Bahrain Makes Progress in Aid Talks With Gulf Allies

(Bloomberg) -- Bahrain and its Gulf Arab allies are said to be making progress on an aid program to help the island-kingdom repair its finances and avoid a devaluation that could roil neighboring markets.

Officials from Bahrain, Saudi Arabia, the United Arab Emirates and Kuwait are discussing a multi-year program that would involve spending cuts and measures to increase non-oil revenue, including the introduction of a value-added tax, according to five people with knowledge of the matter. They asked not to be identified because the details aren’t public.

The Arab Monetary Fund, an organization modeled on the Washington-based International Monetary Fund, has been involved in the discussions, some of the people said. The fund, based in Abu Dhabi, may also help to monitor the program’s implementation.

Bahrain’s economy is the smallest among the six members of the oil-rich Gulf Cooperation Council. But investors fear that without aid to help bolster low foreign-exchange reserves and cut ballooning debt, the tiny kingdom will be forced to abandon the dinar peg to the dollar, triggering speculation that its neighbors would follow suit. Bahrain officials have repeatedly said they have enough reserves to maintain the peg.

Read More: Bahrain Is Said to Hire Lazard for Advice on How to Fix Finances

Bahrain’s dollar-denominated Eurobonds reversed declines after the report, with the yield on securities due 2028 falling by two basis points to 8.11 percent, according to data compiled by Bloomberg.

The kingdom and its allies announced in June they were in talks over aid, giving the country’s assets a much-needed boost. The nation’s bonds were the hardest hit in the Gulf this year as investors worried that the implicit support Bahrain has from Saudi Arabia, Kuwait and the United Arab Emirates wouldn’t materialize.

But the rally fizzled out this month as investors look for details of the aid package.

“This is significant because the presumption was increasingly that complacency was setting in, and a likelihood that Bahrain was playing with brinksmanship,” said Richard Segal, senior analyst at Manulife Asset Management Ltd. in London. "This could be an impetus for further rallies, which had tended to stall, and would be justified both by the committed liquidity from the GCC but also better fundamentals in the future."

Officials in Bahrain, Saudi Arabia, the U.A.E and the Arab Monetary Fund, weren’t immediately available for comment. Kuwait’s Finance Ministry said it doesn’t comment on speculative stories.

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