Prefer desert money to hard currencies

The Gulf States have put themselves on the map quite well in the sporting field. On the foreign exchange market, the coins from this region stand out because of their very high nominal value.

Today Max Verstappen can collect the trophy at the FIA ​​gala as the winner of the Formula 1 season, which ended in a spectacular way in Abu Dhabi on Sunday. Before that, there was a race in the Saudi Jeddah on December 5 in the same region and there was a race in Qatar in November. The racing season also started on March 28 at the Bahrain circuit. If it were up to Verstappen, he would much rather have his cash prize paid out in Bahraini dinars than in euros. The currency from the Gulf state is worth no less than € 2,35. And with that, this dinar variant does not even take the cake.

Loads of money, right?
At nearly $3, the Kuwaiti dinar is the most expensive coin in the world in nominal terms; if you don't count bitcoin and other alternative currencies at least. The high value of the coins from Kuwait and Bahrain seems to radiate a lot of strength. That fits with the picture of the oil wealth in the Gulf region. But the reality is different. For example, Kuwait announced in August that its fiscal deficit has nearly tripled to 2020 billion dinars in fiscal year 2021/10,8. That is more than €30 billion, or the highest level ever. This large deficit has everything to do with the sharp fall in the oil price in the spring of 2020. In the period after the virus outbreak, the price of a barrel of Brent oil fell from more than $60 to just below $20.

This is how you close a budget gap
In most of the world, these kinds of deficits are closed by issuing a new government loan. Yet for a long time it was very sensitive in Kuwait to ask external parties for money. Instead, the country prefers to sell oil assets to its own government fund. Bahrain has less trouble with that. The island state has spent billions of euros on government loans this year to close the budget deficit. Under current policies, Bahrain will not have a balanced budget until an oil price of $88 per barrel, according to the IMF. This explains why steps are being taken through a gradual tax increase to put the state finances in order.

Agenda item: March 20, 2022
For the time being, Bahrain is not in a hurry with fiscal and budgetary measures, as the country is supported by its large neighbor Saudi Arabia. That country, along with other Gulf countries, stepped in in 2018 with a $10 billion aid package to keep Bahrain's economy on track. That is one of the reasons why the Bahraini dinar was able to hold its peg to the dollar. As long as the oil price hovers around $70 a barrel, the Bahraini dollar will be one of the world's most expensive currencies and Formula 1 fans will not be surprised that the new season will kick off in Bahrain on March 20. And if the oil price falls sharply? Then the attention of the financial world turns to very different things than the F1 calendar and the Bahraini dinar.

Joost Derks

Joost Derks is a currency specialist at iBanFirst. He has over twenty years of experience in the currency world. This column reflects his personal opinion and is not intended as professional (investment) advice.

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