Bahrain's default risk has risen to its highest since the peak of political unrest in the country six months ago against a backdrop of concerns that tensions may reignite ahead of an election on Saturday.
The cost of insuring the country's debt against default rose to 328 basis points yesterday, according to five-year credit default swaps' data provided by National Bank of Abu Dhabi (NBAD). Dubai's credit default swap level was 435 basis points.
Increasing insurance costs will make it more challenging for Bahrain's government and companies to raise cash to ease the kingdom's deteriorating fiscal position. Like other countries, the kingdom's capital markets have been hit by Europe's sovereign debt crisis.
"As global investors become more nervous in general terms as a result of heightened concerns regarding sovereign default in the euro zone their risk appetite has clearly diminished, and the impact of this is felt the hardest among those entities that are at the lower end of the credit curve," said Chavan Bhogaita, the head of markets strategy at NBAD.
Standard Chartered wrote in a report this week that it saw "little value" in Bahraini bonds.
"Bahraini issuers, both sovereign and corporate, will find it difficult to tap international markets in the current environment," Philippe Dauba-Pantanacce and Victor Lohle wrote in the report.
The island was gripped by protests in February and March, in which more than 30 people were killed. The economy took a beating and since then the country's fiscal health has become increasingly perilous as foreign reserves have dwindled and banking and tourism activity declined.
The cost of insuring the country's debt had been falling after reaching a peak of 359 on March 15 at the height of the unrest.
Parliamentary elections are scheduled to take place on Saturday. The same day opposition supporters are planning to hold a mass demonstration in Manama.
Higher government spending in response to this year's unrest is likely to push the country's fiscal deficit to 6 per cent, Standard Chartered forecasts.
A small oil producer, the country has one of the highest break-even prices in the Gulf. The Institute of International Finance estimates the country needs an oil price of about US$72 per barrel to help to balance its budget.
The country's central bank has already trimmed its growth forecast for this year by 2 percentage points to 3 per cent. The IMF excluded the country from its update on the regional economy yesterday, citing uncertainties in the political situation.