Gulf allies pledge billions in aid for Bahrain and Jordan

Manama, Bahrain, in 2013.


By FIONA MACDONALD AND ZAINAB FATTA | Bloomberg | Published: October 4, 2018

Gulf Arab allies will pledge $10 billion in aid to Bahrain and finalize $2.5 billion in assistance for Jordan on Thursday, in an effort to stabilize their fragile finances through years of planned economic reforms.

The assistance to Bahrain will be spread over five years and will include loans, deposits and grants, a Gulf official said, declining to be named as the information isn't public. For Jordan, where protests against planned tax hikes brought down the government earlier this year, the aid will include a $1 billion deposit in the central bank.

Support for Bahrain should help avert a currency devaluation that investors fear could force other countries in the oil-exporting region to follow suit. It should also allow the tiny Gulf kingdom, a close Saudi and U.S. ally, to borrow from international debt markets at cheaper interest rates.

The yield on Bahraini Eurobonds due in 2028 pared gains after the news. The yield has plummeted about 3 percentage points since reaching a peak at the end of June.

Investors who bought Bahrain's battered bonds on the expectation that the island kingdom's wealthy neighbors would come to its rescue, welcomed the package. Among them is Franklin Templeton Investments.

"The headline number is very encouraging, and alleviates the risk of any short-term dislocation," said Mohieddine Kronfol, its chief investment officer for global sukuk and Middle East and North Africa fixed income, noting additional information was needed to address sustainability concerns. "Some good news we could all use today."

Bahrain's economy, the smallest among the six members of the oil-rich Gulf Cooperation Council, had been hit hard by lower crude prices since 2014. Thursday's deal follows months of negotiations over Bahrain's planned fiscal overhaul, which is expected to involve spending cuts and measures to increase non-oil revenue, including the introduction of value-added tax.

The country has been relying on bond markets to finance its budget and current-account deficits and replenish its foreign-currency reserves. Authorities scrapped a bond sale in March after investors sought higher yields, but raised $1 billion from Islamic securities.

Asked about the Bahrain aid plan, Kuwait's Finance Ministry said it doesn't comment on stories based on unnamed sources. Officials in Saudi Arabia, Bahrain and the United Arab Emirates didn't immediately respond to requests for comment.

Gulf finance ministers will head to Bahrain from Amman, where they announced a separate aid package for Jordan. Saudi Arabia, Kuwait and the U.A.E. will deposit $1 billion in Jordan's central bank, and offer the kingdom a $600 million loan guarantee and $150 million in budget aid annually for five years, according to a Saudi Finance Ministry statement.

The aid is part of a $2.5 billion package pledged to Jordan in June after a proposed income-tax increase sparked some of the largest protests since the Arab Spring uprisings of 2011.

The funds will give Jordan's government breathing room to implement fiscal reforms aimed at reducing the budget deficit and stabilizing an economy strained by the influx of 1.5 million refugees.

Tax increases were among reforms agreed with the International Monetary Fund in 2016 under a $723 million loan program. Jordan, an oil-importer that has for decades relied on foreign aid from the U.S. and oil-producing Gulf nations, is struggling to reduce subsidies and cut spending while protecting its poor.

The three Gulf countries will also provide $50 million each for the construction of schools in Jordan, according to the Saudi statement.

Jordan, whose public debt nearly equals economic output, has been hurt by the rise in global commodity prices. Unemployment is at a two-decade high. The U.S. this year committed to give Jordan more than $6 billion in aid over the next five years, up from $1 billion annually.

The current premier, Omar Al Razzaz, withdrew the offending tax proposal after taking office. A revised tax plan was approved by his government last month but has yet to be passed by parliament. It increases taxes on banks, telecommunications and other sectors.

Bloomberg's Netty Ismail, Abbas Al Lawati and Lin Noueihed contributed.

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