Bahrain central bank's net foreign assets fall

DUBAI, July 02 (Reuters): Net foreign assets at Bahrain's central bank fell in May, according to official data released on Sunday.

The foreign assets decline may fuel concern about Bahrain's ability to defend its currency against a current account deficit and rising public debt.

The assets dropped to 671.1 million dinars ($1.78 billion) from 779.4 million dinars in April, the central bank said.

Net foreign assets at Bahraini retail banks also fell, to minus 1.20 billion dinars from minus 1.17 billion, meaning liabilities exceeded assets.

Combined, the net foreign assets of the central bank and retail banks sank to minus 526.1 million dinars in May - the lowest level on record.

Bankers say the central bank sometimes uses swap agreements or other deals to obtain foreign currency as needed from retail banks, bolstering its reserves.

The simultaneous fall of both sources of foreign currency suggests that strategy may become increasingly difficult.

Sunday's data showed the central bank's net foreign assets were equivalent to about 40 days' worth of imports.

Some economists believe that a reserve equivalent to 90 days' worth of imports is a safe level for an emerging economy.

Bahrain also has investments abroad which it might liquidate if it needed hard currency.

Analysts believe Bahrain's diplomatic allies in the Gulf have been quietly providing it with infusions of hard currency to support its reserves.

For example, Bahrain made a private placement of $500 million of government development bonds to an unnamed regional institution in April.

Jean-Michel Saliba, regional economist at Bank of America Merrill Lynch, said this.

But Sunday's data suggested such informal, occasional aid might no longer be enough to support Bahrain's foreign reserves.