Bahrain's central bank is likely to step in to support currency devaluation as capital outflows from Bahrain's economy has begun to put pressure on the smallest Gulf economy
Outflows add pressure to Bahrain woes
Capital outflows from Bahrain have begun to put pressure on the smallest economy in the Gulf and could lead the kingdom's central bank to step in to support the currency.
Staff from international banks, law firms and other companies have relocated to Dubai and parts of Europe as a blockade prevented access to the financial centre, which is estimated to account for a quarter of Bahrain's economy.
This has put pressure on the dinar as office workers convert cash to their home currencies and withdraw it from local accounts.
The scale of capital outflows from the kingdom of 1.2 million people is hard to estimate because of a lack of immediate data.
The dinar, which is pegged to the dollar, weakened away from its 0.376 rate last week, dropping as far as 0.37705 on Friday's close.
Some market commentators said the central bank had already intervened to support the currency, and a source at the central bank said it would do "whatever it takes to support" the dinar.
But the Central Bank of Bahrain (CBB) said: "There was no action taken as CBB doesn't see any reason or need to [intervene] as the currency is trading at its normal level."
Market commentators have said intervention is likely if the dinar continues to weaken against the dollar.
"The central bank has to inject more capital to support the currency by buying the currency," said John Sfakianakis, the chief economist at Banque Saudi Fransi. "I think they have already exercised this and I think they'd do it again.
"People and businesses have become more jittery and, naturally under these circumstances, money will flee the region rather than stay, putting pressure on the currency."
Bahraini foreign exchange reserves stand at nearly US$5 billion (Dh18.36bn), or about 20 per cent of GDP.
This is more than enough to absorb the excess dinars sold in the market, said Mahmood Akbar, an analyst at Securities and Investment Company in Manama.
But Mr Akbar said it was "extremely unlikely" this would be required.
A $10bn aid package from the GCC has helped prop up the market but Bahrain has faced several downgradings by debt rating agencies since protests started last month, and the cost of insuring its sovereign debt has hit 20-month highs.