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Capital flight threatens Bahrain, FX peg safe for now

Capital flight threatens Bahrain, FX peg safe for now

Clients move money from Bahraini banks; Currency under pressure but immediate risk to peg small; Other Gulf countries could support Bahrain if needed; But stock exchange, bank closures set worrying precedent.

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March 17, 2011 10:58 by



DOWNGRADES

Bahrain, home to a $66 billion Islamic finance industry, has faced several downgrades by debt rating agencies since protests started in February, and the cost of insuring its sovereign debt has hit 20-month highs.

Fitch Ratings on Tuesday slashed its sovereign credit rating of Bahrain, which has postponed a $1 billion government bond issue, by two notches to BBB, citing political risks.

The scale of capital outflows from the smallest Gulf economy of 1.2 million people is hard to estimate because of a lack of timely data.

The experience of Egypt is modestly encouraging for Bahrain; when commercial banks reopened in Egypt in February after political unrest, the central bank was prepared for an immediate outflow of $8-10 billion from Egyptian pounds, but only about $1.7 billion was transferred out on the first day and about $1 billion on each of the next two days.

But anecdotal evidence suggest substantial sums have already been moved out of Bahrain, whose banks hold assets of about $200 billion.

One banking source, speaking on condition of anonymity, estimated 15 to 20 percent of deposits and investments of high-level Bahraini citizens in private banks had been withdrawn over the past few days.

“A lot of clients are pulling out their money, they’re moving it to London, Europe, wherever. It’s not a question of taxes, but of access to their money,” another banker from the region said.

“One client pulled out $30 million in a matter of days. With banks closed, movements are limited — we will see the rush when they reopen.”

While nearby Qatar and the United Arab Emirates could receive the fund flows, as they have so far escaped political protests and have small local populations pampered by petrodollars, some bankers said they would just be temporary stops for the funds.

“In at least two or three banks, the bulk of the clients have shifted their money abroad,” a banker said.

“Some are moving it through the Emirates, then on to other centres. It makes the transaction less remarkable, as moving a big chunk of money from Bahrain to, say, London would raise eyebrows in this climate.”

Should the political crisis drag on, even long-term investors may start to consider relocating their capital, seriously undermining Bahrain’s status as a financial hub where foreign claims on banks amount to 92 percent of gross domestic product.

“The type of money Bahrain was receiving is long-term money,” said John Sfakianakis, chief economist at Banque Saudi Fransi. “If uncertainty continues over several months and people take out a lot of money, it will have a deep negative impact.”



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