The Bahrain Bourse in Manama. Bahrain has been slow to implement policy changes and attract foreign investment. Image Credit: Bloomberg

Dubai: The bond market is reflecting the diverging fortunes of Bahrain and Oman, the most vulnerable Gulf economies.

The risk premium that investors demand to hold Bahrain’s bonds due 2028 over Oman’s debt of similar maturity has shrunk to about 40 basis points from an all-time high of 346 basis points in June. While Gulf Cooperation Council allies came to Bahrain’s rescue to ward off any default, there’s no guarantee of support for Oman should it need it.

“Oman is in a better position than Bahrain in terms of debt levels and availability of fiscal and external reserves,” said Krisjanis Krustins, a Hong Kong-based director at Fitch Ratings. “But the gap is narrowing and the prospects for GCC support to Oman are less immediate.”

Bahraini bonds are the best performers in the Gulf this year, while Oman’s securities have trailed all of its peers. One reason is that Bahrain will follow Oman and be included in JPMorgan Chase & Co emerging-market bond indexes starting end-January and will benefit from inflows.

Both nations, whose bonds are rated junk, have been relatively slow to implement reforms after the collapse in oil prices. But Bahrain, which enjoys a close relationship with neighbouring Saudi Arabia, was pledged $10 billion (Dh36.73 billion) in aid by Gulf countries, on the condition it tightens its belt.

“We once considered Bahrain alongside Oman as the most-vulnerable country in the region,” said Marshall Stocker, a Boston-based portfolio manager at Eaton Vance Corp. “But just within the last several weeks Bahrain’s leadership has undertaken a fairly radical effort to reform so as to bring fiscal problems under control.”

Uncertain future

Oman has remained neutral in regional disputes, from the conflict in Yemen to the Saudi-led embargo on Qatar. Unlike Bahrain.

What’s weighing further on Oman is that it faces “an uncertain, forthcoming generational shift in leadership, and poor transparency,” said Stocker.

Sultan Qaboos Bin Said, who has ruled Oman since 1970, has yet to name a successor.