Riyadh, London
Bahrain’s foreign-currency reserves tumbled 11 per cent in February, extending a decline that has fuelled speculation that the island kingdom would either tap international bond markets soon or seek financial support from other Gulf Arab monarchies.
Net foreign assets dropped to 645.2 million dinars ($1.7 billion), from the 725.9 million dinars in January, according to central bank data released on Sunday. Overall, they’re down 71 per cent from a peak of 2.24 billion dinars in November 2014.
Bahrain has been more vulnerable to slumping oil prices and regional political instability than richer Gulf Cooperation Council states. With authorities expected to maintain the dollar peg, Bahrain “will likely either tap international markets or receive support from other GCC governments,” said Carla Slim, Dubai-based economist at Standard Chartered.
Reserves will likely “remain under pressure this year,” she said.
The drop in reserves comes nearly a month after the International Monetary Fund warned that Bahrain needs to make significant spending cuts to restore stability to its budget and improve investor confidence.
Credit risk
Bahraini assets, however, have weathered the pressure of the country’s financial troubles, largely because investors expect Saudi Arabia to extend aid if needed. The cost of insuring Bahrain’s debt, measured by credit default swaps, dropped for seven straight months through April, the longest streak since 2012, according to data compiled by Bloomberg. The kingdom raised $600 million from international bond markets in February.
“There is little doubt that Saudi stands ready to provide support to Bahrain,” said Hasnain Malik, head of Global Equities Research at Exotix. Forcing Bahrain to abandon its peg would raise questions over those in Saudi Arabia and Oman, he said.
Bahraini authorities increased spending in response to the global recession in 2009 and civil unrest two years later as sectarian tensions escalated in the Gulf island nation.
When oil prices tumbled, the budget deficit soared, reaching almost 18 per cent of gross domestic product last year. The oil price the government needs to balance its budget remains over $100 a barrel, the highest in the GCC, according to IMF estimates.
GCC support will likely come with strings attached, according to Jean-Michael Saliba, London-based economist at BofA Merrill Lynch.
‘Greater reforms’
“We anticipate that over time, the GCC is likely to require greater reforms from Bahrain,” he wrote in a report released this month. The state budget for this year and next have been delayed as authorities “debate the extent of fiscal consolidation with parliament,” he said.
“Authorities plan to return to the international debt markets after the budget is passed.”
The IMF said in April that the drop in crude prices has largely offset “significant fiscal measures that were implemented,” causing the budget deficit and public debt in 2016 to stand at 18 per cent and 82 per cent of GDP, respectively. It said fiscal measures could include valued-added taxation and further rationalising of spending on subsidies and social transfers.
IMF officials have also noted Bahrain’s ability to raise money from bond markets as a measure to support foreign reserves and maintain the peg.
