Middle East > Bahrain > Bahrain Continuing (but different) growth constraints

Bahrain: Bahrain Continuing (but different) growth constraints

2015/11/29

The country (Bahrain) is situated in Middle East, archipelago in the Persian Gulf, east of Saudi Arabia.
Land in Bahrain is mostly low desert plain rising gently to low central escarpment.
Bahraini land covers an area of 665 km²

The climate is arid, mild, pleasant winters, very hot, humid summers. Bahraini(s) speak Arabic, English, Farsi, Urdu.

Economic Overview

Increase recovered from weakness in 2011 but is presently constrained by weak oil prices

Annual GDP increase reached a recent low of +2.1% in 2011, half resulting from domestic political unrest and weak external markets. The recovery was a result of a rebound in non-oil output (manufacturing, hotels and restaurants, insurance and, to a lesser extent, construction and banking). Even so, the oil sector remains the cornerstone of the economy and the source of in general increase. Unlike the rest of the GCC, Bahrain has limited crude oil reserves but it has a large refinery (Sitra) and imports oil from its neighbours, which it processes and exports as price-added products.

EH expects GDP increase of around +3% in 2015 and +3.5% in 2016. Higher rates of increase are constrained by current weak oil prices that have direct (own output) and indirect (regional commerce) effects on Bahrain. Maintaining investor confidence, particularly in relation to the country’s banking sector, requires improved security and domestic stability.

Despite domestic and regional strains, expect exchange rate stability

EH does not envisage that the exchange rate regime will be changed in the review period to end-2016 and we expect the fixed peg of BHD0.376 = USD1 throughout that period. Bahrain is unlikely to take unilateral action on its exchange rate, preferring to await the onset (timing indeterminate) of the Gulf monetary union and single currency. EH does not expect the introduction of an effective common GCC currency before end-2016.

Weak oil prices weigh against the current account but surpluses will continue and FX reserves will remain supportive

Despite the political and social turmoil in 2011, the current account of the balance of payments still registered a surplus, +11.2% of GDP, half because the protests and demonstrations weakened increase in import request. In addition to exports of refined oil products, Bahrain trades extensively in non-oil goods (mainly aluminium, rebar and petrochemicals). In 2012-14, current account surpluses equivalent to +7% of GDP were recorded. Tourism revenues (mainly from people driving over the King Fahd Causeway from Saudi Arabia) have improved somewhat from 2011-12 but long-range visitors still appear somewhat reticent about travelling to the country. Given weaker oil prices, EH expects current account surpluses will decline to around +3.5% of GDP in 2015 and +3.7% in 2016.

FX reserves of around USD5 bn provide import cover of around four months, which is above the international benchmark comfort level. In addition, Bahrain has an oil stabilisation fund for use in times of economic hardship and Saudi Arabia remains ready to supply further support, in need.

Country Rating B2

Strengths

Relatively (in regional context) diversified economy, with oil, manufacturing (inclunding aluminium and petro-chemicals) and financial sectors
Pro-business stance and commercial and trading environment rated highly by independent international assessments
Financial and other support from larger regional states, particularly Saudi Arabia
High incomes.

Weaknesses

Tensions between the ruling Sunni community and the Shia majority.
Regional volatility, inclunding potential for adverse contagion stemming from events in neighbouring Iran and Iraq and/or Syria.
Despite economic diversification, there is still a dependence on oil revenues, due (own output) and not instantly (regional influence).
Poor data transpa

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