In a move that underscores its resilience and ambition, Bahrain is preparing to issue $2-3 billion in international bonds and sukuk in 2025. This follows the successful $1 billion sukuk issuance by state-owned Bapco Energies earlier this month, highlighting the nation’s commitment to solidifying its position as a leader in the Islamic finance sector.
Economic Context and Challenges
Bahrain’s economy, like many others in the Gulf Cooperation Council (GCC), relies heavily on hydrocarbon revenues. With global oil prices continuing to play a critical role in shaping fiscal strategies, the kingdom faces both opportunities and challenges in its pursuit of financial stability. A tightening of global liquidity conditions or a significant drop in oil prices could pose risks to its ability to raise funds through sovereign issuances. These factors mirror the difficulties Bahrain experienced in March 2020 when the government struggled to refinance its maturing eurobond due to oil price volatility triggered by the COVID-19 pandemic. At that time, Bahrain had to secure a $1 billion loan to meet its repayment obligations, underscoring the challenges posed by unpredictable external factors.
The Current Debt Landscape
According to Moody’s, Bahrain’s external borrowing, including private placements and syndicated loans, reached $5.5 billion in 2023 and $3.6 billion in 2024. In 2025, Bahrain faces $2.4 billion in external bonds and sukuk maturing, compared to $2 billion in 2024 and $2.5 billion in 2023. The relatively consistent figures reflect Bahrain’s proactive approach to managing its debt profile.
Notably, total external repayments from the broader public sector are expected to be lower in 2025 compared to recent years. This is partly due to Bapco Energies’ $1.6 billion repayment in 2024, which reduced the overall burden. Nevertheless, concerns remain about Bahrain’s debt-to-GDP ratio, which is projected to exceed 135% by 2025. Sovereign issuance volumes are expected to range between $2 billion and $2.5 billion, representing approximately 5-7% of GDP. These figures, provided by S&P Global Ratings, align closely with Bahrain’s issuance in 2024, which totaled $3.25 billion, including contributions from the central bank.
The Role of Sukuk in Bahrain’s Financial Strategy
Bahrain has long been a pioneer in the Islamic finance sector, and sukuk issuance remains a cornerstone of its financial strategy. Sukuk, often referred to as Sharia-compliant bonds, are particularly attractive to investors seeking ethical and religiously aligned financial instruments. Bahrain’s early adoption of sukuk dates back to 2001 when the Central Bank of Bahrain issued the first US-dollar-denominated ijara sukuk valued at $100 million. This landmark issuance established Bahrain as a leader in the global sukuk market.
The kingdom’s recent sukuk and bond issuance of $2 billion earlier this year attracted significant investor interest, with orders exceeding $14 billion. The issuance included a $1 billion sukuk with a 6% profit rate for seven years and $1 billion in bonds with a 7.5% interest rate for twelve years. Such strong demand highlights investor confidence in Bahrain’s creditworthiness and its strategic approach to debt management.
Retail Banking and Sporadic Issuances
While Bahrain’s sovereign debt strategy garners attention, the retail banking sector plays a quieter but crucial role in the nation’s financial ecosystem. External debt within the retail banking system has grown in recent years but remains predominantly funded by deposits from GCC banks and non-bank entities. This reliance on regional capital sources provides a measure of stability but also limits the scope for aggressive external debt issuance.
As noted by Dr. Mohamed Damak, managing director and sector lead for financial institutions in the Middle East and Africa, retail bank issuances in Bahrain are expected to remain sporadic and opportunistic. This cautious approach was evident earlier this month when Bahrain-listed Bank ABC pulled back from a $400 million Additional Tier 1 (AT1) issuance due to unfavorable market conditions. Advisors suggest that lower-rated banks in emerging markets are likely to adopt a “wait and see” approach, holding off on issuances until global treasury yields stabilize.
Oil Market Dynamics and Regional Implications
The performance of global oil markets remains a critical factor in Bahrain’s economic outlook. Oil prices directly influence the fiscal health of oil-dependent economies, and any significant fluctuation can have cascading effects on debt issuance, investor confidence, and overall economic stability.
Recent remarks by U.S. President Donald Trump at the World Economic Forum in Davos have added another layer of complexity to the oil market. Trump’s assertion that Saudi Arabia and OPEC should reduce oil prices to help bring an end to the war in Ukraine has sparked debates about the geopolitical implications of such a move. For Bahrain, which operates within the broader GCC economic framework, these developments are closely watched, as they could shape regional economic policies and strategies.
Economic Diversification and Growth Prospects
Bahrain’s economy is on a steady recovery path, with GDP growth projected to accelerate to 3.2% in 2025, matching pre-pandemic levels. This recovery is underpinned by several factors, including monetary easing, lower inflation, and increased public and private investment. Upgrades to Bahrain’s refinery infrastructure are expected to boost goods exports, while the government’s focus on economic diversification continues to yield positive results.
Key sectors driving growth include financial services, manufacturing, and tourism. The financial sector, in particular, has emerged as a significant contributor to Bahrain’s economy, accounting for 17.8% of GDP in 2023. The manufacturing sector follows closely at 13.6%, reflecting the success of Bahrain’s efforts to expand its industrial base.
Strategic Reforms and International Collaborations
Bahrain’s government has implemented a series of reforms aimed at improving the business environment, attracting foreign investment, and creating job opportunities for its citizens. These reforms are part of a broader strategy to position Bahrain as a gateway to the Gulf region, leveraging its strategic location and cost-competitiveness.
Recent initiatives include a landmark transaction involving the Saudi Bahrain Pipeline Company (SBPC), in which BlackRock’s Diversified Infrastructure business acquired a minority stake. This deal marks Bahrain’s first asset monetization by Bapco Energies and reflects the nation’s commitment to innovative financial strategies. Additionally, BlackRock and Bapco Energies have signed a memorandum of understanding to explore future collaborations on infrastructure and decarbonization projects in Bahrain.
Looking Ahead: Opportunities and Risks
As Bahrain prepares for its $2-3 billion international bonds and sukuk issuance in 2025, it faces a complex landscape of opportunities and risks. The kingdom’s ability to successfully navigate this terrain will depend on several factors, including global economic conditions, oil price stability, and regional cooperation.
While challenges such as high debt levels and fiscal pressures persist, Bahrain’s proactive approach to financial management and its commitment to economic diversification provide a strong foundation for future growth. The kingdom’s focus on leveraging its strengths in Islamic finance, attracting foreign investment, and fostering regional partnerships underscores its determination to build a sustainable and resilient economy.
Conclusion
Bahrain’s anticipated bond and sukuk issuance in 2025 represents more than just a financial transaction; it is a testament to the kingdom’s resilience, adaptability, and vision for the future. By balancing fiscal prudence with strategic innovation, Bahrain is charting a path toward long-term economic stability and growth. As the world watches, the kingdom’s efforts to navigate global uncertainties and seize emerging opportunities will serve as a model for other economies in the region and beyond.
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Photo source: Google
By: Montel Kamau
Serrari Financial Analyst
27th January, 2025
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