A statement carried by the official Saudi press agency late on Tuesday said that those three countries are finalising a package “to support economic reforms and the stability of public finances in Bahrain”.
Bahrain CDS was at 438bp on Friday and spiked to 610bp on Monday. But it has since fallen to 390bp.
“I thought the sell-off was overdone,” said one EM syndicate official in London. ”And concern about not meeting the November repayment was an overreaction — the implications of a GCC sovereign default were always too big for Bahrain’s neighbours to ignore.”
Several analysts said before the statement of support for Bahrain, which has a small economy within the Gulf, that a bailout would be forthcoming as its neighbours would be keen to avoid the economic, financial contagion and pressures on their own economies and currency pegs should a default (and de-peg) ensue. But pressure rose as no statement of support was immediately made. The delay in assistance has opened people's minds to the idea of deeper issues within the region.
“The co-ordinated regional support is positive and has helped calm markets for the time being,” said Raza Agha, chief economist, Middle East and Africa at VTB Capital in London. “However, between now and 2029, external debt maturities average $1.1bn annually. Meanwhile, central bank foreign assets were $2.1bn in April 2018. So one time support from regional countries is not a sustainable solution.”
The focus is now on what exactly the terms of the package will be for Bahrain.
Agha said that sustainability will require a multi-year support package backed by policy adjustment.
“Given the dollar peg, policy options have to focus on credible, potent fiscal retrenchment via revenue and spending measures,” he said. “But that’s not it. For sustained market access, investors will need to know what the agreed policy measures are. The current lack of clarity around these issues does raise questions — all the more so as Bahrain’s macro challenges and incrementally expensive market access have been evident for a while.”
Debt has doubled in three years to over 90% of GDP.
The syndicate official agreed that for the country to return to the capital markets, despite the CDS rebound and the show of support from Bahrain’s neighbours, investors will also want to see a clear strategy for improvement.
“Any potential Bahrain new issue would be post-summer,” he said. “So they have time but investors are going to want more of a plan than just a continued bailout from the rest of the GCC. Clearly the money isn’t handed over without strings attached.”