Gulf Powers Weigh Five-Year Bahrain Aid Package

(Bloomberg) -- Bahrain’s Gulf Arab allies are weighing plans for a five-year aid package to steady its finances and protect a currency peg seen as vital to regional economic stability, according to three people with knowledge of the matter. Bonds gained.

The assistance would help Bahrain meet its financing needs over the period while it carries out fiscal reforms, the people said on condition of anonymity. The amount under negotiation is $10 billion, though a final agreement has yet to be reached, one of the people said.

The deal is taking shape after months of negotiations over the measures Bahrain would take to receive support from Saudi Arabia, the United Arab Emirates and Kuwait. The package may include deposits and low-interest loans, one of the people said.

The funds would help avert a devaluation that investors fear could force other countries in the region to follow suit. They’ll also allow Bahrain, a close Saudi and U.S. ally, to borrow from international debt markets at cheaper interest rates.

Bahrain’s economy, the smallest among the six members of the oil-rich Gulf Cooperation Council, has been hit hard by low oil prices since 2014. Bloomberg News reported in August that the aid program would involve spending cuts and measures to increase non-oil revenue, including the introduction of a value-added tax.

What Our Economists Say...

“We estimate Bahrain’s external financing needs over the next five years to be at least $12.7 billion. The financing requirement will be substantially larger if maturing private-sector debt is also added, but estimates of this are less precise.”

-- Ziad Daoud, Bloomberg Economics 

Officials in Saudi Arabia and the U.A.E. didn’t immediately return a request for comment. Kuwait’s Finance Ministry said it doesn’t comment on speculative stories based on unnamed sources.

Bahrain’s government referred Bloomberg to a statement issued in August by the finance chiefs of four countries when they met to review a technical report that included “a comprehensive fiscal balance program” prepared by a joint team in coordination with the Arab Monetary Fund -- an Abu Dhabi-based institution modeled after the Washington-based International Monetary Fund.

Bahrain’s bonds gained after the report, with the yield on securities due 2028 falling 23 basis points to 7.18 percent, according to data compiled by Bloomberg.

The bonds were also buoyed by JPMorgan Chase & Co.’s announcement on Wednesday that Bahrain was among five GCC members that will become eligible for inclusion in JPMorgan’s emerging-market bonds indexes from the end of January, potentially attracting billions of dollars in inflows.

Bahrain has been relying on bond markets to finance budget and current-account deficits and replenish its foreign-currency reserves. Authorities scrapped a bond sale in March after investors sought higher yields, but raised $1 billion from Islamic securities.

“We estimate Bahrain’s external financing needs over the next five years to be at least $12.7 billion,” said Ziad Daoud, chief Middle East economist for Bloomberg Economics.

“These consist of $6.4 billion of expected cumulative current account deficits as well as $6.3 billion of government debt maturing over the period,” he said. “The financing requirement will be substantially larger if maturing private-sector debt is also added, but estimates of this are less precise.”

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