Mazin Manna is chief executive of Citigroup Bahrain. He discusses prospects for Bahrain's banking sector and the outlook for corporate finance and capital markets
How optimistic are you about Bahrain's banking hub prospects?
Bahrain has been one of the main regional banking centres for many years and has key advantages allowing it to continue to play that role in future. Many diverse factors contribute to the creation of a reputable world-class financial centre like Bahrain. Using New York, London, Hong Kong, and Singapore as models, certain common characteristics emerge. The greater the number of these characteristics a financial hub possesses, the greater its chances of attracting and retaining world-class talent, firms and, in turn, capital and investment.
These characteristics include open and fair financial markets, a sound and fair tax regime, high quality, reliable and appropriate telecommunications infrastructure, free flow of capital and a convertible currency, large and sophisticated domestic markets or proximity to large markets, a skilled workforce/flexible labour laws, a fair, transparent, efficient legal and regulatory regime, and unwavering government support. The kingdom has many characteristics of a successful banking hub, a position diligently built over four decades. With this in mind and with upwards of 400 financial institutions represented here, it's difficult to change the view on Bahrain overnight. Bahrain has weathered the global financial crisis relatively unscathed, and while recent events caused a short-term spike in some key economic and market indicators, we have seen a quick return to more normalised levels. Credit default swap rates are back close to pre-crisis levels. Bahrain 2020 [bond] yields have also come off their highs. The currency did not come under any pressure and there was no noteworthy capital flight from the country. Banking sector liquidity levels continue to be high and banks well capitalised. As a result, while there may be some extra provisioning required down the line resulting from the slowdown in the first two quarters, we feel banks are well positioned to overcome extra provisioning needs.
How has corporate finance been affected by the unrest?
Unrest in parts of the region had some impact on activities earlier in the year in terms of increasing bond yields and, in some cases, lowering valuations. Since then, we have seen spreads tighten and with benchmark yields at historically low levels, we are seeing a return in a number of issuers to the market. So while there was a slowdown in debt capital markets issuance in the first few months of the year, we expect to see more activity over the next few weeks and months.
Crises also represent opportunities and we believe for those who have a long-term view and understand these markets well, this may be a buying opportunity for certain assets at attractive valuations. By and large, market liquidity levels remain high and the ability and willingness of banks to finance acquisitions continues.
In addition, some banks will need to beef up their liquidity levels to meet Basel III requirements and will therefore either need to dispose of assets or raise fresh equity to do so.
While regional unrest initially had an impact on corporate finance, we believe its impact is limited and we will see a return to normal activity levels in the last two quarters of 2011.
Are investors returning to capital markets?
We believe markets are open for Bahrain and Bahrain-based entities to tap markets, given the low benchmark yield environment and tightening spreads. It will be up to issuers though to weigh the possibility of a widening in benchmark yields going forward versus a potential further tightening in spreads.
In other words, the issue is not lack of investor interest in issuers from Bahrain or the region. It boils down to the willingness of issuers to pay yields reflecting investor sentiment and their view of a borrower's creditworthiness.
That in turn depends on how immediate issuers' needs are. If an issuer has maturing debts to re-finance, and has little financial flexibility, it may have to pay up to tap the market. Others may choose to wait for a more opportune time to tap the market, at more competitive rates, or tap alternative sources of funding.
While we saw a widening of spreads for some issuers at the beginning of 2011, we are witnessing a tightening of spreads more recently and a number of investors as a result, tapping the markets in the past few weeks. For Bahrain, the economic fundamentals have not meaningfully changed.
The government is prudent in managing its debt stock and the country could very well register a budget surplus this year if oil prices continue at or around current levels.
However, recent rating agency downgrades have affected the borrowing costs of the government and borrowers in Bahrain in general.
© The Gulf 2011
