Core Views We forecast the Bahraini economy to grow by 3.4% in real terms in 2014, down from 5.3% in 2013, owing to the normalisation of oil production. Headline growth will remain relatively robust in the years ahead – reaching 3.8% in both 2015 and 2016 – and will be largely driven by the non-hydrocarbon sector. However, a return to pre-crisis rates of real GDP growth above 7% remains off the cards in the near term. In light of record oil revenues and the weakness of private investment, we expect public spending to outperform over the coming quarters, which should support activity in the non-hydrocarbon economy. Efforts to address the shortage of affordable housing will see government CAPEX accelerate.
Bahrain’s reputation as a stable and welcoming location to do business in the Gulf has suffered as a result of the volatile political climate. At the moment, it remains to be seen if Manama will be able to compete with Doha and Dubai in attracting investment into the all-important hospitality and financial services industry. The economy’s medium-term outlook remains contingent upon a lasting solution being found to the current political crisis. 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.
Bahrain’s weak medium-term fiscal prospects will force the government to make difficult choices. We believe that Manama will have little option but to introduce new taxes over the coming years, while the issue of spending consolidation will loom large on the agenda. Support from Saudi Arabia could delay these pressures, but would entail a significant loss of sovereignty.
Table Of Contents
Bahrain Business Forecast Report Q4 2014 Executive Summary 5 Core Views...5 Key Risks To Outlook5 Chapter 1: Political Outlook.. 7 SWOT Analysis 7 BMI Political Risk Ratings.. 7 Foreign Policy I 8 Snub To US Carries Little Cost8 The expulsion of a senior US diplomat from Bahrain represents a new nadir in the ties between the two countries, but will entail few costs to Manama. Washington's ability to influence events on the ground remains limited, although Bahrain's strategic importance might decline over the longer run if a successful resolution is found to Iran's nuclear programme. table: POLITICAL OVERVIEW8 Foreign Policy II ... 9 Qatar Dispute Adds To GCC's Internal Troubles.9 A diplomatic dispute between Bahrain and Qatar, revolving around Doha's alleged poaching of Bahraini Sunni nationals, will add to the Gulf Cooperation Council's internal divide. Cooler relations will affect the already-limited economic cooperation plans between the two countries, including the long-delayed Qatar-Bahrain causeway project. Long-Term Political Outlook. 11 Sun, Sea, And Sectarianism: Prospects For Future Stability Assessed.11 Bahrain's political future is complicated by growing tensions between the Sunni elite and the Shi'a majority, labour and population imbalances, the need to stay on side with both Iran and Saudi Arabia, and economic vulnerability. We believe the most likely long-term scenario is for democratisation to be brought about by political and economic necessity, although there is no guarantee that this would be peaceful. Chapter 2: Economic Outlook.. 15 SWOT Analysis... 15 BMI Economic Risk Ratings.. 15 Economic Activity .. 16 Headline Growth Robust, But Sector Performance Uneven ..16 We forecast the Bahraini economy to grow by 3.4% in real terms in 2014, down from 5.3% in 2013, owing to the normalisation of oil production. Headline growth will remain relatively robust in the years ahead - reaching 3.8% in both 2015 and 2016 - and will be largely driven by the non-hydrocarbon sector. table: Economic Activity ....16 Monetary Policy . 20 Price Growth Moderate Apart From Housing20 We forecast consumer price inflation in Bahrain to average 2.9% in annual terms over 2014 and 3.0% in 2015. Although rental prices will continue to see strong growth as a result of tight housing stocks, weak international food prices and restrained wage growth will limit overall inflation. table: Monetary Policy..19 Banking Sector .. 20 Banks To Benefit From Construction Recovery.20 The performance of the Bahraini commercial banking sector is set to improve heading into 2015, as stronger construction activity feeds through to lending growth. We forecast asset growth of 8.0% by the end of 2014, compared to an average of 4.8% over 2011- Chapter 3: 10-Year Forecast 23 The Bahrain Economy To 2023.. 23 Political Crisis Raises Risks..23 Assuming oil prices do not collapse and political stability is eventually restored, Bahrain's economy will be able to post relatively moderate levels of real GDP growth over the coming decade. That said, the ongoing political crisis has raised a host of questions surrounding Bahrain's long-term outlook, with concerns growing that the country's financial services and tourism sectors will suffer heavily. table: Long-Term Macroeconomic Forecasts...23 Chapter 4: Business Environment 25 SWOT Analysis... 25 BMI Business Environment Risk Ratings 25 Business Environment Outlook. 26 Institutions .... 26 TABLE: BMI BUSINESS AND OPERATION RISK RATINGS....26 Infrastructure 27 TABLE: BMI LEGAL FRAMEWORK RATING....27 Market Orientation... 28 TABLE: LABOUR FORCE QUALITY..28 TABLE: MENA - ANNUAL FDI INFLOWS....29 TABLE: TRADE AND INVESTMENT RATINGS30 Operational Risk. 31 TABLE: Top Export Destinations.31 Chapter 5: Key Sectors... 33 Pharmaceuticals and Healthcare .. 33 table: Healthcare Expenditure Trends, Historical Data And Forecasts 34 table: Pharmaceutical Sales, Historical Data And Forecasts34 table: Private Healthcare Expenditure Trends, Historical Data And Forecasts... 35 table: Government Healthcare Expenditure Trends, Historical Data And Forecasts .. 35 Telecommunications.... 36 table: Telecoms Sector - Mobile - Historical Data and Forecasts. 37 table: Telecoms Sector - Wireline - Historical Data and Forecasts.. 38 Other Key Sectors... 41 table: Oil and Gas Sector Key Indicators..41 table: Infrastructure Sector Key Indicators..41 table: Autos Sector Key Indicators..41 table: Food and Drink Sector Key Indicators....42 table: Freight Key Indicators42 Chapter 6: BMI Global Assumptions. 43 Global Outlook.... 43 US Revision Drags Down Forecast.43 Table: Global Assumptions43 Table: Developed States, Real GDP GrowtH, %..44 Table: BMI VERSUS BLOOMBERG CONSENSUS REAL GDP GROWTH FORECASTS, %.. 44 Table: Emerging Markets, Real GDP Growth, %.45