Bahrain progresses with talks on Gulf economic programme

Bahrain and its Gulf allies are said to be making progress on an economic programme to help the island-kingdom repair its finances and avoid a devaluation that could roil neighbouring markets.

Officials from Bahrain, Saudi Arabia, the UAE and Kuwait are discussing a multi-year programme that would involve spending cuts and measures to increase non-oil revenue, including the introduction of a value-added tax, according to five people with knowledge of the matter. They asked not to be identified because the details aren’t public.

The Arab Monetary Fund, an organisation modelled on the Washington-based International Monetary Fund, has been involved in the discussions, some of the people said. The fund, based in Abu Dhabi, may also help to monitor the programme’s implementation.

Bahrain’s economy is the smallest among the six members of the oil-rich Gulf Cooperation Council. But investors fear that without aid to help bolster low foreign-exchange reserves and cut ballooning debt, the tiny kingdom will be forced to abandon the dinar peg to the dollar, triggering speculation that its neighbours would follow suit. Bahrain officials have repeatedly said they have enough reserves to maintain the peg.

Bahrain's dollar-denominated Eurobonds reversed declines after the report, with the yield on securities due 2028 falling by two basis points to 8.11 per cent, according to data compiled by Bloomberg.

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The kingdom and its allies announced in June they were in talks over stimulus, giving the country’s assets a much-needed boost. The nation’s bonds were the hardest hit in the Gulf this year as investors worried that the implicit support Bahrain has from Saudi Arabia, Kuwait and the UAE wouldn’t materialise.

But the rally fizzled out this month as investors look for details of the aid package.

“This is significant because the presumption was increasingly that complacency was setting in, and a likelihood that Bahrain was playing with brinksmanship,” said Richard Segal, senior analyst at Manulife Asset Management in London. "This could be an impetus for further rallies, which had tended to stall, and would be justified both by the committed liquidity from the GCC but also better fundamentals in the future."

Officials in Bahrain, Saudi Arabia, the UAE and the Arab Monetary Fund, weren’t immediately available for comment. Kuwait’s Finance Ministry said it can’t comment on media speculation.