Oman and Bahrain , May 06 2025,

Gravity laws : what goes up must come down !

Welcome to MENA MARKET LAB !

We aim here to bring you regular updates on factors and events impacting financial markets in the Middle East and North Africa region with an accent on foreign exchange and rates.

We also aim to bring reflections on certain topics and subjects, close to recent events, which we think are worth stopping on .

Thank you for your attention !

What message is being sent to the Americans ?

We have seen recently Eric Trump visiting the UAE, ten days ahead of his dad. It was quite fruitful. A new big hotel -residence tower on the main boulevard , not sure what size the logo will be but it will be BIG and a decent fee. The best was probably an Abu Dhabi firm investing 2 bn $ in Binance using Trump’s stablecoin . Next should be the resurrection of an old Trump’s project in Moscow that was shelved in 2013 but now is the time to start again. Of course , there is no conflict of interest . Other strongmen have amassed significant fortunes for themselves and their families while in power, in Hungary, Turkiye, Russia to name a few. With one difference, they don’t put their names on the building. At least , in the past , a certain former British Prime Minister had the decency to wait to be out of office to start milking it.

Now,

OPEC+ has agreed again to increase its oil output by another 411k barrels per day in June after the 411k agreed the previous month ; on the paper, they have reversed almost 40 % of the 2.2mn bpd voluntary cuts agreed by eight members. In December, they agreed to phase out those cuts by September 2026 and will monitor market conditions. There is also close to 5mn bpd of other output cuts that were applied since 2022.

We have heard the main reasons : punish producers constantly exceeding their quotas ( Kazakhstan, Iraq, UAE), a bit of PR for the US President and also the realization that oil at 100$ is unrealistic for now.

Historically, the main drivers on the GCC currency markets have been oil and geopolitical tensions. Investors-operators–speculators would first focus on the Saudi riyal as it is the deepest and largest FX market in the GCC but currencies of the smaller countries would come on the radar as well even though liquidity is much thinner.

Lately though, oil , geopolitical events or regional tensions have caused less and less reactions in the market. It doesn’t help that several waves of attempts to get GCC currencies to realign one way or the other have failed and so interest in GCC currencies as a quick punt has gone down quite a bit in the HF community. Focus has been a lot more on the liquidity situation, ALM side of life. As a good friend characterizes it, follow the money.

Not always as easy as it sounds : Kuwait’s example. True 6 months ago, the forward curve was excessively low but the local market was awash with extra liquidity. Some headlines had given reasons to believe the market would tighten ( debt law, passed and approved, mortgage law, still in the antechamber) but so far nothing has been issued. Those big Kuwaiti names that used to flood the market are not doing anymore. So the cash must have gone some where !

But whenever , the situation heats up a bit and oil goes down, one cannot not have a look at GCC.

Liquidity again is very important , this time though , market liquidity and depth. It is relatively doable to execute 1 bn $ worth of 1 year USD/SAR , the same cannot be said of USD/OMR or USD/BHD.

USD/OMR has reacted twice so far in the past few weeks to fast drop in oil prices, once shortly after the famous “ Liberation Day” and again after the release of US’s GDP figures. Both times, the 1year FX USD/OMR jumped from levels slightly above Par to above 100 and few days ago 150 ( a 30 bps jump in the spread over $ ). Interestingly, 1 Year Usd/Bhd barely moved.

Below are a few numbers for both countries . We can add that Bahrain’s rating is B+ while Oman has recently been upgraded to BBB-. A few days ago Fitch downgraded Bahrain’s outlook from stable to negative on its fiscal and debt positions.

What has to be pointed is while Bahrain’s fiscal and debt positions have only gone worse, Oman has made very impressive progress to tackle those two issues . In the past 5 years, Oman’s debt has been cut from over 70 % to 35 % of GDP . Bahrain is on an upward trajectory.

Also, Bahrain’s oil breakeven point ( to balance budget) is over 130 $ a barrel while Oman is around 65 $.

Few more numbers : Oman’s 2031 dollar bond yields 5.19 % while Bahrain 2030 is yielding 6.48 %. Oman’s 5 year CDS is at 130 while Bahrain is 239.

In 2018, Bahrain received a financial assistance package from the GCC worth 10 bn $ with the aim to engage in serious structural and fiscal reforms to tackle debt and fiscal deficits. The assistance was supposed to end in 2021 and was finally rolled until this year. Recently a 12 point plan was aired with “ serious measures” but it seems it was just a plan. Subsidies, pensions, public sectors, taxation, VAT , all has to be restructured and or phased out.

