Bahraini dinar-dollar peg safe say analysts
Manama, March 17, 2011
The central bank's tight control over the foreign exchange market, and the possibility of other Gulf countries providing financial support, mean there is no threat to Bahraini dinar's peg against the US dollar, analysts said.
Bahrain is likely to avoid a full-blown currency crisis as the kingdom's reserves would be enough to see off any threat to the peg, especially because the peg system helps the central bank to influence trade, they said.
The dinar briefly weakened away from the 0.376 peg to the dollar on Wednesday, dropping as far as 0.37716, but it soon bounced back as the central bank intervened to supply dollars.
The central bank had net foreign assets of just $4.7 billion at the end of October 2010.
'We do not expect pegs to be broken. It would create a bit of precedent in the region and many central banks and authorities across the GCC have been priding themselves on keeping the pegs unchanged,' said Bartosz Pawlowski, head of strategy for the region at BNP Paribas in London.
'In order to have a pressure on the peg you need to have a really functioning market. The risks as we stand are minimum.'
If necessary, Saudia Arabia might use its resources to defend Bahrain financially, just as it is physically deploying its troops, analysts said.
'Bahrain has foreign reserve resources to support the currency and at the very end of the day even if there were pressures, Saudi Arabia and GCC would likely alleviate pressure through further financial assistance,' said Farouk Soussa, Middle East chief economist at Citi in Dubai.
Bahrain, which needs crude oil prices as high as $97 per barrel to be able to balance its budget, is set to receive $10 billion from its wealthier Gulf neighbours to upgrade housing and infrastructure over 10 years.
However, a tumble by the Bahraini dinar in the forwards market on Wednesday suggested what might happen to the currency if authorities did not maintain consistent support. The forwards briefly implied dinar depreciation of about 0.9 percent in one year's time, before they bounced back in response to the central bank intervention.
The small non-Opec oil producer, where nearly $10 billion in mutual funds was parked last year, is the first Arab banking hub to be hit directly by the political instability sweeping across the Middle East and North Africa.
It is struggling to contain its worst unrest since the 1990s, prompting Saudi Arabia to send in troops in an effort to restore order. As many as six people were killed on Wednesday.
'A normal reaction to the ongoing downgrades by credit rating agencies would be outflow of short-term capital from the country, but different from other examples, possible financial helplines from other GCC (Gulf Cooperation Council) countries are an alleviating factor,' said Kubilay Ozturk, EMEA economist at Deutsche Bank in London.
But bankers said there had been substantial outflows of funds from Bahrain this week. The scale of capital outflows from the smallest Gulf economy of 1.2 million people is hard to estimate because of a lack of timely data.
Bahrain banks hold assets of about $200 billion. - Reuters