major macro economic indicators
|2017||2018||2019 (e)||2020 (f)|
|GDP growth (%)||3.8||1.8||2.0||-3.6|
|Inflation (yearly average, %)||1.4||2.1||1.4||2.8|
|Budget balance (% GDP)||-14.2||-11.9||-8.0||-8.1|
|Current account balance (% GDP)||-4.5||-5.9||-4.3||-4.4|
|Public debt (% GDP)||88.2||94.7||101.7||106.9|
(e): Estimate. (f): Forecast.
- Hydrocarbons resources
- Developed banking sector with large capital buffers
- Benefits from financial support of the GCC countries
- Higher degree of economic diversification across the region
- Persistent fiscal and external imbalances
- Dependence on foreign capital inflows
- Dependence of fiscal and export revenues on hydrocarbon sales
- Political deadlock: a risk for economic growth
Low oil prices remain a restrictive factor on growth
With lower oil prices in the aftermath of 2014, Bahrain’s economic imbalances have widened. Although economic activity has recently started to show some stability, it is not expected to record high growth rates as previously. Indeed, large external and public deficits force the government to implement fiscal austerity measures, which then weigh on private consumption (accounting for nearly 40% of GDP). Yet, private consumption is still expected to remain in positive territory. Austerity measures will also reduce the contribution of government consumption to growth. On the other side, thanks to the funds provided by the GCC countries (Bahrain was pledged USD 10 billion in a bailout package in 2018 from Saudi Arabia, Kuwait and the United Arab Emirates, helping the country to overcome a potential debt crisis), investments are expected to edge up driven by infrastructure projects. Construction projects in the pipeline, such as a USD 1.1 billion new passenger terminal building at Bahrain International Airport, a USD 5 billion refinery expansion project of Bahrain Petroleum Company (Bapco), and the expansion project of line 6 of Aluminum Bahrain (Alba), are expected to support the construction sector. The latter is expected to boost Bahrain’s aluminum production that is expected to rise by around 20% in 2020.
Arduous consolidation as lower oil prices weigh on public and external accounts
Bahrain’s fiscal breakeven oil price is estimated at around USD 92 per barrel in 2020, as per the IMF. With oil prices hovering between USD 60-65 per barrel, Bahrain’s fiscal revenues will be dragged down – as hydrocarbons account for around 60% of fiscal revenues – its deficit will persist and debt increase further. On the other hand, the country will continue to benefit from reduced borrowing costs on the back of the implementation of the fiscal consolidation program and the USD 10 billion in aid over five years pledged by Saudi Arabia, Kuwait and the United Arab Emirates in 2018. As a result, the government’s efforts to diversify its resources (introduction of a 5% value-added tax, planned higher fees on foreign hiring, etc.) will continue in the upcoming period. Bahrain has posted current account deficits since the oil prices crash of 2014. As oil revenues account more than half of total export revenues, the country will remain exposed to volatility of oil prices. The country’s external balance is expected to remain in deficit because of lower oil prices, slower economic growth in the world and in neighboring Gulf countries, weighing on Bahrain’s service exports. Bahrain’s current external debt rollover requirements by 2022 are estimated around USD 16 billion. Adding that to the financing need coming from the budget deficit, and the defense of the dinar peg to the dollar, the country will have to return to the capital markets or its Gulf neighbors to find necessary funds. Foreign exchange reserves are covering less than a month of imports.
Rising political challenges
Although the ruling family is expected to stay in power and keep the support of Bahrain’s allies in the Gulf region, social unrest will continue to be a risk for the country. Shi’a Muslim community, which forms the majority of the population, complains about high level of unemployment, limited representation in parliament and difficult access to public jobs. As little has been resolved since the political crisis ten years ago, tensions remain high between Sunni-dominated government and the Shi’a opposition. Introduction of austerity measures within the fiscal Balance Program (i.e. voluntary retirement scheme, cuts to electricity and water subsidies) are challenging measures as they can further anger the opposition and add to the risk of social unrest. Therefore, a more gradual introduction of reforms is expected. On the other hand, introduction of a new bankruptcy law in 2018 is a positive step for Bahrain to improve its business environment.
Last update: February 2020