Sep 12 2011 |
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Economic performance: In focus: Bahrain's slipping role
Bahrain's government may have gained control of the streets after protests shook the small Gulf island kingdom earlier this year, but the financial costs of the unrest continue to mount. The country's aspirations of maintaining its role as the Gulf's pre-eminent financial centre suffered another blow in August, as reports emerged that a French bank, Credit Agricole, will quit the country and concentrate its operations in Dubai.
During the height of Bahrain's unrest in February and March, major international banks shifted staff to Dubai but did not close down their operations. The move by Credit Agricole, which was granted a licence to operate in Bahrain in 2008, may not herald a sudden rush for the exit at other banks. It is, however, a symptom of the ongoing decline of Bahrain's role as a regional financial centre.
Central Bank of Bahrain ( CBB ) statistics listed 409 financial institutions in the country as of July 2011, including 134 banks. Most of these are wholesale banks that operate offshore in providing project finance for infrastructure and construction programmes in the region. The financial sector accounted for around 25% of Bahrain's real GDP in 2010, more than twice as large a contribution to the economy as oil, hence the importance the government attaches to maintaining a positive image for the country as a finance hub.
Bahrain has a relatively transparent regulator in the CBB , although there have been criticisms that it acted slowly to prevent the bankruptcy of The International Banking Corporation (TIBC), a small Bahraini investment bank linked to the Algosaibi bankruptcy scandal. Linked to the same scandal, and surely a deterrent to expatriates living in the country, several US and British bankers associated with TIBC had their passports withdrawn and were detained in the country.
Standard & Poor's (S&P) and Fitch Ratings, two of the major international ratings agencies, rate Bahraini sovereign debt at BBB, only two notches higher than junk. In July S&P put its rating on negative outlook, implying a potential further downgrade in the medium term. Bahrain's deteriorating sovereign rating has led to downgrades of several domestic banks and insurers, driving up the cost of wholesale funding for these firms.
In addition to French financiers, foreign funds are also leaving the country. Foreign assets and liabilities of the Bahraini banking system both fell by around 12% in the first seven months of this year. The CBB 's holdings of foreign exchange fell by a similar percentage over the same period, although it denied that it had moved to support the Bahraini dinar.
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