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Bahrain's central bank foreign currency assets rose by almost $800 million in June from May, recovering further from pandemic lows but still modest for an oil-led economy with a currency pegged to the dollar, HSBC said on Thursday.
"However, the rise means that reserves have risen 50% in the space of a year to their highest level since Q4 2015, continuing the recovery from COVID-19-era lows when holdings fell to just USD770m," Simon Williams, HSBC chief economist for Central and Eastern Europe, Middle East and Africa, said in a research note.
It was the third consecutive month-on-month rise in foreign currency assets, to 1.95 billion dinars ($5.17 billion), he said.
"Subsequent to the June data, Bahrain repaid a USD1.5bn Eurobond which could have required the authorities to tap reserves, but Bloomberg data also show there was a USD1bn private placement that may have preserved liquidity," Williams said.
A small oil producer, Bahrain is one of the most heavily indebted of the hydrocarbon-rich Gulf Cooperation Council countries and is rated "junk" by credit rating agencies.
The rise in reserves reflects a strong current account performance, with eight straight quarterly surpluses notched since the second quarter of 2021 worth a cumulative $3.8 billion, or 8% of HSBC's estimate for gross domestic product this year, Williams said.
"The performance has been driven by higher oil earnings, but non-oil exports have also gained and services credits have risen as the tourism sector strengthened, buoyed by demand from Saudi Arabia," he said.
"While the external position has improved, other challenges persist."
Bahrain was the only one of the six GCC countries to post a budget deficit last year amid a windfall for the others from booming oil prices.
GDP growth slowed in the first quarter to 2% from 4% in the fourth quarter and almost 5% for 2022.
"The dip primarily reflects maintenance work that saw oil output fall and the hydrocarbon GDP contract by nearly 6% y-o-y," Williams said.
"However, while non-oil growth was stronger at 3.5% y-o-y, the pace is well down on close to 6% recorded last year, with strong gains in transport and tourism in Q1 offset by a contraction in manufacturing and construction," he added.
($1 = 0.3769 Bahraini dinars)
(Reporting by Yousef Saba Editing by Keith Weir)