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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.

March 17, 2011 10:58 by

Capital flight from Bahrain is starting to pressure its currency and threaten its position as a Gulf financial centre, though it looks likely to avoid a full-blown currency crisis for now.

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 after majority Shi’ite protesters took to the streets, prompting Saudi Arabia to send in troops in an effort to restore order. As many as six people were killed on Wednesday.

The central bank’s tight control over the foreign exchange market, and the possibility of other Gulf countries providing financial support to prevent market turmoil from spreading, mean Bahrain is unlikely for the foreseeable future to have to abandon the dinar’s peg against the U.S. dollar.

“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. On Wednesday, banks in Manama’s financial district closed down, the central bank operated from an alternate location and the stock market stopped trading.

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