Bahrain’s foreign currency reserves fall 11% in one month

Bahrain’s foreign-currency reserves tumbled 11% in February, extending a decline that has fueled 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 725.9 million dinars in January, according to central bank data released on Sunday. Overall, they’re down 71 percent 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, a Dubai-based economist at Standard Chartered.

Reserves will likely “remain under pressure this year,” she said.

The latest data come 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.

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 percent 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. (Source credit – Bloomberg)

 

 

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