The Gulf island kingdom of Bahrain has asked its allies for financial assistance to prevent a devaluation of its currency, according to reports.
Bloomberg cited sources as saying the country had requested funds from Saudi Arabia and the UAE to replenish its foreign exchange reserves. A different source said Kuwait had also been asked.
In return for the money, the countries have initially asked Bahrain to do more to bring its finances under control. The talks are at an early stage, according to the publication.
Bahrain has been among the hardest hit countries in the Gulf Cooperation council by the drop in oil prices, which has raised questions over the sustainability of dollar-pegged currencies in the region.
The country’s allies are deemed unlikely to allow Bahrain’s situation to worsen to the point where it is forced to devalue its currency, pegged at 0.376 Bahraini Dinars to the US dollar, as this could then challenge their own pegs.
“If Bahrain was forced to devalue its currency it would probably start to raise questions about other currency pegs,” Capital Economics’ economist Jason Turvey was quoted as saying.
The latest data available from August, shows Bahrain’s central bank foreign reserves have declined 75 per cent to just over $1.39bn.
The IMF says the country’s budget deficit is expected to narrow this year but will remain the largest in the region. Bahrain’s oil breakeven price is also the highest in the region at $99 a barrel, compared to the recent high for Brent crude this year of just over $60 a barrel.
In August, the organisation warned that Bahrain needed to raise its interest rates to protect its currency and should refrain from central bank lending to cover the government’s budget deficit. It predicted Bahrain’s gross official, external reserves would stay flat at $2.4bn, down from $6.1bn in 2014 and equivalent to only 1.4 months of imports of goods and services.
All three major rating agencies assess Bahraini debt as junk but the country has still successfully borrowed on international markets, with a $3bn bond as recently as September, due to expectations its Gulf allies would prevent a financial crisis.