Tue April 5, 2011
Middle East

Foreign Investors Uneasy Amid Bahrain Violence

Bahrain's Sunni royal family, with tacit U.S. backing, has cracked down on largely Shiite protesters demanding political and economic reforms. But even as the kingdom moves swiftly to protect its status as a stable banking and financial hub for the Middle East, some analysts are wondering if foreign investors are already looking for another place to send their money.

Bahrain may live in the shadow of its neighbor Saudi Arabia, but it has racked up some impressive feats: It hosted the first Middle East oil find, and long before Dubai emerged as a financial hub it was Bahrain that attracted financial firms and investors to the region.

It was able to do that in the 1980s because bankers and their capital were looking to flee from the previous financial hub, Lebanon, where a 15-year civil war was destroying the economy. But now Bahrain seems to be on the other end of the stability/investment equation.

Losing Ground To Other Hubs

Last month, Bahraini protesters took their demonstrations to the most sensitive place they could find: the country's main financial center. Days later, Saudi troops came pouring over the causeway into Bahrain, and a fierce crackdown began. Analysts say clearly the protesters had crossed a line, but had the damage already been done?

Writing for the risk assessment website euromoney.com, analyst Dominic O'Neill said yes.

"Political tension," he wrote, "looks likely to end Bahrain's claim to be the Gulf's financial center."

Raj Madha, an analyst with the Rasmala Investment Bank in Dubai, says even before the unrest erupted, Bahrain had been losing ground to its neighbors Dubai and Abu Dhabi in the United Arab Emirates and the Qatari capital, Doha.

"This more or less accelerates that process," he said. "Bahrain had been making somewhat of a comeback during the crisis, but the reality is that's probably stopped. So I think it's much more of a competition between Dubai and Doha, and Bahrain, at least for the moment, seems to be counted out."

Bahraini officials insist this is a temporary setback and that the kingdom will soon return to its reliable, stable self. On a recent visit to the Bahrain financial exchange, the head of the kingdom's central bank said the fundamentals remain in place for continued economic growth.

Investor Confidence Shaken

But Matthew Martin, banking and finance editor for the Middle East Economic Digest, says he has seen the beginnings of the professional flight to Dubai and elsewhere.

"Obviously, a lot of the banking sector was staffed with expatriates who have all been very shocked by the events that have taken place over the last month," he said. "So a lot of them have left and gone to places like Dubai. Convincing them to come back is going to take quite a long time as well."

There are certain advantages Bahrain's Sunni royal family will continue to enjoy as it tries to recover from its failure to peacefully resolve the demands of its Shiite majority. First and foremost is the close bond with Saudi Arabia. Analysts say those ties help explain why Washington, D.C., has so far been reluctant to pressure the king, to the dismay of Bahraini protesters.

But Martin says that, as governments the world over have learned, it's much easier to lose investor confidence than it is to rebuild it.

"The Foreign Office of Britain, for instance, at the moment is still advising people against going to Bahrain, and it's advising people who are there to pretty much stay locked up in their houses," he said. "And these things are going to have a significant dent on peoples' perceptions of Bahrain, if they're looking for a job in this part of the world."

For now, it seems Bahrain is facing one of the worst outcomes of the Arab spring. The protesters are watching their dreams of a better life be throttled by the security forces, and the country's elite is seeing decades of work to attract foreign investment unravel in a matter of weeks. Copyright 2011 National Public Radio. To see more, visit http://www.npr.org/.