Gulf Allies Pledge Billions in Aid for Bahrain and Jordan

(Bloomberg) -- Gulf Arab allies pledged $10 billion in aid to Bahrain and finalized $2.5 billion in assistance for Jordan on Thursday, in an effort to stabilize their fragile finances through years of planned austerity.

The assistance to Bahrain will be spread over five years and cover half the government’s financing needs, including debt repayments, as it begins a program of savings that aims to eliminate the budget deficit by 2022.

“The government would be looking to finance the other half through debt as and when needed,” Khalid Al-Rumaihi, chief executive officer of the country’s Economic Development Board, said in a telephone interview Thursday.

Gulf governments came to the aid of two fellow Sunni-ruled monarchies seen key to regional stability for different reasons. Bahrain is part of Saudi-led alliance against Shiite Iran and gas-rich Qatar, while Jordan is home to large population of Syrian refugees and has historically played a key role in the Israeli-Palestinian conflict.

Support for Bahrain should also help avert a currency devaluation that investors fear could force other countries in the oil-exporting region to follow suit. It should also allow the tiny Gulf kingdom, a close Saudi and U.S. ally, to borrow from international debt markets at cheaper interest rates.

The yield on Bahraini Eurobonds due in 2028 pared gains after news that the deal would be signed Thursday. The yield has plummeted about 3 percentage points since reaching a peak at the end of June.

‘Very Encouraging’

Investors who bought Bahrain’s battered bonds on the expectation that the island kingdom’s wealthy neighbors would come to its rescue, welcomed the package. Among them is Franklin Templeton Investments.

“The headline number is very encouraging, and alleviates the risk of any short-term dislocation,” said Mohieddine Kronfol, its chief investment officer for global sukuk and Middle East and North Africa fixed income, noting additional information was needed to address sustainability concerns. “Some good news we could all use today.”

Bahrain’s economy, the smallest among the six members of the oil-rich Gulf Cooperation Council, had been hit hard by lower crude prices since 2014. Thursday’s deal follows months of negotiations over Bahrain’s planned fiscal overhaul, which aims to save 800 million Bahraini dinars ($2.1 billion) annually. The program involves a voluntary retirement scheme for state employees and other measures to cut government spending.

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The country has been relying on bond markets to finance its 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.

Help for Jordan

Gulf finance ministers arrived in Bahrain from Amman, where they finalized a $2.5 billion package promised in June after protests against planned tax hikes brought down the government earlier this year.

Saudi Arabia, Kuwait and the U.A.E. will deposit $1 billion in Jordan’s central bank, and offer the kingdom a $600 million loan guarantee and $150 million in budget aid annually for five years, according to a Saudi Finance Ministry statement.

The funds will give Jordan’s government breathing room to implement fiscal reforms aimed at reducing the budget deficit and stabilizing an economy strained by the influx of 1.5 million refugees.

Tax increases were among reforms agreed with the International Monetary Fund in 2016 under a $723 million loan program. Jordan, an oil-importer that has for decades relied on foreign aid from the U.S. and oil-producing Gulf nations, is struggling to reduce subsidies and cut spending while protecting its poor.

The three Gulf countries will also provide $50 million each for the construction of schools in Jordan, according to the Saudi statement. The U.S. this year committed to give Jordan more than $6 billion in aid over the next five years, up from $1 billion annually.

Jordan, whose public debt nearly equals economic output, has been hurt by the rise in global commodity prices. Unemployment is at a two-decade high and the proposed income-tax law sparked some of the largest protests since the Arab Spring uprisings of 2011.

A revised tax plan that increases levies on banks and the telecommunications sectors was approved by the government last month but has yet to be passed by parliament.

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