Bahrain, which has a high-risk debt rating from the three major credit rating agencies, received in 2018 a $ 10 billion aid package over five years from Saudi Arabia, Kuwait and the United Arab Emirates, to help it avert a credit crunch in a deal linked to financial financial reform.
But the small country allied with the United States, which is a small oil producer, may need more than the allocation for the year 2020 to meet the needs of greater financing in light of oil prices between $ 20 and $ 30 a barrel.
Last March, Bahrain announced a $ 11 billion stimulus package, which includes plans to spend $ 570 million on private sector salaries to reduce the impact of the Corona virus on the economy.
“We estimate that Bahrain needs additional funding in 2020 from the $ 10 billion support package it received in 2018,” Goldman Sachs emerging market analyst Sarah Groot told Reuters.
The Ministry of Finance declined to comment on the date, in which it expects to receive this year’s tranche of $ 10 billion in aid over five years, which will reach $ 1.76 billion, according to official plans announced last year.
According to the International Monetary Fund, Bahrain’s budget deficit is expected to jump to 15.7% of GDP this year from 10.6% in 2019. Initial estimates for Bahrain in February predicted that the deficit for 2019 would amount to 4.7% of GDP.
A banker specializing in debt in the Gulf region said that Bahrain’s financing gap would be “insignificant”, especially with additional aid, but support from its neighbors “may not be very close this time.”
Bahrain lacks the abundant oil and financial resources its neighbors enjoy, and its public finances are among the weakest in the region. But its Gulf allies provide political and economic support to maintain its stability over the years, given its importance in countering Iranian influence in the region.
Bahrain, which is home to the US Navy’s Fifth Fleet, shares the concern of some Shiite citizens of the two Sunni families, and accuses Iran of stoking it, a charge Tehran denies.
“The small size (of Bahrain) and its strategic importance support continued support” from Gulf allies, but Manama will need to use the rest of the package faster, said Fitch Els, director of Fitch.
According to the Ministry of Finance, measures to squeeze public spending, including a 30% cut in ministries ’administrative budgets and postponement of massive infrastructure projects, will ensure government spending remains within the budget ceiling for 2020. The ministry said in a statement emailed to Reuters that Bahrain intends to Issuing international bonds twice this year.
Banking sources had told Reuters that Manama obtained a loan of about one billion dollars to repay the bonds worth 1.25 billion dollars, due to be due at the end of March, after the suspension of plans to issue international bonds in light of the worsening market conditions.
But two banking sources said they had to rely on local banks to complete the deal. One of them said, “The international banks that usually lend to Bahrain were neutral this time.”
With foreign reserves at the central bank reaching $ 3.4 billion at the end of February, some are questioning Bahrain’s ability to protect its currency pegs to the US dollar.
“I saw some recommendations for a devaluation of the Saudi riyal, but I think the two most visible currencies in the region will be the Omani riyal and the Bahraini dinar,” said Tim Ash, chief analyst of emerging debt for emerging markets at the BlueBay Asset Management Corporation, in an email sent last month.
The returns of Bahraini dollar bonds due in 2047 rose sharply by about 180 basis points since the beginning of March. Goldman Sachs said in a research note that Manama’s foreign exchange reserves are probably not sufficient to accommodate the decline in its ongoing transactions if oil remains around $ 30 a barrel this year.
“Bahrain has already undertaken reforms, so what is the area that has been left in effect?” Said a Dubai-based fund manager. Referring to subsidy reductions and the introduction of VAT as part of a program to achieve parity budget by 2022.
In the end, he added, it is about oil prices, “If you stay at $ 20, I think you can forget everything about (Gulf) support.”