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Bahrain is facing its worst unrest since the 1990s and downgrades by rating agencies, but the Gulf Arab kingdom's central bank governor said on Thursday he hopes to go forward with a planned $1 bln bond issue.
Rasheed al-Maraj also said he had not seen major capital flight after protesters emboldened by popular uprisings in Tunisia and Egypt took to the streets last week. Seven people were killed as security forces clamped down.
"So far there is no indication of a major capital flight from the island," Maraj told Reuters.
Major capital outflows could put the country's currency peg to the U.S. dollar under pressure and become a challenge for the central bank, whose net foreign assets are at nearly $5 bln. The small non-OPEC crude producer's central bank said on Sunday the banking system was working normally and promised all support to facilitate bank operations in the country, where nearly $10 bln in mutual funds is parked.
Before Shi'ite-led protests erupted, the Sunni government had planned to issue debt by the end of March to cover a rising fiscal deficit spurred by higher expenditures on social items, partly to contain public anger.
"The plan is still on," Maraj said of the bond. "I think we need to time it in such a way that we can access the market with a reasonable level of cost of borrowing."
However, the turmoil that has also spread to Libya sent costs of insuring debt up across the Gulf, while yields on government bonds rose and stock markets in the world's top oil exporting region suffered.
Moreover, Standard & Poor's downgraded the sovereign rating of Bahrain, a regional financial centre, by one notch to A minus this week over concerns that the political unrest will persist.
Moody's put Bahrain on review for possible downgrade, while Fitch has warned it could cut the sovereign rating.
Bahrain's five-year credit default swaps have almost doubled since the unrest gripped much of the Arab world in January to reach a 20-month peak of 317 points on Wednesday, Markit data showed.
SPENDING RISE
The yield on Bahrain's Islamic bond, due in 2014, was at 4.0% on Thursday, near its highest levels since last March, while currency forwards implied roughly 0.5% weakening in the dinar over one year.
Bahrain planned to spend some $14 bln over the next two years before the king ordered estimated at least $700 mln more in social spending before protests began.
But robust oil prices over $100 a barrel, surging on the regional jitters, are seen helping the stretched budget.
"There will be some increase in spending," Maraj said. "On the other side, we're seeing higher revenues as a result of higher oil prices. This could offset some of the extra spending that we are doing."
Maraj also said the central bank would maintain its interest rate policy for now and that it still expected Bahrain's economy to grow by 4-5% this year, adding that it was premature to estimate the impact of the unrest.
"We will maintain our interest rate policy for the time being. I don't see that we have very much room to go further down," he said.
The central bank's repo rate, which it uses to inject liquidity into the system via purchases of deposit certificates or government bonds, has stood at 2.25% since September 2009. The one-week deposit rate is at 0.5%.
The central bank needs to keep its rates near U.S. benchmarks to avoid pressures on the peg, set at 0.376 to the dollar.
Analysts polled by Reuters in December expected Bahrain's economy, whose financial sector is slowly recovering from impacts of a regional property crash, to grow by 4.2% this year, after an estimated 3.7% rise in 2010.
