Complex Made Simple

$10bn Bahrain aid package soon to be inked with Saudi, UAE, Kuwait

Bahrain’s financial problems may soon be alleviated with the signing of the long-awaited aid package from neighboring Gulf countries.

Reuters just reported that Saudi, Kuwait and the UAE will soon sign an agreement to provide up to $10 billion of financial support to Bahrain, quoting an unnamed Gulf diplomatic source telling Kuwait’s Al-Rai newspaper on Thursday.

So when?

The agreement will be signed in Bahrain after the ministers complete their current visit to Jordan, where they are concluding a financial aid deal for that country, the newspaper reported.

“A Gulf decision at the highest levels was taken to start the execution steps for a program to support the financial stability of Bahrain,” the diplomatic source was quoted as saying.

“Bahrain’s international bond prices and currency have come under pressure this year as the kingdom runs fiscal and current account deficits partly caused by low oil prices,” says Reuters.

The Gulf lenders had linked the aid package with reforms to Bahrain’s finance, including the introduction of VAT and changes to the pension system.

Sources in Bahrain told Reuters last month that the government planned to push reforms through parliament before Nov. 24 elections to the assembly.

Read:Expats love Bahrain, but country’s economy teetering on the edge

Aid explained

A $10 billion package would be worth about a quarter of Bahrain’s annual GDP and 28% of public debt and cover over two years of state budget deficits, according to International Monetary Fund projections.

Bahrain has also become strained under the weight of public subsidies, and now faces growing debt problems on the back of low oil prices from 2014 to 2017, with public debt reaching 89% of its roughly $33 billion GDP in 2017, while fiscal deficit reached 13% of GDP.

The International Monetary Fund (IMF) forecast that public debt could reach 100 percent of GDP in 2019.

The country is also facing low foreign currency reserves, highlighted when the country declared in June 2018 it had enough to cover only 1.5 months of imports.

Saudi, Kuwait and the UAE, which have hundreds of billions of dollars in their sovereign wealth funds and with Brent oil trading above $80 a barrel, have seen their own deficits narrow sharply or disappear in recent months.

Read:Bahrain resisted reform, has finally succumbed. Why?

Bahrain’s newest investment plans

Kuwaiti officials announced on Oct. 2 a major investment plan for two industrial cities — Al-Salmi and Al-Shadadiyah. Al-Jarida reported. Under the plan, Kuwait will distribute 700 industrial land plots in the two cities for development, according to global intelligence site Stratfor.

“The plan would increase the number of industrial units available in Kuwait by 50%, but opening land up to industrial development is a challenge in the country because of land ownership debates, parliamentary opposition, bureaucratic red tape and a strong oil ministry that has opposed land sales on or near oil resources,” Stratfor says.

Kuwait is also planning industrial development for the city of Al Naeem as part of its State Vision 2035 program, which launched in 2017.

Read:What a metro could mean for Bahrain’s future

Crude awakening

Kuwait has not sent any crude oil to the United States for at least four weeks, EIA’s weekly petroleum reports.

The last week that saw Kuwaiti crude coming into the United States was August 24th, when 49,000 bpd were received at U.S. ports, said OilPrice.com.

“This compares with 214,000 bpd a year earlier, suggesting that Kuwait is reorienting itself to the more lucrative Asian markets,” Bloomberg reports, having calculated that Kuwaiti crude costs an average of $80 a barrel in Asia, which is a dollar more than it costs in the US.

“But the emirate is facing a production cap,” Bloomberg notes, “because of an ongoing dispute with ally Saudi Arabia about the fields that they share in the so-called neutral zone.”

Read: Can Bahrain be saved from a “terminal decline”?

On Sunday, Saudi Arabia’s Crown Prince Mohammed bin Salman went on a visit to Kuwait to discuss the topic in light of growing pressure on Middle Eastern producers to ramp up production to offset a loss of supply caused by the U.S. sanctions against Iran.

Joint oil production in the neutral zone was suspended in 2015.

The neutral zone, the Financial Times reported at the time, could be pumping 0.5 million bpd in a few months, according to the International Energy Agency, which would add to more than 10 million bpd of Saudi production and almost 3 million bpd on Kuwaiti production, based on the latest figures for July.