Developments in Bahrain over the past week suggest that the government is backtracking on its commitment to fiscal austerity. We doubt that the other Gulf countries will withdraw their support but, if Bahrain’s public finances continue to deteriorate, dollar bond spreads are likely to widen. Meanwhile, we warned that the rally in the Saudi stock market would reserve course and, this week, the Tadawul dropped by more than 5%. Further falls probably lie ahead.
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