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OTG: Bahrain – Bear With Me

By Standard Chartered Bank

Summary

We turn more bearish on Bahrain’s short-term growth on weaker prospects for non-oil-sector growth and the vulnerability of oil-sector growth to swings in oil production, particularly from the Abu Safah shared field.

We cut our 2016 real GDP growth forecast to 2.5%, from 3.5% previously. Real GDP growth dropped to 2.4% y/y in Q3-2015 from 3.7% y/y in Q2. The oil sector – which makes up 21% of real GDP – contracted 1% y/y. The non-oil sectors lost momentum, but continued to post positive growth. Financial services, manufacturing, trade and construction slowed, while tourism, health care and education picked up growth momentum. Growth in government services, which make up 12.6% of real GDP, continued to slow. We believe that this is a sign that public consumption and investment are decelerating.

Indeed, fiscal policy has turned contractionary, which is also likely to affect Bahrain’s growth outlook. We forecast a fiscal deficit of 14% of GDP for 2016. Fiscal adjustment is necessary, as Bahrain has already raised its debt ceiling twice to BHD 10bn (c.80% of GDP). The government has started subsidy reform – subsidies for energy, utilities and meat are gradually being lifted. This reform could cause a one-off impact on inflation, which we forecast will accelerate to 3.5% in 2016. Adhering to a fiscal adjustment path will be crucial for the government to maintain its investment-grade ratings. All three rating agencies rate Bahrain at the lowest investment-grade status, with negative outlooks.

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