Instead of reducing the fiscal imbalances, they are just growing wider.

For many years, Bahrain was able to position itself between the two largest GCC countries ( Saudi Arabia and UAE) as a neutral ground in a fairly permissive atmosphere. Not anymore : for years now, international companies choosing to establish a bridgehead in the region will chose Dubai and the UAE first. And a few years back, Saudi Crown Prince stated very clearly that firms who wanted to do business in the Kingdom had to be established there.

Even though Bahrain can be said to be easy going and have a good quality of life ( I spent five wonderful years there) , the fact is that it is difficult to lure top investors, hedge fund types, family offices, tech and AI workers to Bahrain while Dubai promised the seven wonders of this world. And once well established international firms or banks in the small island state are reducing their presence to the benefit of Abu Dhabi and Dubai.

A good indicator is the real estate : prices are stagnating or going down ; a decent house in Bahrain will cost you in rent a third of Dubai .

The IMF has highlighted recently all those issues again and conjures the Kingdom of Bahrain to engage in serious structural reforms.

Looking above at the numbers, there is no contest but more than that, Oman is on an upward trajectory while Bahrain is on a downward slope.

Besides all that , in today’s context, a sharp drop in oil prices should hurt both countries but Bahrain more so. But interestingly, it seems that it is Oman that has attracted the attention of a few punters.

Market wise , we see that the BHD curve has barely moved while the OMR 1 year saw a jump of 35 bps. True, trading around Par to the $ is cheap for OMR . But unlike previous sharp oil drops, Oman’s breakeven point is much lower now and around where the analysts’ consensus see oil for 2025. Much can go wrong with that but Trump can also get a deal with China and that would send oil back up !

So there seems to be a replay of the much used phrase those days , “ and the strong will do as they please and the weak must suffer !” Meaning that if someone wants to have a go and put some serious firing power on the table , one can move the market and try bully others into submission . High targets.

Several constraints though for a market as OMR forwards.

· It is very much an offshore market in the sense that local entities only have a sporadic interest in it, only when it suits ; and not everyone wants to face local entities for Wrong Way Risk reasons.

· Reduced liquidity makes it easier to move but once you gave it a good shake , liquidity will vanish and the capacity to exit and square positions will be much smaller . Positions can be built up with ticket size of 25mn $ : the exit can be reduced to 3 to 5 mn $. So the exit slippage can be quite commensurate. Especially if some have bene hurt on the way up.

· Straight FX swap positions in size will be difficult to fund in the very short dates. So spreads might be more interesting to do. Funding through spot or just going long $ Outright is also an option but one might run into market risk limit headwinds.

· Anything above 1 year gets tricky.

Levels for the 1 year OMR above 100 ( 125 mid I hear ) are ok with oil prices below 60$. Is there potential for move higher ? Probably if oil dips lower to 55 or 50 but then again, an improvement in the tariff war would send oil higher.

Looking at charts over five years :

1. OMR 1 year fx swap points for the past 5 years averaged 172 at that includes a peak over 1875 and a prolonged period up to December 2020 where the points were around 500. So the average from mid 2021 to now would be closer to 100. My chart doesn’t include the early pandemic period otherwise the points would have been over 2000.

2. For the BHD, the 5 year average is 172 with a range of 70 to 280.

3. Brent , an average of 77 and a low-high of 27 and 139. The low would even be lower if the 5 year chart was extending a few more months in the past.

Is a return to 2000 points possible for the 1 year OMR ? ( that is 5 % spread over corresponding $ rates) Short of another monumental unexpected crisis ( nuclear attack in Iran ? ) , I don’t think so. A move up to 400 ? Possible , it would require oil to dip probably to 50 or lower and I reckon along the way up , local institutions will be keen to sell to capture the spread , as they had been selling on the way down before.

Although I made the argument, along many others , for the GCC currencies to move away from their pegs to a system closer to Kuwait and its trade-weighted basket of currencies to distance themselves from the greenback and the Fed’s policies ( and potentially with weights on the Asian currencies such as the CNY, INR and others as they are now GCC’s main trading partners ) , the peg system has served GCC very well since inception and they have weathered many crisis and some much more serious than the moment we are in. GCC countries in those days were in a much more precarious position , fiscally , debt and reserves wise than they are in today.

So ultimately, as with Newton and his apple, gravity reigns . And it seems that the force of gravity are stronger with time. Meaning that the shocks experienced with each crisis are getting smaller and so markets go back to the natural equilibrium faster.

I am still a bit puzzled as to why one would choose OMR as the weak link whereas BHD seems the obvious choice. What am I missing..

Thank you

DC