Bahrain is to issue a $500 million five-year sovereign Eurobond early next year, a significant expansion of its presence on international capital markets.
The bond, which will be lead managed by Salomon Smith Barney and BNP Paribas, is expected to be marketed mainly to regional institutions. The political uncertainties in the Middle East, which have already caused some western banks to withdraw money from Bahrain, is likely to lessen its appeal to European and US investors. One consequence is that the bond has a shorter maturity than the 10 years the government was hoping for.
Bahrain does not need the money as its economy is relatively strong, with present policy firmly focused on liberalization and privatization. But ministers are thought to be keen to take advantage of the A- rating it received recently from Standard & Poor’s. Capital Intelligence and Moody’s rate the country BBB-.
The decision to issue a bond is also evidence of a more active management of Bahrain’s economic and financial sector. Sheikh Ahmed bin Mohammed Al-Khalifa, the governor of the Bahrain Monetary Agency, has sought to give the central bank an expanded regulatory role and to modernize supervisory standards. This is designed to reinforce a reputation, built up over the past 30 years, for adopting international best practice.
The central bank has also built on its initial success in turning Bahrain into a centre for recycling petrodollars by establishing a thriving market for Islamic and non-Islamic finance. It is now developing an insurance sector and making a concerted effort to promote these changes to international banks.
The recent decision by Swiss bank UBS to establish Noriba, its new Islamic financial services firm, in Bahrain provided a much-needed boost to the country’s status as the pre-eminent regional financial centre.
“Our strategy is to improve the regulatory and operating environment and focus on projects and sectors which add value,” says Sheikh Ahmed. “We are focusing on having the right quality of regulation, developing the most appropriate products and promoting the market.”
These initiatives are timely. Global banking mergers and the gradual drift of those institutions, including Citibank, towards Dubai have chipped away at Bahrain’s regional dominance. Dubai’s decision to set up an international financial centre means that competition between the states is set to get even more intense.
Bahrain’s banks have also suffered from global volatility. Even such long-established banks as Investcorp, which invests Middle East money in European and US private equity, have come under pressure.
Institutions such as BMB Investment Bank and Bahrain International Bank, which have focused on international equities, particularly in the IT sector, have been hard hit. Both are receiving support from the central bank. A crucial test for Sheikh Ahmed will be the solution he negotiates for these institutions.
The domestic retail banks have performed better than the more internationally oriented institutions. Murad Ali Murad, chief executive of the Bank of Bahrain and Kuwait (BBK), says: “Those banks that have focused on the local market and regional corporate business have done very well. They are delivering higher profits for the first nine months of this year than in 2001. The Islamic banks, which have looked at real estate and other funds, have also performed well.”
Even though the banking sector has held its own with regional rivals, the record elsewhere has been less successful. Bahrain has lost its position as the transport hub and first choice among international business for a regional headquarters as Dubai’s development has gathered momentum.
Bahrain is now working hard to regain lost ground. Sheikh Hamad bin Isa Al-Khalifa, the head of state, has introduced wide-ranging democratic reforms since his succession in 1999. The parliament, elected on a franchise that includes women, has real powers to initiate legislation and hold ministers to account.
Efforts have been made to foster social equality by distributing resources more evenly between the poorer Shia majority and the ruling Sunni minority.
A more cohesive attempt has been made to persuade international businesses to base regional operations in Bahrain. “The aim is
to create a system that will enable international investors to complete their application, including payment, online in one visit,” says Jamal Al Hazeem, chief executive of the Economic Development Board.
The strategy is starting to bear fruit. Bahrain beat off a strong challenge from Dubai to host a Formula One grand prix, for at least six years, starting in October 2004. The building of the track for this, with a $150 million contribution from the Bahrain government, will stimulate infrastructure and hotel construction. At present Bahrain has only 2,500 of the estimated 15,000 top-quality hotel rooms needed to host such an event.
Visitors will find a city that lacks the glitz of Dubai but hosts most of the world’s leading financial institutions, which for 25 years have chosen Bahrain because of the quality of its regulation. That, though, is no longer enough to keep them there, even at a time of international concern about money laundering and terrorist financing.
Bahrain has responded by extending the powers of the central bank and examining ways of expanding the scale and scope of the financial sector. The bank has always been a vigilant regulator. It introduced a law against money laundering this year.
“We issued an anti-money-laundering law in January 2001 and have put renewed effort into this area since September 11. We have a policy committee and an enforcement committee. We are fully covered in this area,” says Sheikh Ahmed.
A bigger role The most significant development has been the decision to extend the central bank’s responsibilities from banking to all aspects of the financial sector, including the stock exchange and insurance. London law firm Freshfield, Bruckhaus, Deringer has helped in drafting the framework for this. Among the measures already introduced are the use of laptops and direct email communication to carry out more efficient regulation, as well as better staff training.
“This shows the BMA’s determination to have legal and regulatory standards that will continue to match international best practice,” says Sheikh Ahmed, who before becoming central bank governor was in charge of the Bahrain Stock Exchange.
Bahrain bankers welcome the move. “Having a single regulator, particularly one that is so well established, has a lot of advantages. It will give a lot of attention to such sectors as insurance and capital markets that need to be developed,” says BBK’s Murad.
The second strand of the new strategy was to identify and develop asset classes with high growth potential. Consultancy McKinsey has urged a focus on seven sectors: debt and equity markets, insurance, Islamic finance, corporate and private banking, and remote services.
“Our business will be to do a little of many things,” says Sheikh Ahmed. “McKinsey has identified these seven asset classes. I don’t believe that one will be enough. This requires us to set up a regulatory and supervisory model that will work for all these groups. A simple example is that 1,270 funds are registered in Bahrain but only 30 have set up full operations.”
Among the other initiatives, including those to promote Islamic banking, is a human resource development fund for training Bahrainis in banking and finance. There has also been expansion of the Bahrain Institute for Banking and Finance.
The confidence of local investors has been demonstrated by the announcement of the Bahrain Financial Harbour project, a private sector initiative that will offer facilities for banks and their support services.
Its success may depend on the outcome of the crucial battle between the Gulf states for the location of a genuinely regional capital market. Dubai set out its stall earlier this year with the announcement of the Dubai International Financial Centre. It hopes to create a capital market where Arab investors will place their money in local and international equities and bonds without having to use London and New York.
The prize could be enormous. Historically most Arab public-sector and private-sector money is recycled rapidly into western markets because of the lack of investment opportunities in the region. According to Brad Bourland, chief economist at Riyadh-based Saudi American Bank (Samba), Gulf individuals account for some $1.4 trillion of the $23.5 trillion held by the world’s high-net-worth individuals. Non-Gulf Arab private wealth amounts to an additional $150 billion.
“We estimate that there is about $700 billion in Saudi private wealth abroad, $266 billion from the UAE, $163 billion from Kuwait and $65 billion from the rest of the GCC. This is concentrated in the hands of some 200,000 individuals,” says Bourland.
Collapsing western markets, fear that the US will seize Arab assets without legitimate reason and low interest rates mean that Middle East investors are no longer automatically channelling their money to western markets. If even a small portion of these assets were invested through a regional market, the impact would be considerable.
The slow speed at which national markets in the Gulf have opened up and the nervousness about the region because of geopolitical uncertainties mean that it will take some time to create a liquid and dynamic market for regional and international bonds and equities. But the modernizations introduced by Bahrain’s central bank will ensure that it is well placed to compete.
