Bahrain ask Saudi and UAE for aid to stave off financial crisis

 02 Nov 2017 - 12:04

Bahrain ask Saudi and UAE for aid to stave off financial crisis

By Alaa Shahine and Zainab Fattah / Bloomberg

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 is rated BB- at S&P Global Ratings, three levels below investment grade. The rating company changed Bahrain’s credit outlook in June from stable to negative. 

“We continue to factor the potential for external support, particularly from Saudi Arabia, into our ratings,” it said.

The slump in oil prices has battered some of the Gulf states, at times raising questions over whether a dollar peg seen as a bedrock for economic stability for more than three decades was sustainable. And while bets against the region’s currencies have subsided this year, a devaluation of a GCC member would risk shifting the attention to others. 

“Most people are fully expecting the other Gulf countries to come to Bahrain’s aid,” said Jason Tuvey, a London-based economist at Capital Economics. “If Bahrain was forced to devalue its currency it would probably start to raise questions about other currency pegs.”

Bahrain, the Gulf’s smallest economy and a close Saudi ally, has been more vulnerable to slumping oil prices and regional political instability than richer GCC states, several of whom have cut spending. 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.S. dollar -- maintained at 0.376 Bahraini dinars.

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 cushioned its assets and allowed it to tap global 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. 

Bahrain is also a member of a Saudi-led coalition blockading 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 UAE and Kuwait didn’t immediately respond to requests for comment on the aid talks. Saudi officials couldn’t immediately be reached.
Bond Sale Proceeds

Before the September bond sale, Bahrain’s reserves were equivalent to just one month of imports and barely covered currency in circulation, according to BofA Merrill Lynch economist Jean-Michel Saliba. 

And even if the kingdom doesn’t spend any of the $3 billion to finance its 2017 needs, the proceeds are only enough to cover part of next year’s deficit, which is expected to reach $4.2 billion, said Ziad Daoud, an economist at Bloomberg Economics. The rest will have to be financed through additional borrowing or “using the government’s reserves,” he said.

Bahrain’s $1.5 billion Eurobonds due 2022 fell on Wednesday. The yield rose seven basis points, the most in two months, to 4.7 percent, according to data compiled by Bloomberg.

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.

In May, Saliba of BofA wrote after an eight-day visit to the GCC that Bahrain’s allies are likely to “nudge” the kingdom toward “greater fiscal reforms.”