it will be explicitly needed.”
Central Bank Governor Rasheed Al-Maraj said last month the country has enough foreign reserves to maintain the currency’s peg, as a recovery in oil prices helps ease pressure on its public finances. The central bank’s net foreign assets rebounded in April after dropping to a seven-month low in March.
Investors aren’t convinced. Twelve-month forwards for the Bahraini dinar climbed to the highest level this year, indicating increased bets the country may devalue its currency, which is pegged at 0.376 per dollar. The cost to insure Bahrain’s debt against default for five years rose to 404 basis points on Wednesday, the highest since June 2016, based on credit-default swaps.
The nation’s debt is rated junk by the three major rating companies. Bahrain is the only Gulf oil producer that needs prices to climb beyond $100 a barrel in order to balance its budget in 2018, according to International Monetary Fund estimates.
“The oil price has improved, that gives them a little bit of time, but that’s not enough,” Kronfol said. “Something has to eventually give. Either you see a much bigger impact on their numbers through decisions they take, or you see some additional support come in to give them the time to implement the different reform measures that they’ve announced.”
Bahrain should consider implementing corporate income tax to shore up its finances, the IMF said last week. The Gulf’s smallest economy has been relying on debt sales to finance budget and current-account deficits. It scrapped an offering in March after investors sought higher yields, but raised $1 billion from Islamic securities.
“It’s been critical for a while,” Kronfol said. “What’s delayed any need for emergency funding has been the fact that Bahrain has continued to have access to debt markets, but the last issue they closed didn’t go well. That is a very significant warning sign, or red flag.”
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