The renewed closure of the Strait of Hormuz threatens to push Bahrain towards a currency devaluation or sovereign default without fresh outside support, research house Capital Economics said in a note on August 3.

The warning marks out the smallest Gulf monarchy as the region's most financially exposed to the oil chokepoint's shutdown, because unlike Saudi Arabia and the United Arab Emirates, which can reroute trade through Red Sea and other non-Gulf ports, Bahrain has no alternative and relies on the strait for two-thirds of the exports it sends outside the Gulf. The kingdom has also been hit by repeated Iranian drone and missile attacks in recent months.

"Bahrain's balance sheet is relatively weak, and it can't withstand a closure of the strait for long without facing balance of payments strains," wrote William Jackson, chief emerging markets economist at Capital Economics. "In that situation, either domestic demand needs to fall to reduce imports, or the dollar peg would need to be abandoned."

The strain is already visible in trade data. Chinese and US imports from Bahrain fell around 80% year on year in May, while card-spending figures suggest tourist arrivals dropped 15% y/y in June, hitting a sector the note called relatively large for the economy.

Central bank foreign reserves fell from $6bn in March, when the war broke out, to just over $2bn by June, a pace of depletion Capital Economics said the central bank could not sustain for more than another month or so. Measures of Bahrain's country-risk premium have spiked back to levels last seen in March, far above its Gulf peers and comparable to weaker emerging markets such as Egypt.

The International Monetary Fund (IMF) estimates Bahrain's public debt reached almost 150% of GDP last year, raising questions over the government's ability to roll over maturing external debt if reserves keep falling.

Bahrain has some backstops, including a $5.3bn currency swap line with the UAE agreed in April, reportedly untapped as of early July, and a sovereign wealth fund holding roughly $18bn, though the note said much of that is illiquid.

Capital Economics' base case is that Saudi Arabia or the UAE would step in with further support if needed, as in a Saudi-led bailout in 2018 and the UAE swap line in April, partly to protect their own standing as they compete for regional influence and partly to avoid wider questions over the durability of Gulf dollar pegs.

Any such support would likely come tied to fiscal-tightening conditions similar to 2018's, which would weigh on the recovery of Bahrain's non-hydrocarbon economy.