Home > Democracy, Economic Development, Investment > Bahrain Trouble Brewing

Bahrain Trouble Brewing


UPDATE: Bahrain has rescheduled its Formula 1 Grand Prix for October. It had originally been planned for March, but was pushed back because of civil unrest. That dealt a significant blow to the nation’s tourism industry. It’s unclear what kind of event spectators will get in October — expect a lot of protests. I am sure plenty of devoted racing fans will still attend, but enough people could still be wary about that nation’s situation to provide less of an economic boost than anticipated.

Bahrain has not received the sexy news coverage of its Arab Spring counterparts in Egypt or Libya, but there’s definitely reason for concern in that country that has gone somewhat unnoticed.

A Miami Herald story from Monday sums up what is going on in that tiny island vacation destination:

On May 19, President Barack Obama criticized the Sunni Muslim government’s harsh crackdown on the country’s majority Shiite Muslim population. The crackdown has featured the destruction of Shiite mosques, the jailing and physical abuse of leading opposition political figures and journalists, and official harassment and intimidation of teachers, medical professionals and others.

This is economically significant for several reasons.

The single greatest aid to economic development, aside from education, are stable political institutions. Call me old fashioned, but I don’t believe most investors think a country where there is government-backed torture and killing of peaceful protestors is a safe spot to stash their money.

Bahrain’s situation is more unique because of its advanced banking and regulatory system. The Heritage Foundation ranks it as the freest economy in the Middle East, but that all can change if institutions are overturned. And what was once considered a stable and respectful government has turned out to be something quite different, thus making for some unpredictability. Significantly, the Bahrain Islamic Bank’s credit rating was cut to junk status this week.

To that effect, Moody’s Investor Services downgraded Bahrain’s credit rating to Baa1 with a negative outlook, saying “there seems little prospect of the underlying causes of the unrest being peaceably resolved, at least over the short term.” That is the third-lowest investment rating, which will make it much more expensive and difficult for Bahrain to borrow money, which could stall or prevent large projects and lead to underfunding of various services. It also sends a strong message to investors that the political fiasco in Bahrain is not likely to turn around soon. The International Monetary Fund also readjusted its prediction on Bahrain economic growth from 4.1 percent to 3.1 percent.

Out of a sense of panic or urgency, the Bahrain government responded to the Moody’s downgrade with the cosmetic fix of lifting its state of emergency. That announcement was met with continued protests, as if nothing had changed (because, let’s be honest, nothing did aside from a few tanks pulling out of cities).

Foreign direct investment accounts for $15.8 billion of Bahrain’s economy, putting it 10th in the region. But it falls behind powerhouses such as Saudi Arabia (oil), Israel (technology, stable democratic institutions), Egypt and Qatar. For a country of its size, Bahrain gets a substantial amount of foreign investment — for the time being.

Any domestic instability has to be troubling for international markets and foreign investors. Even before the government crackdown, beatdown, showdown, whatever you want to call it, Bahrain was ranked 36th worldwide in public debt. And while many Middle Eastern nations rely on natural resources — such as oil — for a bulk of its gross domestic product, Bahrain derives 11 percent of its GDP from oil, making it one of the smallest producers of the crude stuff in the Middle East.

So where does a bulk of Bahrain’s economy come from? Tourism. And unless your fanny-packed family of four had insurrection on the travel itinerary, I think Bahrain might be pushed down the list of Middle East hotspots.

Of course, tumbling tourism dollars has been a theme of the Arab Spring — after all, the people carrying out these revolutions are hardly concerned about what John Smith and his three redheaded children think.

If the country must rely on tourism for a sizable portion of its economy, has a large debt burden and still wants to pride itself on being a progressive business economy, it must address its social unrest. This type of instability sends a bad signal to foreign investors — especially if its ability to generate revenue from tourism decreases, which directly affects Bahrain’s debt level.

Advertisements
  1. Alan
    June 3, 2011 at 1:20 pm

    “The single greatest aid to economic development, aside from education, are stable political institutions. Call me old fashioned, but I don’t believe most investors think a country where there is government-backed torture and killing of peaceful protestors is a safe spot to stash their money.”

    people will always go to countries that dont work with the united states to stash money and invest. Those are tax free dollars my man and sometimes better protected by guns then by laws.

  1. June 4, 2011 at 1:42 pm

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

%d bloggers like this: