GCC support for Bahrain could be pushed back to 2019 – BofAML

Gulf Cooperation Council countries could delay financial support to Bahrain until 2019, according to Bank of America Merrill Lynch (BofAML).

Saudi Arabia, the UAE and Kuwait issued a statement late Tuesday indicating they were in discussions on aid for Bahrain to support “its economic reforms and fiscal stability”.

The announcement helped the Bahraini dinar recover from a 17-year low and bond prices rebound on Wednesday.

Read: Bahrain dinar, bonds rebound after GCC allies pledge to avert debt crisis

In a report, BofAML MENA economist Jean-Michel Saliba said this support could be held back until 2019 to allow current subsidy discussions between Bahrain’s parliament and the government to conclude and time for parliamentary elections after the summer recess.

Read: Bahrain seeks deal with parliament on new subsidy system

The bank had previously indicated GCC support for Bahrain was likely to become conditional on reforms moving forward.

Read: GCC financial support to Bahrain could become conditional – BofAML

“Alternatively, a GCC deal could be announced prior to the November 2018 maturity to ensure market access, leaving reforms to be fleshed out in 2019. This would also allow for completion of elections. Authorities have banned members from dissolved opposition parties from running in parliamentary elections.”

The bank noted unofficial GCC support had likely already been deployed several times in recent years.

Neighbouring countries likely provided a $3bn increase in forex-denominated non-resident deposits in retail banks from January 2015 to March 2018 along with an increase in FX reserves in March 2017, separate $500m private placements in a government development bonds in August 2017 and April 2018 and a $2.8bn FX-denominated deposit by regional social security funds at retail banks in April 2018, BofAML indicated.

“The April 2018 GCC intervention was timely as it cushioned against the difficult reception of the March 2018 international bond issuance,” the bank noted.

Going forward, the lender said it expected negotiations for further support with the GCC to conclude prior to the third quarter, which could allow Bahrain to refinance a November 2018 sukuk. However, it does not expect debt restructuring to be a condition in return for fiscal reforms.

“Should market stress remain intense, we anticipate official GCC FX transfers may be needed and forthcoming.”