Bahrain Central Bank Net Foreign Assets Fall in May

Net foreign assets at Bahrain’s central bank fell in May, according to official data released that may fuel concern about the country’s ability to defend its currency against a current account deficit and rising public debt. The assets dropped to 671.1 million dinars (US$1.78 billion) from 779.4 million dinars (US$2.06 billion) in April, the central bank said.

Net foreign assets at Bahraini retail banks also fell, to minus 1.20 billion dinars (US$3.18 billion) from minus 1.17 billion (US$3.10 billion), meaning liabilities exceeded assets. Combined, the net foreign assets of the central bank and retail banks sank to minus 526.1 million dinars (US$1.39 billion) in May — the lowest level on record. Bankers say the central bank sometimes uses swap agreements or other deals to obtain foreign currency as needed from retail banks, bolstering its reserves. The simultaneous fall of both sources of foreign currency suggests that strategy may become increasingly difficult.

Yesterday’s data showed the central bank’s net foreign assets were equivalent to about 40 days’ worth of imports; some economists believe a safe level of reserves for emerging economies is around 90 days. Bahrain also has investments abroad which it might liquidate if it needed hard currency. Analysts believe Bahrain’s diplomatic allies in the GCC have been quietly providing it with infusions of hard currency to support its reserves.

For example, Bahrain made a private placement of US$500 million of government development bonds to an unnamed regional institution in April, according to Jean-Michel Saliba, regional economist at Bank of America Merrill Lynch. But yesterday’s data suggested such informal, occasional aid might no longer be enough to support Bahrain’s foreign reserves and that a much larger, long-term assistance program could be required.

Bahrain’s dinar, pegged at 0.37608 to the US dollar, slipped to a 17-year low last week as hedge funds dumped its global bonds because of jitters about Manama’s public debt, which jumped to 89% of gross domestic product last year. The markets then partially rebounded after Saudi Arabia, the UAE and Kuwait said they would soon announce an assistance program to support the country’s fiscal stability and economic reforms.

However, the allies did not give any details, and many bankers think that even if Bahrain is bailed out, its finances will remain shaky unless it can also introduce tough austerity steps to shrink its state budget deficit. Domestic political opposition has so far blocked such steps. The cost of insuring Bahrain’s sovereign debt against default fell but remained high even after last week’s pledge of assistance, with credit default swaps now implying a nearly 24 % probability of default in the next five years.