Bahrain borrowing 'critical' for currency peg after FX reserves drop - Moody's

Bahrain's foreign reserves more than halved between February and March

  
A Central Bank of Bahrain official shows a new BD$20 (Bahraini 20 Dinars Note) on the first day of its release in Bahraini capital of Manama

A Central Bank of Bahrain official shows a new BD$20 (Bahraini 20 Dinars Note) on the first day of its release in Bahraini capital of Manama

REUTERS/Hamad I Mohammed

DUBAI- Bahrain will need to attract additional capital this year, including through borrowing to sustain its currency peg, after a huge drop in foreign reserves due to low oil prices, ratings agency Moody's said.

One of the financially weakest countries in the Gulf, Bahrain's foreign reserves more than halved between February and March, and then dropped to 290 million Bahraini dinars ($768.82 million) in April, central bank data showed.

That was their lowest level since 1990, Moody's said.

Reserves picked up in May, rising to $1.8 billion, after Bahrain issued $2 billion in bonds. 

"The sharp drop of nearly $2.7 billion (or 78%) between February and April highlights Bahrain's exceptionally high external vulnerability risk given that its longstanding exchange-rate peg is supported by only a very thin foreign currency buffer," Moody's said in a note.

Bahrain maintains an exchange-rate peg at 0.376 Bahraini dinars to the US dollar.

Its current account deficit could widen to around $2 billion between June and December this year, said Moody's.

"The ability of Bahrain to attract additional net capital inflows this year (including in the form of external borrowing by the government) will be critical to sustaining the currency peg and avoiding a depletion of reserves," it said.

Bankers and analysts have told Reuters that Bahrain, rated as junk by major credit rating agencies, may need more financial aid from fellow Gulf states as soon as this year. urn:newsml:reuters.com:*:nL8N2CL0CS

In 2018, the small oil producer received a $10 billion aid package over five years from Saudi Arabia, Kuwait and the United Arab Emirates to help it avoid a credit crunch

($1 = 0.3772 Bahraini dinars)

(Reporting by Davide Barbuscia; Editing by Pravin Char) ((Davide.Barbuscia@thomsonreuters.com; +971522604297; Reuters Messaging: davide.barbuscia.reuters.com@reuters.net))

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