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Euromoney Country Risk

ECR – Bahrain: No viable political solution

The arrival of GCC troops in Bahrain has escalated the security situation in the country to a new level. Senior Bahrain opposition MP Abdul Jalil Khalil, quoted by Reuters, described the crackdown on protesters by Bahraini security forces as a "war of annihilation". The hard-line stance taken by the regime has raised questions about the possibility for the current rulers of Bahrain to reach any kind of agreement with the protesters. As a consequence, Bahrain fell by 5 places in the official Euromoney Country Risk Rankings this week to 41st in the table. This followed the 6.7 point drop witnessed since the protest movement began in February.

Should the protests force the al-Khalifas from power, it is unclear what form of interim government would take over. Unlike the Egyptian military, which refrained from opening fire on unarmed protesters, the Bahraini armed forces have already fired live rounds at protesters on several occasions, which could undermine their credibility in any interim arrangement.

As a result of their failure to engage in meaningful debate with the protesters, the al-Khalifas have been largely responsible for bringing about a political impasse they can ill-afford. “The more the Bahrainis use force against the protesters, the more likely it is that the situation will get out of control,” says Meir Javedanfar, Director of the Middle East Economic and Political Analysis Company.

The question now is whether the business environment in Bahrain is likely to remain volatile in the medium to long term. The danger is that the actions of the regime risk radicalising majority Shia opinion against the regime. “The demands of the moderate al-Wefaq party are still centred on constitutional reform rather than the removal of the ruling family,” says Anthony Skinner, Associate Director of Maplecroft, a political risk consultancy. “The arrival of Saudi troops brings with it the real risk of polarising opinion against the al-Khalifa royal family. Furthermore, by deploying forces in Bahrain, the Saudis themselves risk precipitating further domestic protests by the Shia population of the Eastern Province.”

Bahrain’s finances will deteriorate further

With no sovereign wealth fund of their own and external debt equivalent to 145% of forecast 2011 GDP, Bahrain is now dependent on the $20 billion aid package from the GCC that was announced earlier this week. Bahraini sovereign debt is now trading at similar spreads to that of Nigeria, according to Exotix, a frontier market brokerage. “Bahrain has the weakest finances of any of the Gulf states,” says Rachel Ziemba, a MENA economist at Roubini Global Economics. “It has relatively small reserves of oil and gas but remains heavily dependent on natural resource revenues. Additional spending on subsidies and reduced fiscal revenues as a result of the disruption means that its breakeven oil price has risen to around $100 dollars a barrel.”

Regional implications are extremely grave

ECR considers a further political risk downgrade of the Gulf region by our expert panel to be the likely consequence of the action by GCC forces. The crisis appears to have evolved from a manifestation of the youth-led secular protest movement witnessed in Tunisia and Egypt into a much more worrying escalation of the Shia-Sunni conflict that has plagued post-invasion Iraq and the Lebanon.

The presence of police from the UAE and troops and light armour from Saudi Arabia speaks of a refusal by the Sunni rulers of the Arabian Peninsular to countenance the installation of a Shia satellite state in the Gulf.

“The Saudis have seen Iranian influence rise in Iraq following the US invasion,” says Javedanfar. “They have seen the gains made by Hezbollah in Lebanon in recent years. Now they have decided that enough is enough.”

“The Saudis have watched the US throw Mubarak under a bus,” says Michael Moran, Executive Editor of Roubini. “They weren’t going to sit back and let the same happen to them. The deal struck during the 1991 Gulf War, under which the US would secure stability in the Gulf, is finished.”

The US has called on Saudi forces in Bahrain to exercise restraint. The recent visit of Robert Gates, US Secretary of Defence, to Riyadh was seen in some parts of the Middle East as the US giving its blessing to Saudi Arabia to intervene in Bahrain. “The US views is that the Saudis have overreacted,” continues Moran. “Washington considers what the Saudis have done as opening a window for Iran in an area they would otherwise have been unable to influence.”

Despite the short term stability that may be bought by the increased security presence in the region, questions remain over the wisdom of the strategy. “The Saudis are playing with fire,” says Javedanfar. “The repercussions of their actions will be felt for years to come.”



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