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Wed 11 Jul 2018 04:53 PM

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Bahrain's Gulf allies offer a helping hand

Why the UAE, Saudi Arabia and Kuwait are stepping in to help Bahrain with an economic assistance programme

Bahrain's Gulf allies offer a helping hand
Bahrain has also announced the establishment of a $100m “fund of funds” to help start-ups across the Middle East

After a long absence of any signal of financial aid from Bahrain’s neighbours sent the kingdom’s credit risk rising – the most of any emerging market – the UAE, Saudi Arabia and Kuwait have recently stepped in with promises of a new programme that will be a welcome relief for Bahrain’s economy.

Although precise details of the programme have yet to be revealed, in a statement last week the three countries said they were in the midst of discussions “to confirm their commitment to consider all options to support the Kingdom of Bahrain and to finalise an integrated programme that will soon be announced to enable the Kingdom of Bahrain to support its economic reforms and fiscal stability.”

Why now?

For Bahrain, the announcement couldn’t have arrived at a more opportune or important time, coming just days after the cost of insuring Bahrain’s debt against default spiked 170 basis points to 609 on Monday last week, the most since records began in 2008.

That alarming statistic is the highest among Bahrain’s emerging-market peers after Lebanon. Additionally, the Bahraini dinar – whose peg to the dollar has remained a constant since 1980 – fell in the onshore market to its weakest level since 1988.

Bahrain’s Central Bank has committed to keeping the Bahraini dinar’s peg to the dollar, prompting a decline in the yield of the kingdom’s dollar bond due in 2022. “That’s because the question isn’t whether the Central Bank is committed or not,” Medley Global Advisors lead Gulf analyst Nick Stadtmiller is quoted as saying by Bloomberg.

According to the International Monetary Fund (IMF), Bahrain has a projected state budget gap of $3.5bn, and remains alone among the oil-producing nations of the GCC in that it needs oil prices to rise above $100 to balance its budget this year. In 2019, the IMF expects that the kingdom’s debt will exceed 100 percent of its economic output.

For these reasons, investors were hoping that Bahrain’s allies in the GCC would make public assurances of support, with Carla Slim, an economist of Standard Chartered in Dubai, telling Bloomberg that “nervousness [was] increasing on the uncertainty of Bahrain’s outlook given the lack of a medium-term debt sustainability plan and the absence of explicit support from Gulf Cooperation Council allies.”

News of the UAE, Saudi Arabia and Kuwait’s pledge – even if it still lacks in detail – gives Bahrain that assurance.

FDI on the rise

The positive news coming from Bahrain’s allies in the Gulf was by no means the only good news regarding Bahrain’s economy to emerge recently. Earlier in June, new data from the United Nations Conference on Trade and Development (UNCTAD) found that inflows of foreign direct investment (FDI) rose 114 percent to Bahrain in 2017, even as global flows of FDI fell by 23 percent.

In a report, the UNCTAD notes that the growth of investment in Bahrain has been bolstered by a number of key economic reforms, such as amendments to its commercial properties law that allow 100 percent foreign ownership in a number of sectors.

“Foreign direct investment creates jobs, diversifies the economy and fuels growth, so we are delighted to see such strong momentum, even against a challenging global backdrop,” remarks Khalid Al Rumaihi, the CEO of the Bahrain Economic Development Board (EDB). “This proves the growing interest in the GCC opportunity is translating into investment.”

Al Rumaihi expects that Bahrain will announce a number of further measures in the coming months to help investors access the GCC through Bahrain, building upon the success of initiatives undertaken in the first half of this year.

Foreign direct investment creates jobs, diversifies the economy and fuels growth, so we are delighted to see such a strong momentum”

A key find

In the long-run, Bahrain’s economy will also benefit from the recent discovery of a vast oil field off the country’s west coast, a find that Bahraini Minister of Industry, Commerce and Tourism Zayed Alzayani recently said was a “gift from God”. While it is clear that the find will have a significant positive effect on the country’s oil and gas sector, Alzayani says that the revenue from the find will have an important knock-on effect on other sectors of the economy.

“What we found in the recent discovery is something additional, and it will no doubt have a positive impact on growing our GDP, and there will no doubt be more contribution from the oil and gas sector,” he notes. “But I think we should act wisely to use the revenues generated by this find to develop our economy and diversify it even further, by reducing national debt [and] by investing in human capital, health services and education.”

A recent analysis from Moody’s noted that the find “could stimulate private investment in the country’s energy sector in the near term, and in the medium-term could increase government and oil and gas-related revenue and reduce the country’s fiscal and current account deficit.”

In 2017, hydrocarbon-related revenue accounted for 75 percent of government revenue, significantly less than the 87 percent recorded in 2013.