Another Gulf Crisis: Dinar Devaluation Looms As Bahrain Begs Neighbors For Bailout

Despite the recent rise in oil prices, all is not well among the allies in the Gulf. The "pegged-to-the-dollar" Bharaini Dinar has tumbled in the last few days as Bloomberg reports the nation has asked Gulf Arab allies for financial assistance as it seeks to replenish its foreign-exchange reserves and avert a currency devaluation - which could spread contagiously through MidEast markets.

Bloomber notes that the slump in oil prices has battered the six-member Gulf Cooperation Council, at times raising questions over whether a dollar peg seen as a bedrock for economic stability for more than three decades was sustainable. And while bets against the region’s currencies have subsided this year, a devaluation of a GCC member would risk shifting the attention to others. Gulf central banks, including Bahrain’s, have repeatedly brushed aside talk of abandoning their exchange-rate regimes.

But Bahrain has seen its central bank"s foreign reserves collapse over 75% from 2014 highs as they have defended the currency peg.

And so, as Bloomberg reports, according to people with knowledge of the talks, Bahrain has asked for a bailout.

The request was made to Saudi Arabia and the United Arab Emirates, two of the people said.

 

A third person said Kuwait was also asked.

 

The countries responded by requesting the island kingdom do more to bring its finances under control in return for the money, the people said on condition of anonymity because the discussions were private.

 

The talks are at an early stage, one person said.

It appears the FX markets are not convinced as the Dinar tumbled...

The IMF estimates that Bahrain needs oil prices at $99 a barrel to balance its budget this year, compared with $73.1 a barrel for Saudi Arabia, which is overhauling its economy.

While Brent crude is trading at the highest level in more than two years, it’s still almost $40 below Bahrain’s breakeven price.

But, Bloomberg points out that economists say that a Saudi-led bailout of Bahrain will be less costly than cleaning up the mess of a devaluation.

“Most people are fully expecting the other Gulf countries to come to Bahrain’s aid,” said Jason Tuvey, a London-based economist at Capital Economics.

 

“If Bahrain was forced to devalue its currency it would probably start to raise questions about other currency pegs.”

Will this be the next ripple to spook markets? Or just another dip to buy?