The skyline of Manama at night. Bahrain may become the first GCC member to require oil prices above $100 a barrel to balance its budget. Image Credit: Reuters

Manama: Bahrain sold $750 million in seven-year Islamic bonds, becoming the first Arab country affected by the Arab Spring this year to tap global bond markets.

The sale was the first in more than a year for Bahrain. Bahrain sold the sukuk at a yield of 6.273 per cent.

Scarce sovereign sales in the region helped investors overlook Bahrain's slowing economic growth, said Sergey Dergachev, at Union Investment Privatfonds. Islamic bonds yielded 75 basis points, or 0.75 of a percentage point, less than the average yield on non-Sharia compliant bonds in the region yesterday, according to HSBC/Nasdaq Dubai bond indexes.

"It's like a pearl, such an issue, since it's very unlikely to see the issuer very frequently on the market," Dergachev said in an e-mailed response to questions, adding that he bought the sukuk. "It can be expected that Saudi Arabia will be there to help Bahrain should it face some financing pressures."

While Bahrain's economic growth may slow to 1.5 per cent in 2011 from 4 per cent a year earlier, that's still faster than Tunisia and Egypt, International Monetary Fund data show. The price Bahrain paid was "generous," Malek Khodr Temsah, assistant vice-president of treasury and investment at Manama-based Albaraka Banking Group BSC, said in an e-mailed answer to questions. "We felt the issuer had left some cash on the table for investors."

BNP Paribas, Citigroup and Standard Chartered Bank were hired to manage the sale. Bahrain will use the money to finance a budget deficit of about 5 per cent of gross domestic product, Central Bank Governor Rashid Al Maraj said in a September interview in Washington.

Bahrain may become the first GCC member to require oil prices above $100 a barrel to balance its budget, HSBC Holdings said in a quarterly regional report on October 6.

"Their fiscal position is on a knife's edge," Gabriel Sterne, London-based senior economist at Exotix Holdings, said in an e-mailed response to questions.

"The fiscal outlook is more important than Saudi support, which itself can only go up to a point."

Brent crude prices, a benchmark for many Middle Eastern crudes, was trading at about $112 a barrel in London.

Sovereign Issuers

Bahrain is among three Arab sovereign issuers that have Islamic bonds, along with Dubai and Ras Al Khaimah. The extra yield investors demand to hold Dubai's 6.396 per cent sukuk maturing in November 2014 over Bahrain's 6.247 per cent Sharia-compliant security due June 2014 widened 46 basis points so far this month to 255 yesterday, according to Bloomberg prices.

The island kingdom, which is rated three levels above junk grade at Moody's Investors Service, saw its default risk more than double this year to 379, according to data provider CMA.