Dubai, London: Bahrain hired investment bank Lazard Ltd to advise on how to repair its strained public finances, according to people with knowledge of the matter, as the island kingdom seeks to secure crucial support from rich neighbours to avoid a currency devaluation.

Lazard is helping Bahrain evaluate fiscal reforms to help ease pressure on the state’s budget, the people said, asking not to be identified because the details aren’t public. The options include raising capital from international markets, one of the people said. Bahrain’s Eurobonds dropped after the report.

Lazard declined to comment. Bahraini officials didn’t immediately respond to requests for comment.

Bahrain, one of the most vulnerable Gulf Arab economies to lower oil prices, confirmed last week that it was in talks with Saudi Arabia, the UAE and Kuwait for support that would help reduce ballooning debt and shore up foreign-exchange reserves. Bloomberg News reported last year that the three countries had asked authorities to do more to bring finances under control before receiving aid.

Doubts over whether the Gulf countries would come to the rescue battered Bahraini assets last month, raising the kingdom’s credit risk by the most on record. Without the aid, investors had feared that policymakers would be forced to abandon the dinar peg to the dollar, raising questions about the ability of other Gulf nations to sustain their own currency policies.

Bahrain’s bonds trimmed losses after last week’s announcement, but economists say the kingdom’s ability to tap global bond markets depends on details of the assistance package and how quickly the money can be delivered. At the current rate of foreign-exchange reserve depletion, the government will likely need external funding by October, according to Carla Slim, an economist for Standard Chartered Plc in Dubai.

Precautionary

Bonds dropped on Tuesday, sending the yields on securities maturing in 2020, 2028 and 2029 higher, according to data compiled by Bloomberg.

While the appointment of Lazard isn’t necessarily “negative for bonds,” it could imply that the “financial situation is worse than earlier assumed if the advice is viewed as necessary,” said Richard Segal, senior analyst at Manulife Asset Management Ltd. “These types of firms are commonly associated with borrowers about to restructure, although in this case it could be precautionary.”

Bahrain, a key Saudi ally and home to the US Fifth Fleet, said on June 28 it will form a committee to devise plans to balance the budget. The group, whose members include the finance minister and central bank chief, will present its plans to the prime minister, who will take a decision “at the earliest possible time.”