Economic Analysis - Fiscal Consolidation To Weigh On Investment, Consumption - SEPT 2017

BMI View: Real GDP will decelerate in Ba hrain over the coming quarters as selected fiscal consolidation measures negatively impact investment and consumption. The infrastructure sector will remain a key driver of growth, supported by large-scale investment inflows from allied GCC countries.

We forecast a slowdown in Bahrain's real GDP growth to 2.6% in 2017, from an estimated 3.0% in 2016. Higher energy prices will be insufficient to substantially improve the energy earnings-reliant government's fiscal position, and as such, austerity measures will need to be implemented, weighing on public and private consumption and investment. Meanwhile, the infrastructure sector - propped up by investments from allied Gulf states - will remain a key driver of non-hydrocarbon growth.

Growth To Decelerate
Bahrain - Real GDP Growth
e/f = BMI estimate/forecast. Source: National sources, BMI

Selected fiscal consolidation measures will weigh on public and private consumption and investment in Bahrain over the quarters ahead. Although we expect energy prices to rise - our Oil & Gas team forecast Brent crude to average USD57.0 per barrel (/bbl) in 2017 and USD60.0/bbl in 2018, from USD45.1/bbl in 2016 - the extent and pace of this trend will prove insufficient to substantially improve Bahrain's weak fiscal position, particularly as production growth remains flat. With foreign reserves equivalent to only 2.7 months of imports, Manama will need to limit expenditure and increase revenues from selected taxes in order to prevent further deterioration ( see: ' Deficit To Remain Wide As Social Tensions Limit Austerity Measures, ' May 22 2017). A reduction in government spending, albeit modest, will in turn dampen private consumption and investment.

Hydrocarbon Production Stagnating
Bahrain - Hydrocarbon Production
f = BMI forecast. Source: BMI, EIA

Meanwhile, the ongoing economic slowdown in neighbouring Saudi Arabia will continue to negatively impact Bahrain's trade balance. Saudi Arabia is by far the largest recipient of exports from Bahrain (over 30% of the total in 2015), and as economic conditions in the kingdom are set to remain challenging over the quarters ahead, external demand for Bahraini products will be limited. In addition, growth in the tourism sector is likely to be affected, as Saudi nationals account for over half of all tourist arrivals into Bahrain. We also note that growing levels of sectarian tensions and social unrest are likely to deter some tourists from travelling to the country.

Saudi Economic Slowdown To Weigh On Export Demand
Bahrain - Exports By Destination (% Of Total)
Note: Figures from 2015 (last full year for which data is available). Source: Trade Map, BM

Infrastructure To Remain Key Growth Driver

On a more positive note, the infrastructure sector will remain a key driver of economic growth in Bahrain over the coming years, supported by large-scale investments from the rest of the Arab Gulf via the Gulf Cooperation Council (GCC) development fund. The fund aims to provide Bahrain with USD7.5bn in development grants over a 10-year period from 2011 (with USD3-4bn already allocated). Given the strategic importance of the country to other Gulf states - particularly Saudi Arabia, whose government fears that instability in Shi'a-majority Bahrain could spill over into its Shi'a-majority Eastern Province - we do not expect any major cutbacks in such funding, despite challenging economic conditions. Major projects currently underway include the USD1bn international airport modernisation, the USD2.5bn Alba Line 6 expansion (with a linked USD800mn power station) and the USD355mn construction of a new Banagas gas plant.

We also expect continued growth in other key non-oil sectors over the quarters ahead - including financial services, manufacturing and healthcare - though at slower pace compared with historical standards, amid more subdued consumption and investment levels.