What a Difference $10 Billion Makes to Gulf's Weakest Link

(Bloomberg) -- Bahrain and Oman are the most vulnerable economies in the Gulf, but one has a $10 billion bailout package and the other is on its own.

That’s why the bonds of Bahrain, whose dwindling foreign-currency reserves fueled concern this year that its currency’s peg to the dollar may be at risk, became 2018’s best performers in the six-nation Gulf Cooperation Council after Saudi Arabia and other rich allies came to the rescue in October.

The aid helped shrink the risk premium that investors demand to hold the island-state’s debt due 2028 over Oman’s to about 30 basis points from an all-time high of 346 basis points in June. That gap will probably narrow further as JPMorgan Chase & Co. starts to include Bahrain’s securities in its emerging-market bond indexes from the end of January.

• Bahraini bonds have returned 4.2 percent this year, while Oman’s have lost 2.8 percent

“The gap is narrowing,” even though Oman’s debt levels and reserves are healthier than Bahrain’s, said Krisjanis Krustins, a Hong Kong-based director at Fitch Ratings. What Bahrain has that Oman doesn’t is immediate GCC support, he said.

Bahrain has benefited from a close relationship with Saudi Arabia for decades. The downside of that is its has adopted the kingdom’s foreign policies, which has caused some concern among investors of late, but the upside is the financial aid it gets from its richer neighbor.

Oman, on the other hand, has resisted pressure to take sides in regional spats, so there’s no guarantee Arab nations will come to its rescue. Also, it faces “an uncertain, forthcoming generational shift in leadership, and poor transparency,” said Marshall Stocker, a Boston-based portfolio manager at Eaton Vance Corp. Sultan Qaboos bin Said, who has ruled Oman since 1970, has yet to name a successor.

“We once considered Bahrain alongside Oman as the most-vulnerable country in the region,” said Stocker. “But just within the last several weeks Bahrain’s leadership has undertaken a fairly radical effort to reform so as to bring fiscal problems under control.”

Read More: Bahrain to Roll Out VAT System in Stages Before Official Launch

To contact the reporter on this story: Netty Ismail in Dubai at nismail3@bloomberg.net

To contact the editors responsible for this story: Dana El Baltaji at delbaltaji@bloomberg.net, Claudia Maedler

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