A setback for business-friendly Bahrain

By Michael Birnbaum
Washington Post Foreign Service
Monday, February 28, 2011; 10:05 PM

MANAMA, BAHRAIN - Two weeks ago, Bahraini business leaders touched down in Phoenix to push more trade between the Persian Gulf monarchy and the Arizona city twice its size. The same day they met with the mayor, demonstrations erupted at home and one protester was killed.

The Bahrainis signed a trade agreement, but they cut the trip short and jetted home. The unrest that has convulsed the island nation for two weeks has shaken investors and damaged Bahrain's efforts to present itself as the most business-friendly country in the gulf, analysts say.

Top Bahraini officials said that they were confident the country will ride out the storm and that they had not seen investors pulling money off the island, which has turned itself into a banking hub.

But analysts said that the longer protesters remain in the streets, the harder it will be for the country, ranked second to Saudi Arabia by the World Bank in ease of doing business in the Middle East, to put itself back on track. Major ratings agencies downgraded or issued warnings about Bahrain and many of its banks last week.

"All the royals know that their welfare depends on businesses wanting to invest in Bahrain, so that gives them encouragement to give in to some of the demands from the protesters," said Jean-Francois Seznec, a visiting associate professor at the Center for Contemporary Arab Studies at Georgetown University and a partner in a private-investment firm.

Tens of thousands of Shiite-led protesters have taken to the streets of Bahrain to push for democratic rights and an end to discrimination that they say puts the Shia majority at the back of the line for housing, education and jobs. Seven protesters have died and dozens have been wounded after armed forces fired on them.

Seznec said that if reformists in the monarchy reach a compromise with the protesters that makes Bahrain more stable, the country's long-term economic prospects could improve.

"If there is a successful opening by the crown prince," known for his reformist outlook, Seznec said, "we will see some major progress. But it's not simple, and it's not going to happen quickly, immediately or automatically."

Bahrain's tourism is on hold, with restaurants and hotels empty; taxi drivers are complaining that they have no customers; and many of Bahrain's 525,000 citizens are in the streets every night. Crown Prince Salman bin Hamad al-Khalifa last week withdrew from hosting the Formula One race that was scheduled for mid-March, dashing a major source of revenue and good publicity.

Bahrain has gone to work to combat the hit to its reputation, installing a British public relations firm after the violence began, freeing 300 political prisoners and calling for "national unity."

In another concession to protesters, the king announced Saturday that he had replaced five cabinet ministers. Four of the replacements are Shia. He also said that outstanding government housing loans would be cut by one-quarter.

"The fundamental economic values of Bahrain remain strong," said Rasheed al-Maraj, head of the central bank. "We haven't seen any adverse impacts so far on the operations of the banks," which comprise about one-quarter of the country's economy, analysts say. Bahrain is ranked second by the World Economic Forum for ease of access to loans.

The spike in oil prices resulting from the unrest in Libya and the region has become a windfall for Bahrain, Maraj said, helping to offset the cost of a plan announced shortly before the protests to give $2,650 to every household. He has no plans to revise economic forecasts, he said.

But some of the changes protesters are asking for, such as improved Shia access to housing and jobs, won't help the economy, Maraj said, because discrimination in those areas "is a myth," although he said he wanted to give all Bahrainis access to good jobs.

Analysts said that even the perception of instability in the country may be enough to keep investors away.

"You can sense some discomfort amongst those with investment exposure there, simply because they don't know what's coming next," Ann Wyman, the London-based head of emerging markets research in Europe for Nomura Holding, said in an e-mail.

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