A scar on Bahrain’s financial marketplace
Bahrain’s civil unrest — which had a one-year anniversary this week — has taken a toll on the local economy and left a deep scar on the Gulf state’s aspiration to become an international financial hub.
A new paper from the Sovereign Wealth Fund Initiative, a research programme at Center for Emerging Market Enterprises (CEME) at the Fletcher School at Tufts University, examines how the political instability of 2011 is threatening Bahrain’s efforts in the past 30 years to diversify its economy and develop the financial centre.
Asim Ali from University of Western Ontario and Shatha Al-Aswad, assistant vice president at State Street, argue in the paper that even before the revolt, Bahrain lagged in building the foundations of a truly international hub in the face of competition from Dubai and Qatar.
Unlike DIFC (Dubai International Financial Centre) and QFC (Qatar Financial Centre), Bahrain insists upon local labor; currently 70% of employees in its banking and financial services industry are Bahrainis. Bahrain’s reluctance to hire non-resident talent has made Dubai…an alternative for those investors looking for a centre with more flexible labor practices such as DIFC provide… The constraints – a lack of formalized institutional and regulatory structure, along with an ad hoc business environment, underdeveloped infrastructure, and under-supplied skilled workforce – have negatively affected its growth and potential to become the financial gateway in the Middle East.
Then came the crackdown of protesters.
Its ruling Al-Khalifa family unleashed a ferocious extra-judicial crackdown against the opposition. It appeared the standard axiom of Gulf ruling families – securing legitimacy and counter-acting political opposition through redistribution of oil wealth – was sorely insufficient to address citizens’ grievances. These led not only to international opprobrium of the Bahrain government but also made foreign businesses reconsider Bahrain as a financial center – with many foreign business shifting workers and operations to Dubai… Indeed, confidence in Bahrain as a financial hub took a major blow along with its image as a stable, tolerant and liberal state.
It remains to be seen what impact last year’s pro-democracy uprising will have on the state of Bahrain and its ambition as a regional financial gateway– especially at a time when Dubai (DIFC) and Qatar (QFC) remain serious contenders to become dominant financial centers in the Middle East.
Bahrain had shown perseverance and strength in building its financial center, but democracy efforts and human right violations were able to threaten the hard work of more than 30 years.
Bahrain’s sovereign wealth fund Mumtalakat, which is leading the country’s efforts to diversify its economy away from the hydrocarbon sector, suffered a series of ratings downgrades last year as a result of sovereign downgrades. Mumtalakat is rated triple-B.
A black swan in the desert
Just when investors were settling down to lock in a few of the year’s profits and put their feet up for the end of the year holidays, a black swan has come waddling out of the desert to put everything on edge.
The unwelcome cygnus atratus came in the form of Gulf emirate Dubai telling creditors of Dubai World and property group Nakheel that debt repayments would be delayed. Fears of contagion spread widely, hitting world stocks, lifting the dollar out of its basement and driving demand for European debt so much that a roughly 6-month trading range for futures was breached.
It all may settle down soon. Dubai says the problem does not apply to its big international ports group. Meanwhile, the emirate is a pretty leveraged place, but fellow emirates and neighbouring countries such as Abu Dhabi, Qatar and Saudi Arabia are pretty flush with cash. They could even step in to help as a matter of solidarity.
At least for now, though, it is showing just how interlinked everything is. Ok, of course, banks get hit when people worry about expsosure. But who would have thought that a European car company would get clobbered by a debt problem in the Gulf?
The issue is those sovereign wealth funds that have been recycling their country surpluses into investments elsewhere. Qatar owns 10 percent of Porsche, Abu Dhabi and Kuwait own 17 percent of Daimler between them. So it is not just investors worrying about their money in the region, it is investors also worrying about where the region’s money is.
Is country risk taking on a new meaning?
Investing is getting very complicated with the intervention of sovereign funds. Once something goes wrong in their countries, they will liquidate assets and update the regional stock markets.I think if those rulers in Middle East are smart, they will step in to snap up the bargains after those overseas investors pull out of the market.
Dubai pride helps Nakheel to save face
By Jason Benham
It’s the property face of the Gulf’s business and tourist hub and the developer of palm-shaped islands visible from space – so Dubai will simply not allow property firm Nakheel to default on its huge $3.5 billion Islamic bonds which mature in December.
Just think of the bad publicity it would bring to the region, and there’s already been plenty of that. Another kick in the teeth is certainly not what Dubai needs. Plenty of critics have joined the ‘bash Dubai” bandwagon and several more are set to join the ranks at some stage.
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