Bahrain to receive second economic package from the GCC

Bahrain, the GCC's smallest economy, is set to receive support from Saudi Arabia, the UAE and Kuwait to ensure fiscal stability of its financial institutions as the Arabian Gulf state pressured by high external borrowings struggles to recover from a three-year slump in oil prices.

A new programme "designed to strengthen Bahrain's fiscal stability", will be announced by the three states, finance minister Sheikh Ahmed bin Mohammed Al Khalifa said in a statement carried by the state-run Bahrain News Agency on Wednesday. It did not give further details of the financial aid package or when it was expected to be announced.

Meanwhile, a joint statement on the Saudi Press Agency by the trio said they were “in discussions with the authorities in the kingdom of Bahrain to enhance the stability of the financial situation”. They will “consider all options to support Bahrain and to finalise an integrated programme ... to support its economic reforms and fiscal stability,” the statement said.

This is not the first time the sovereigns in the GCC, which accounts for about a third of the world’s proven oil reserves, have come together to financially help their peers in the six-member economic bloc and other Arab nations. The GCC in March 2011 announced a $20 billion aid package for Bahrain and Oman to support their economies, create jobs and upgrade housing and infrastructure over 10-year period.

Bahrain, also the GCC's smallest oil producer, saw finances take a turn for the worse amid the low oil price environment, forcing the government to raise debt in order to plug its budget deficit and maintain public spending. The country’s debt to gross domestic product ratio last year rose to 89 per cent and the International Monetary Fund expects it to climb to 100 per cent of the GDP in 2019.

Bahrain's latest grant from the GCC will likely be in the range of "millions of dollars, not billions", said Jasim Husain, an independent economist based in Bahrain.

"The support should bring about calm in the short term at least. Longer term requires economic reforms and sustained commitments from Saudi Arabia, the UAE and Kuwait," he said.

"[Bahrain's] budget could not spare money for capital spending, hence the significance of the GCC funding," added Mr Husain.

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The move by the three Gulf states is aimed at allaying market fears on Bahrain’s debt issues. Its credit risk rose the most in emerging markets this month. The cost of insuring the nation’s debt against default for five years jumped 170 basis points on Monday to 609. The dinar, whose peg to the dollar has been effectively unchanged since 1980, fell on Tuesday in the onshore market to the weakest level since at least 1988, according to a Bloomberg report.

The Central Bank of Bahrain’s foreign exchange assets had dropped to a 2001 low of about $1.2bn in 2017. They have almost doubled since, helped by cash raised through bond sales but the government has about $2bn of interest payments on bonds through 2019, according to data compiled by Bloomberg.

However, the country’s bonds bounced and currency forwards fell after the pledge of support from its neighbours. The yield on the nation’s dollar bonds due 2028 plunged 96 basis points to 8.65 per cent during early trade in London. Forwards on the dinar due over the next 12 months plummeted 25 per cent to 320 in the offshore market, Bloomberg reported.

“The fact that support [from the three Gulf countries], which was being assumed as implicit is now more explicit, will add a lot to boost investor confidence and enable Bahrain to further tap into the debt market as per its needs, said Nishit Lakhotia, the head of research at Bahrain’s Sico investment bank. “One should also not forget the $7.5bn in GCC development fund provided to Bahrain, which is also a clear evidence of seriousness of UAE, Saudi and Kuwait to help Bahrain when required.”

There was concern among international investors about the “ability of the government to meet its financial obligations such as payment of debt instalments in the absence of unconditional support from Saudi Arabia in particular, and the UAE and Kuwait to a lesser degree”, said Mr Husain.

Mr Lakhotia agreed saying the GCC announcement was "definitely reassuring”, particularly for investors who have been active in the Bahrain government bonds.

Bilal Khan, senior economist, Mena and Pakistan at Standard Chartered Bank, said: “We view the announcement as reassurance to markets following deteriorating investor sentiment towards Bahrain recently. While the news is positive for Bahrain’s financing prospects, we await details on financing commitments before factoring these into our macroeconomic forecasts.”

Despite the rising debt levels, Bahrain’s economy is poised to grow 3.2 per cent this year and is forecast to cut its fiscal deficit to 11 per cent of the GDP in 2018, from 14 per cent last year. The shortfall was as high as 18 per cent in 2016, the IMF said in May.