The rebounding dinar prompted investors to buy back Bahraini debt
Bahrain’s dinar recovered from 17-year lows and its bond prices rebounded on Wednesday after the country’s diplomatic allies in the Gulf pledged to prevent its ballooning public debt from triggering a financial crisis, reported Arab Times.
The dinar bounced to 0.37 against the US dollar in early spot market trade, recovering from a 0.38 low away from its official peg of 0.37 as hedge funds dumped Bahraini bonds.
The yield on the kingdom’s international bond maturing in August 2023 plunged to 7.58 per cent from 8.95 per cent though it stayed far above early 2018 levels of 5.22 per cent.
Bankers said the pledge of aid to Bahrain by Saudi Arabia, the United Arab Emirates and Kuwait eased fears that Manama might be unable to redeem a $750 million Islamic bond that will mature in November.
“It’s time to buy Bahrain,” Barclays said in an analyst report, predicting the aid pledge would ease international investors’ worries about the country’s solvency, Arab Times reported.
However, the cost of insuring Bahrain’s debt against default remained high, suggesting many investors are still sceptical about the country’s ability to stabilise its finances over the long term without repeated injections of aid.
On Tuesday, Saudi Arabia, the United Arab Emirates and Kuwait said they were in discussions on aid for Bahrain and would consider all options to support the country.
They promised “an integrated programme that will soon be announced to enable the kingdom of Bahrain to support its economic reforms and fiscal stability”. No details were given, according to Arab News.
The small size of the Bahraini economy would make it relatively easy for neighbouring states to bail it out. Manama has projected a state budget gap of $3.5 billion in 2018, far less than the hundreds of billions of dollars which each of its neighbours hold in their sovereign wealth funds.
Bahrain’s state finances are among the weakest in the region; the International Monetary Fund warned last month that Manama needed to reform its finances urgently, as public debt had jumped to 89 per cent of gross domestic product last year.
Domestic political opposition has slowed austerity plans designed to cut the government’s budget deficit. Many bankers think that unless authorities can ram through tax increases and spending cuts, its finances will remain shaky.