Bahrain has asked Gulf Arab allies for financial assistance as it seeks to replenish its foreign-exchange reserves and avert a currency devaluation that could reverberate across the region, according to people with knowledge of the talks.
The request was made to Saudi Arabia and the United Arab Emirates, two of the people said. A third person said Kuwait was also asked. The countries responded by requesting the island kingdom do more to bring its finances under control in return for the money, the people said on condition of anonymity because the discussions were private. The talks are at an early stage, one person said.
Bahrain, a close Saudi ally, has been more vulnerable to slumping oil prices and regional political instability than richer Gulf Cooperation Council states. Several GCC nations have cut spending and curtailed handouts to their citizens, and while Bahrain’s budget deficit is set to narrow this year, the International Monetary Fund expects the shortfall to be the highest in the GCC.
The central bank’s foreign reserves, including gold, have tumbled about 75 percent since 2014 to just above 522 million dinars ($1.39 billion) in August, according to the most recent official data. Without aid or a recovery in oil revenue, authorities may struggle to keep the currency’s peg to the U. dollar -- maintained at 0.
Devaluation Risk
Expectations among investors and credit-rating companies that rich Gulf states would prevent Bahrain’s difficulties from morphing into a full-blown financial crisis have allowed the kingdom to tap international bond markets as recently as September, when it raised $3 billion. Bahrain’s debt risk, measured by five-year credit default swaps, has dropped more than 60 basis points to 241 as of Tuesday, according to data compiled by Bloomberg.
Saudi Arabia led a military intervention to support Bahrain’s government during protests that broke out in 2011. Authorities have repeatedly blamed the instability on Shiite-ruled Iran. Bahrain is also a member of a Saudi-led coalition boycotting neighboring Qatar.
A bond prospectus in September included a warning from authorities that falling reserves carried the risk of a currency depreciation. The central bank, being a “significant” lender to the government, may not be able to maintain the peg, according to the document seen by Bloomberg News. Bahrain didn’t cite that risk in its prospectus in 2013.
Officials in Bahrain, the U. and Kuwait didn’t immediately respond to requests for comment on the aid talks. Saudi officials couldn’t immediately be reached.5 billion Eurobonds due 2022 fell. The yield rose seven basis points, the most in two months on a closing basis, to 4.7 percent, according to data compiled by Bloomberg.
“Even if we assume that Bahrain will not use the $3 billion to finance any of its 2017 fiscal needs, then the bond issuance is enough to only cover part of the 2018 deficit, which is expected to reach $4.2 billion,” Ziad Daoud, a Dubai-based economist at Bloomberg Economics, said by email. The rest will have to be financed through additional borrowing or “using the government’s reserves,” he said.
The IMF estimates that Bahrain needs oil prices at $99 a barrel to balance its budget this year, compared with $73.1 a barrel for Saudi Arabia, which is overhauling its economy. While Brent crude is trading at the highest level in more than two years, it’s still almost $40 below Bahrain’s breakeven price.
Economists say that a Saudi-led bailout of Bahrain will be less costly than cleaning up the mess of a devaluation. Protecting Bahrain’s peg remains a priority among GCC members to avoid contagion risk, according to BofA Merrill Lynch’s Jean-Michel Saliba. The GCC is likely to “nudge Bahrain towards greater fiscal reforms,” the London-based economist wrote in a note in May after an eight-day trip to the region.
— With assistance by Lyubov Pronina, Archana Narayanan, Vivian Nereim, and Claudia Maedler.
0 comments:
Post a Comment