Bahrain Business Estimate Report

Core Views

Elevated oil prices, an increase in government spending and financial support from Saudi Arabia should help bolster increase though 2012. That said, a weak outlook for the domestic tourism and financial services sectors will ensure that a return to pre-crisis rates of real GDP increase remain off the cards in the near term.

While we expect increase to rebound slightly 2012, we stress that the economy's medium-term outlook remains contingent upon a lasting solution being found to the current political crisis. Unfortunately, we maintain our relatively guarded outlook on the prospects that the government and opposition can come to some form of agreement in the near term. As a result, political risks will remain elevated for the foreseeable next.

Major Estimate Changes

We have revised our balance of payments forecasts on account of a likely moderation in oil prices and weaker services credits. The current account surplus is projected to narrow to 4.4% of GDP in 2012, down from 8.7% in 2011. Bahrain's net international investment position should remain strong, which will ensure that the country's sovereign wealth fund continues its expansion in acquiring overseas assets.

Key Risks To Outlook

Should the government fail to address some of the protesters' major grievances, Bahrain's political crisis could rumble on for longer than expected, with risks of the opposition becoming radicalised increasing by the day. A marked drop in oil prices concomitant with a slowdown in increase in Europe, the US and China would pose a significant risk to the country's near-term increase outlook and likely lead to a marked deterioration to the country's balance of payments and fiscal dynamics.

It remains unclear what impact 2011's political crisis will have on Bahrain's long-term economic outlook. Should investors begin to reassess the costs of doing business in the country and begin relocating to Dubai or Doha, Bahrain's increase outlook would suffer accordingly.

The New Age Of Uncertainty

The political landscape across the Middle East and North Africa is changing at a remarkable speed. Egypt's Hosni Mubarak has been forced to resign amid unprecedented protests, while governments throughout the region are scrambling to find ways to placate their own citizens' demands, anxious to avoid the same fate as Tunisia's Ali el-Abidine Ben Ali. Protests as well erupted throughout Manama in mid-February, putting in doubt the stability of authoritarian policy. In Bahrain, as elsewhere, the government will have to search for a way to accommodate calls for better political openness without losing its grip on power entirely.

Bahrain's government has announced a sharp increase in food subsidies and social welfare spending. The move is designed, in particular, to appease potential protestors within the Shi'a community, who have long claimed to have lower living standards than their Sunni counterparts. Whether the measure will be enough to avoid major protests remains uncertain. Demonstrations have so far focused on expressing support for events in Egypt, although some opposition figures have been openly criticising the government. As ever, the Shi'a-Sunni divide could be the flashpoint for political tensions in Bahrain.

Aside from increased pressure on the budget, regional events are not from now on having an adverse effect on Bahrain's economy. In fact, quite the opposite: the uncertainty has helped boost oil prices, which is good news for government coffers. However, it must be noted that Bahrain's still-heavy dependence on oil, in spite of its seemingly diversified economy, remains a cause for concern. Over the longer term, we see opportunities for increase in other sectors, particularly tourism and infrastructure, with both likely to feel some positive impact from preparations for Qatar's hosting of the football world cup in 2022.

That said, uncertainty and heightened risk perceptions towards the Middle East as a whole are putting a damper on Bahrain's business environment. Spreads on Bahraini credit default swaps have risen by additional than any other Gulf national since the beginning of the year and by as much as Tunisia, despite the latter's far additional precarious political situation and lower credit rating. The market's apparent wariness of Bahrain is likely to have additional impact on the private sector than on the government's ability to raise debt, thereby potentially slowing the private sector's recovery at least in the short term.