The relative spread relationship between Turkey and Bahrain has largely been driven by oil prices over the past year. With the outlook for oil prices uncertain, it seems unlikely that the spread differential will imminently revert to the c.40bp trough (Turkey '43s vs Bahrain '44s) of September last year. However, Barclays believes political considerations argue for a tighter spread differential than the current one in excess of 100bp.
The recent geopolitical developments in the Middle East region have likely strengthened the Saudi support anchor for Bahrain. Bahrain remains at the forefront of perceived Iranian attempts to expand its influence in the Gulf region given its overwhelmingly Shiite population. With the escalating tension between Saudi Arabia and Iran recently over the Yemeni conflict, and the participation of Bahrain in the Saudi coalition against the Houthis rebels there, the ties between Bahrain and its richer neighbour are ever stronger.
Expectations of this continued financial support is critical given the impact of lower oil prices on Bahrain's public finance (where analysts estimate the deficit will likely widen to around 11% of GDP in 2015 compared to 6% in 2014).
