Bahrain was already having a tough time before the Iran war broke out.
The Gulf nation was contending with a debt burden that equated to about 140% of gross domestic product and limited reserves. Then the kingdom, which hosts the headquarters of the US Naval Forces Central Command, was bombarded with missiles and drones, and the near-closure of the Strait of Hormuz and flight disruptions magnified the damage to its economy.
But the two-week truce agreed by the US and Iran — and the likelihood of further negotiations on a more sustained ceasefire — have given Bahrain some relief.
Its bonds, particularly intermediate and long-end securities, have rallied, while option-adjusted spreads in that market segment are now tighter than pre-war levels, according to Bloomberg Intelligence fixed-income strategist on Middle East and Africa Basel Al-Waqayan.
The reason: Investors remain confident the country will secure the support it needs from its larger and wealthier partners in the Gulf Cooperation Council, primarily Saudi Arabia and the United Arab Emirates.
Local funding channels have remained open for the duration of the war, which erupted February 28. The Central Bank of Bahrain said Treasury-bill issuances were fully or over-subscribed last month. And a sukuk sale that took place on April 6 — the day before a deadline US President Donald Trump set to for Iran to open Hormuz or have its power plants and other infrastructure destroyed — was oversubscribed by 225%.
While there was no indication whether the UAE and Saudi investors bought any of the debt, Bahrain’s rules allows for bids by non-residents.
The first official confirmation of foreign support for Bahrain came on April 8, when the central bank and its UAE counterpart signed a five-year, 20bn dirham ($5.4bn) currency-swap agreement, giving Bahrain’s commercial lenders access to additional liquidity.
“In the near-term, any liquidity issues that arise from a decline in revenues can be dealt with through arrangements such as the currency swap with the UAE,” said Farouk Soussa, Goldman Sachs Group Inc’s Middle East and North Africa analyst. “Longer-term, more meaningful support may be required to shore up confidence, particularly as Bahrain seeks to come to the market to refinance its outstanding external debt. Luckily, though, this is unlikely to be before the start of next year, when the next bond redemptions come due.”
On April 13, Bahrain’s central bank unveiled additional support measures for lenders, including loan deferrals. It will also provide retail banks with unlimited dinar liquidity for six months, a facility that must be matched by eligible collateral up to a current limit of 7bn dinars ($18.6bn).
Prior to the war, Bahrain’s fortunes were closely linked to continued financing and support from regional partners, alongside the rollout of a new fiscal program, according to JPMorgan Chase & Co analyst Francesco Arcangeli. He sees the importance of continued regional support having become even more pronounced as the conflict has weighed on economic activity.
“Encouragingly, and consistent with our expectations, we have already seen clear indications of ongoing regional backing,“ Arcangeli said. “The recent swap also sent a strong signal of renewed commitment to support Bahrain.”
Non-oil activities accounted for 85.8% of Bahrain’s GDP last year, according to the finance ministry. The economy is highly dependent on refining, manufacturing, logistics, tourism and financial services — all of which are highly exposed to transport disruptions.
“Bahrain’s resilience in the face of regional tensions is rooted in the Kingdom’s proven economic diversification and fiscal reform programs,” a spokesperson for the country’s national communications center said in response to questions. “Long-term reform of the economy has provided robust macroeconomic stability and the Kingdom’s ability to absorb external shocks.”
Even so, HSBC expects the economy to contract about 4% this year and the budget deficit to breach 8% of GDP. Unlike the UAE and Saudi Arabia, Bahrain’s foreign-exchange reserves remain relatively lower at just over two months of prospective nonhydrocarbon imports of goods and services, the International Monetary Fund reported in January.
That’s a key indicator given the risks that the US and Iran might fail to reach a lasting peace agreement.
There is a possibility the conflict turns into a “frozen war,” according to Sorana Parvulescu, a partner for Europe, Middle East and Africa at Control Risks.
“That is becoming more feasible because there is no good military option on the table right now for the US and because the deal is probably going to prove itself more elusive than meets the eye,” Parvulescu said in an interview with Bloomberg TV on Thursday.
Daniel Wood, a fixed-income portfolio manager at William Blair International, sees it as unlikely the Bahrain will default on its debt or need to devalue the dinar, which is pegged to the US dollar.
“Aside from the UAE swap, there is an expectation that Bahrain will receive additional financial support from neighboring countries if necessary to ensure the stability of the currency peg and to allow external debt to be serviced,” he said.
Bahrain has turned to the region for help before — it tapped neighbors including Saudi Arabia and the United Arab Emirates for a $10bn bailout in 2018. In a bid to rein in rising debt and widening budget deficits, the government approved several fiscal reforms, including changes to corporate income tax and spending cuts.
“A meaningful reform program will be needed to bring the fiscal position into a more sustainable position,” said Abu Dhabi Commercial Bank Chief Economist Monica Malik. “Any potential regional support will be central in bolstering wider capital inflows, and likely lowering the borrowing cost.”
Bahrain’s government “remains firmly committed to its fiscal reform agenda, including measures announced in December 2025, and will continue to advance reforms that support long-term growth and investment,” the national communications center’s spokesperson said.
