Saudi Arabia, Kuwait and the UAE are likely to make financial support to Gulf neighbour Bahrain conditional and explicit as the relationship eventually undergoes a "fundamental shift", according to a research paper by Bank of America Merrill Lynch.
The Gulf countries said on Tuesday they will soon announce an integrated programme to support Bahrain’s economic reforms and its fiscal stability.
The announcement comes as the International Monetary Fund expects Bahrain’s debt to exceed 100 percent of economic output in 2019.
Bahrain’s finances have been hit hard by a slump in oil prices in 2014. On Tuesday, its dinar plunged to a 17-year low against the US dollar as hedge funds dumped Bahraini bonds because of concern about rising public debt.
Bank of America Merrill Lynch's MENA economist Jean-Michel Saliba said: "We expect GCC support to Bahrain to move to being conditional and explicit, from unconditional and implicit previously. However, an acute pick-up in dollarisation and capital outflows could precipitate downside risks if negotiations fail.
"Recall that press reports in November 2017 suggested that GCC countries have requested Bahrain undertake fiscal reforms in exchange for financial support to stave off devaluation. The GCC-Bahrain relationship is thus likely to eventually undergo a fundamental shift."
He added that the timing of support from GCC countries remains uncertain and may be pushed back to 2019 due to the legislative recess in Bahrain and the country's late-year parliamentary elections which will delay the adoption of fiscal reforms.
Saliba also said he expects the negotiations with the GCC to conclude prior to the third quarter of this year.
Manama has projected a state budget gap of $3.5 billion in 2018.For all the latest banking and finance news from the UAE and Gulf countries, follow us on Twitter and Linkedin, like us on Facebook and subscribe to our YouTube page, which is updated daily.
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