Bloomberg: Bahrain Foreign Reserves Tumble 11% amid Risks of Exchange-Rate Policy Change

2017-05-09 - 10:17 p

Bahrain Mirror: Bahrain's foreign-currency reserves tumbled 11 percent 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, Bloomberg revealed.

"There is good reason to support Bahrain," said Koon Chow, a strategist at Union Bancaire Privee UBP SA in London. Pressure that would force the country to change its exchange-rate policy "would have huge contagion risks not only for Saudi Arabia but for the rest of the region," he said.

"Remember Greece and Europe, it is the same argument. Why do we support Greece?" he added.

In a report issued Monday (May 8, 2017) Bloomberg revealed that the "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."

According to the New York-based financial think-tank, this data comes 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.

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, which also revealed that "the kingdom raised $600 million from international bond markets in February."

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.

"We anticipate that over time, the GCC is likely to require greater reforms from Bahrain," he wrote in a report released this month. The state budget for this year and next have been delayed as authorities "debate the extent of fiscal consolidation with parliament," he said. "Authorities plan to return to the international debt markets after the budget is passed," he went on to say.

Bloomberg also stated that "the IMF said in April that the drop in crude prices has largely offset "significant fiscal measures that were implemented," causing the budget deficit and public debt in 2016 to stand at 18 percent and 82 percent of GDP, respectively. It said fiscal measures could include value-added taxation and further rationalizing of spending on subsidies and social transfers.

"IMF officials have also noted Bahrain's ability to raise money from bond markets as a measure to support foreign reserves and maintain the peg," Bloomberg further said.

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