Home Feature The cost of a heavy hand


The cost of a heavy hand

Manama’s reputation stained by blood in the streets

by Executive Editors

Bahrain is known more for its sleek steel and glass skyscrapers of high finance than the unpaved alleys of the disenfranchised tucked behind them. Indeed, the kingdom has worked hard to polish this veneer in recent years with a glossy international advertising campaign luring investors to “business friendly Bahrain.” But rosy adjectives were the first victims of the state security services’ repeated attempts to put down peaceful protests last month with truncheons, tear gas, rubber bullets and live ammunition, which left more than half a dozen dead and hundreds injured. 

While economic incentives such as the possibility of 100 percent foreign ownership of businesses, low taxes and easy access to Saudi Arabia and other Gulf markets are certainly draws for foreign investors, blood and tanks on the streets of Manama are not.

“If this [crisis] carries on, I’m sure it will have a more lasting effect,” said Salman Shaikh, the director of the Brookings Doha Center. “Right now, what I can say is that investor confidence is a little bit shaky.”

A diversification drive’s fender bender

Before the current turmoil, Bahrain had done an impressive job at putting out the right signals to foreign investors. In the 2011 Index of Economic Freedom published by the Heritage Foundation the country was ranked as the freest economy in the Middle East and 10th freest in the world. The International Finance Corporation ranked Bahrain as the 28th easiest place in the world to do business, putting the country behind only Saudi Arabia in the region and well ahead of the United Arab Emirates.

Bahrain’s rulers have long recognized that building a competitive business environment was necessary to diversify the government’s revenues away from hydrocarbon dependence and the economy away from relying on public spending. The public sector already employs some 25 percent of the workforce and is simply unable to absorb the 100,000 new jobseekers projected to enter the labor market over the next decade. This is coupled with the fact that at current extraction rates Bahrain’s oil reserves will be depleted in less than 20 years and oil production, refining and processing currently account for some 28 percent of gross domestic product.

The government has thus been actively promoting banking and finance as growth sectors and today they make up about a quarter of the economy. Unrest in Bahrain, however, creates doubt regarding the country’s stability; threatening its reputation and in turn its future as a destination for international capital and status as a financial center. As perhaps a worrying sign of things to come, the decision to cancel the annual Formula One season opener scheduled for March 13 is not just a blot on the country’s prestige; as major advertising and tourism draw its cancellation is anticipated to lose Bahrain $600 million in total revenue, according to the Abu Dhabi newspaper The National.

How blood makes markets queasy

The barbarism of Bahraini authorities seems to have directly contributed to the consternation the country is earning recently on international financial markets.

In the early hours of February 17, riot police descended on the Pearl roundabout where thousands of protesters were sleeping in a make-shift encampment; reports regarding the ensuing onslaught vary, but what is clear is that at least a handful were killed and hundreds were injured, with the authorities the next day again firing live ammunition into the funeral processions of those killed the night before, killing one and injuring more. Financial markets reacted swiftly: the cost of insuring Bahrain’s debt jumped 19 percent the day following the assault on the Pearl roundabout as the country’s five-year credit default swap spread hit an 18 month high of 310 basis points, according to Reuters. Three days later Standard and Poor’s (S&P) lowered its long and short-term credit ratings on Bahrain, its central bank, its Mumtalakat sovereign wealth fund, Ahli United Bank — Bahrain’s largest bank by market cap at $3.6 billion at end-February — and BMI Bank. S&P also issued a “CreditWatch negative” warning of a possible future downgrade for Bahrain’s Baraka Banking Group. Moody’s, which downgraded the kingdom’s sovereign rating last year, also announced it was concerned about the ongoing turmoil and was observing the situation closely. Fitch Ratings warned it may downgrade Bahrain’s credit ratings in the next few months if anti-government protests escalate.

In response, Central Bank Governor Rasheed al-Maraj publicly offered words of reassurance: “All financial transactions are at the normal level and the dinar continues to trade at the same level,” he said, adding that the monetary authority would provide banks all necessary support to facilitate banking operations.

