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Capital flight threatens Bahrain, FX peg safe for now

Capital flight threatens Bahrain, FX peg safe for now

Clients move money from Bahraini banks; Currency under pressure but immediate risk to peg small; Other Gulf countries could support Bahrain if needed; But stock exchange, bank closures set worrying precedent.

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March 17, 2011 10:58 by



CURRENCY

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.

Although the central bank had net foreign assets of just $4.7 billion at the end of October 2010, many analysts said its reserves would be enough to see off any threat to the peg, especially because the peg system helps the central bank to influence trade.

“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.

(By Martin Dokoupil. Additional reporting by Martin De Sa’Pinto in Zurich and Frederik Richter in Manama; Editing by Andrew Torchia)



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