February 14, 2011 8:56 pm. By Robin Wigglesworth and Simeon Kerr
Jasmine may be the scent sweeping across parts of the Arab world, but tear gas was the smell that permeated parts of Bahrain today.
A “day of rage” planned by Bahraini youths has resulted in clashes between demonstrators and security forces. As the day went on, the confrontations grew increasingly frequent and violent, with groups of as many as hundreds seen challenging lines of riot police. Despite a government promise to allow peaceful protests, riot police have used rubber bullets and tear gas to break up demonstrators.
It is the first significant public protest in the oil-rich Gulf since Tunisia and Egyptousted their presidents through widespread revolt.
The Gulf Cooperation Council, a loose bloc of Arab peninsula states, is arguably the world’s richest country club, with over a trillion dollars stashed away in foreign reserves and almost half the planet’s proven oil reserves still underground. This wealth has bought autocratic rulers domestic support and helped insulate the bloc from the current wave of Arab unrest.
However, Bahrain, the smallest of the GCC countries, is starting to look like the odd one out, due to its strained government finances and unique demographic makeup.
Unlike the rest of the Gulf, Bahrain is a Shia-majority country ruled by a Sunni royal family. The Shia, and some Sunni liberals, have for decades complained about limited rights, discrimination and heavy-handed rule. While public protests are exceedingly rare in the Gulf, they are have happened sporadically in Bahrain.
At the same time, Bahrain cannot boast the abundant hydrocarbons of its neighbours. Saudi Arabia produced an estimated 8.5m barrels of oil last year, the United Arab Emirates 2.4m barrels and Kuwait 2.3m barrels, but Bahrain only eked out 200,000 barrels of black gold, according to the IMF.
While Bahrain’s economy is one of the most diversified in the region, the government still depends on its modest oil exports for much of its revenue – and has gradually become hooked on higher prices.
The oil price needed to balance the government budget has climbed from about $30 per barrel in 2004 to almost $80 a barrel last year, according to Moody’s. This is one of the highest budgetary “break-even” points in the region.
Coupled with an already high budget deficit, this resulted in Bahrain suffering the ignominy of a rare credit rating downgrade by Moody’s last year, to A3, the lowest level in the Gulf.
Budgetary stresses are now set to increase further. Ahead of the “day of rage” the government has recently unveiled a raft of measures, such as relaxing the media laws and increased food subsidies and social welfare payments – including a BD1,000 ($2,650) cash payment to all local families, announced only hours before Mubarak was forced to step down in Egypt.
Higher oil prices have boosted government revenue, and will help pay for this largesse. However, the spending plans will still increase Bahrain’s expected budget deficit this year by 0.8 percentage point to 2.8 per cent of gross domestic product, according to Barclays Capital.
Bahrain has a relatively low debt burden, but heightened concerns over political risks across the Arab world have caused the cost of Bahraini credit-default swaps to climb to 245 basis points – among the highest in the region.
For now, Bahrain is unlikely to see any significant political and financial upheaval. Oil prices remain high, the Al Khalifa royal family remains popular with most Sunnis, and has in the past proven adept at dealing with Shia strife with a mix of carrots and sticks.
Nonetheless, Bahrain is uniquely exposed should oil prices soften, given its existing budget deficit and modest exports. And with two Middle East autocrats overthrown in little over a month, regional analysts are now starting to ponder the previously unthinkable. As Barclays Capital noted in a recent report,
The announcements of street protests, concessions by the government at the cost of a deteriorating fiscal position and simmering political tensions have created a backdrop that has clearly caused investors to view Bahrain with increased caution. Given the heightened focus on political and fiscal risks across the region, this is not entirely surprising.