“It is normal following any political or economic development that the credit rating agencies would review the ratings,” Maraj said. “However, we believe that the economic fundamentals of the kingdom of Bahrain remain strong and that the short-term economic and political developments should not entirely reflect on the review.” The Bahraini stock exchange, for its part, seemed to mirror Maraj’s sentiment — the market took some relatively minor hits as the protests began but as Executive went to print it appeared to have stabilized.

Root of the unrest

The principal source of instability in Bahrain is rooted in the country’s sectarian and socio-economic makeup: in a population of some 500,000 Bahrainis (not including the more than 200,000 expat workers also residing in the country), roughly seven in 10 are Shia Muslim, yet Bahrain is ruled by the Sunni al-Khalifa family and Sunnis have much greater affluence and influence in the country.

“If you compare the Sunni villages and the Shia villages, you will see how Shia villages are ignored,” says Nazeeha Saeed, a Bahraini journalist working for France 24 and Radio Monte Carlo. 

Bahrain’s Shia community have long felt politically and economically marginalized, unable to play any significant role in governance and regularly denied opportunities for professional advancement in both the public and private sector. For the Shia, such inequalities bring up questions of racism, but, Saeed says “[the Shia] don’t hate the Sunnis for that, they hate the government for that.”

Supporters of the protest movement say that Bahrain’s wealth has not been spread around evenly and that disparities in income appear across the country. “The middle class has been disappearing in Bahrain and the gap between the poor and the rich has been increasing,” says Amal Jaffar, a marketing executive in Manama.

Attempting to assuage resentment over economic disparities and dissuade protesters from taking to the street, the Bahraini monarchy announced in the week leading up to the first protest, on February 14, that it would hand out $2,600 to every Bahraini family as a gift.

The Bahraini government has been accused by protesters and observers of fueling divisions along sectarian lines, by portraying the mostly Shia protesters as a fifth column, loyal not to Bahrain but to Iran. “This is what the government is trying to tell the whole world and [to] make it happen, actually,” says Saeed. After Bahraini forces stormed the Pearl roundabout on February 17, the government defended their actions by claiming that the protesters were armed supporters of Hezbollah. These allegations were not corroborated by any independent sources.

A different tomorrow?

Following the failure of the heavy-handed crackdown, the government seems to have softened its stance, committing to talks with opposition leaders, allowing protestors to encamp again at Pearl roundabout, releasing dozens of political prisoners and pardoning Hassan Mushaima, the exiled leader of the Shia Haq opposition movement. As Executive went to print, questions over whether the government would make a genuine effort to reach a compromise remained unanswered. To some, the unprecedented protests in themselves signify that Bahrain is a changed country. “We [Brookings] think that Bahrain has already changed,” says Shaikh. “The question will be how much will this change the nature of the entire culture and the role of the ruling family?”

However the socio-political situation is addressed, whether “business friendly” Bahrain can repair the damage to its reputation is perhaps of equal, if not greater concern in the long run. Protracted negotiations over constitutional reform and accompanying demonstrations would undoubtedly wear on investor confidence, leading to an exit of foreign capital. This in turn would send the government’s economic diversification successes into regression — meaning a contraction of the private sector and increased unemployment — and an increase in Bahrain’s dependence on its hydrocarbon resources which, barring new finds, will run dry within the foreseeable future.

Less revenue would limit the government’s ability to fund its generous welfare programs and employ its expansive public service, introducing new fuel to the public’s discontent. Though both the United States — which bases it navy’s Fifth Fleet in Bahrain — and neighboring Saudi Arabia would likely step in to cover any shortfall in state funding, the increased influence of either of these countries over this island kingdom would be unlikely to sit well with the majority of Bahrainis.  

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Executive Editors

Executive Editors are the collective voice of the magazine. Stories written by Executive Editors are the culmination of discussions, brainstorming, research and information-gathering by our editorial team. Over decades, our editorial team has applied a blend of seasoned expertise and a discerning eye to bring you insightful and engaging and substantive reads that eschew sensationalism.
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