Bahrain’s foreign reserves have more than halved since the end of 2014 as low oil prices slash the value of the country’s exports, the prospectus for the kingdom’s sovereign bond issue this week shows.
The central bank of Bahrain, one of the Gulf states hit hardest by cheap oil, has not published its monthly monetary statistics bulletin since June 2015. It has not responded to requests for comment on why it halted publication.
That leaves bond prospectuses as a key source of data on the kingdom. The government has been increasing its debt issues to finance a budget deficit caused by cheap oil, and on Tuesday it sold $1bn of seven-year Islamic bonds and $1bn of 12-year conventional bonds.
Gross foreign reserves held by the central bank, including gold, shrank to $2.78bn on June 30 this year from $3.39bn at the end of last year and $6.06bn in 2014, the Islamic bond prospectus showed.
At the end of 2014, reserves were worth 3.7 months of Bahrain’s imports, the prospectus said. That implies reserves have now dropped well below 90 days of import cover, a level traditionally considered by many economists to be at the bottom of a country’s comfort zone.
Bahrain’s current account balance, which includes trade in goods and services, fell into a $79m deficit last year from a $1.52bn surplus in 2014, the prospectus showed.
Despite the falling reserves, this week’s bond issues attracted a healthy combined order book of over $7bn, and the Bahraini dinar, which is pegged to the U.S. dollar, has come under only modest pressure in the forwards market during the past few months.
Bahrain’s central bank has repeatedly said it is able and determined to preserve the dinar’s peg against the dollar, but the prospectus noted that ultimately, the dinar’s value depended on some factors which were outside the government’s control.
“There can be no assurance that there will not be a need for a devaluation as a result of external factors,” it said.
Bahrain receives financial support from Saudi Arabia, a close political ally, and the markets expect Riyadh to extend more aid if necessary to avert any crisis.
Bahrain’s main source of oil is the Abu Saafa oilfield, which it shares with Saudi Arabia. Under their treaty, Bahrain is entitled to 50 percent of the field’s output, but the prospectus noted that it had been receiving “significantly more” than that ratio.
Bahrain is also benefiting from a regional development fund established by Saudi Arabia and two other rich neighbours, Kuwait and the United Arab Emirates. The fund, established in 2011, aims to provide Bahrain with $7.5bn of grants over a 10-year period.
Of that amount, $6.2bn has been earmarked for development projects in Bahrain but only $500m has actually been disbursed, the prospectus said.