Bahrain: Shia unrest to drive terrorism and protest risks

04 April 2018

Continued social unrest raises the risk of business interruption and terrorism in Bahrain. Sovereign credit risks are elevated, as low oil prices have rapidly increased the country’s debt burden. Power sector assets are potential targets for Shia militants and state-sponsored cyber-attacks.

Security Environment

Since the protests of 2011, relations between Bahrain’s ruling Sunni royal family and the majority Shi’ite population have deteriorated, increasing the risk of both civil unrest and terrorism. Support from neighbouring Saudi Arabia ensures that the monarchy is unlikely to be overthrown. However, violent protests in urban centres such as Manama and Sitra may disrupt supply chains. Security personnel have used shotgun pellets to disperse protesters, and bystanders face a high risk of injury or detention.

While companies are less likely to be attacked than security forces, Shia militant activity is likely to increase throughout 2018 in response to the government’s hard-line response to dissent. Bahrain’s most strategically important power stations are located at Al Hidd and near Jaww, areas that are less likely to be directly affected by Shia militancy.

However, in November 2017, an oil pipeline 10 miles southwest of Manama was damaged by an improvised explosive device that halted the oil flow for several hours. The Bahraini government blamed the attack on Iran-backed militants. Since June 2017, Bahrain and a number of other Gulf States have enforced a diplomatic and economic blockage of Qatar. While tensions persist, an escalation into direct military confrontation remains unlikely.

Companies operating in Bahrain’s energy sector may be targeted by cyber-attacks on their industrial control systems. In August 2017, the state-owned oil firm in neighbouring Saudi Arabia, Saudi Aramco, was targeted by a malicious cyber-attack that was believed to have been intended to trigger an explosion. While there have not been any high-profile attacks on Bahrain’s power sector in recent years, it remains a potential target, particularly for hostile state-sponsored cyber-attacks.

Trading Environment

Low global energy prices have weakened Bahrain’s credit profile, while GDP growth is estimated to slow marginally from 3.3% in 2017 to 3.1% in 2018-19. Government debt-to-GDP has roughly doubled in the past 4 years and is forecasted to continue rising, reaching over 90% of GDP in 2019.

The threat of unrest in Bahrain has limited the ability to rapidly cut expenditure. In March 2018, Fitch Ratings downgraded Bahrain’s credit rating from BB+ to BB- with a stable outlook, citing its preliminary 2017 budget deficit of over 11% of GDP. Bahrain’s fiscal break-even price of oil is close to USD 100 per barrel, yet the price of Brent crude in 2018 and 2019 is forecasted to average just over half this figure.

While Bahrain’s fiscal position will remain weak in the medium-term, the risk of debt default is mitigated by significant support from Gulf allies. Bahrain is likely to seek additional financial assistance from its Gulf neighbours in the coming months. Despite Bahrain’s broader economic challenges, the power sector is set to benefit from robust consumption, which is forecasted to expand by an annual average of 5.7% between 2018 and 2026. This will be primarily driven by increased demand from the aluminium and petrochemical sectors.

Investment Environment

The Bahraini government is keen to encourage investment in nonhydrocarbons sectors. While only around 6MW of wind and solar capacity had been installed by January 2018, Bahrain aims for renewables to comprise 5% of the power mix by 2025. The risk of expropriation is low. Land may be seized by the state for development, although owners will likely receive adequate compensation. Having already largely privatised the power and water sectors, the government is likely to pursue economic liberalisation in the coming years.

Contractual and legal risks are moderate. The legal environment has been strengthened by the inauguration of 2 specialised commercial courts in September 2016. Whilst this should allow cases to be resolved more swiftly, the judiciary is not entirely independent as judges are royally appointed. The courts may be reluctant to penalise the ruling family, state-owned firms and entities linked to Saudi Arabia. Businesses perceived to be supportive of Iran or Qatar are also likely to face adverse rulings in the legal system.

Bahrain: Shia unrest to drive terrorism and protest risks

In this month's Risk Outlook, we also provide a detailed forward looking assessment of developments within the security, trading and investment environments for Ukraine, DRC, Cuba and Guyana all of which have been the subject of recent enquiries from JLT's client base.

CPS April 2018

The monthly Risk Outlook is supported by JLT’s proprietary country risk rating tool, World Risk Review (WRR) which provides risk ratings across nine insurable perils for 197 countries. The country risk ratings are generated by a proprietary, algorithm-based modelling system incorporating over 200 international sources of data. 

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For further information, please contact Eleanor Smith, Political Risk Analyst on +44 (0)121 626 7837 or email eleanor_smith@jltgroup.com

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