The Gulf island kingdom of Bahrain is said to ask Allies for Aid. As a minuscule islet tucked between Qatar’s and the Arabian peninsulas, it has been among the hardest hit in the Gulf Cooperation council countries by the currently low oil prices. As a matter of fact, all countries of the Gulf are reported to be facing yearly state budgets restrictions, developments curtailment and investments restraints generally.

Per a recent Bloomberg report, Bahrain has asked its Gulf allies, notably Saudi Arabia, the United Emirates and Kuwait for financial aid whereas ironically, it was once promoted as a potential financial center of the region. This request is believed to be critical to help prevent a potential devaluation of its currency.

This past summer, the IMF mentioned that the country’s budget deficit although narrowing this year, would very likely to remain the largest in the region.

Here are some excerpts of Bloomberg’s article written by Alaa Shahine and Zainab Fattah and published on November 2, 2017.

 

Bahrain Is Said to Ask Allies for Aid to Stave Off Crisis

 

Bahrain has asked Gulf 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.

Saudi Arabia and the United Arab Emirates were approached, 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.

The slump in oil prices has battered the six-member Gulf Cooperation Council, at times raising questions over whether a dollar peg seen as a bedrock for economic stability for more than three decades was sustainable. While bets against the region’s currencies have subsided this year, a devaluation of a GCC member would risk shifting the attention to others. Gulf central banks, including Bahrain’s, have repeatedly brushed aside talk of abandoning their exchange-rate regimes.

“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 neighbors. Several countries in the region have cut spending and curtailed handouts to their citizens. The International Monetary Fund expects Bahrain’s budget deficit to be the highest in the GCC this year even as it narrows.

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. Authorities have repeatedly blamed the instability on Shiite-ruled Iran. Bahrain is also a member of a Saudi-led coalition boycotting neighboring 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 U.A.E. and Kuwait didn’t immediately respond to requests for comment on the aid talks. Saudi officials couldn’t immediately be reached.

 

Please read the full article in Bloomberg’s