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Bahrain Country Risk Report Q1 2017

  • October 2016
  • -
  • Business Monitor International
  • -
  • 41 pages

Core Views

External financing from the rest of the Gulf Cooperation Council (GCC) will help to shield the Bahraini non-oil sector from the ongoing retrenchment in public spending. Despite the negative impact of subsidy cuts on internal demand, we forecast Bahrain to grow at a relatively robust rate of 3.0% in 2017. 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. Unfortunately, we maintain our 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. The Central Bank of Bahrain (CBB) will continue to follow a pro-cyclical monetary policy over 2017, raising interest rates in line with the US Federal Reserve's moves. Although the government's subsidy cuts will trigger inflation, continued strength in the US dollar and subdued commodity prices will help to offset inflationary pressures.

Table Of Contents

Bahrain Country Risk Report Q1 2017
Executive Summary.................................................................................................................................. 5
Core Views.......................................................................................................................................................................................5
Key Risks.........................................................................................................................................................................................5
Chapter 1: Economic Outlook.................................................................................................................. 7
SWOT Analysis........................................................................................................................................................... 7
BMI Economic Risk Index.......................................................................................................................................... 7
Economic Growth Outlook........................................................................................................................................ 8
Non-Oil Resilience Will Continue...................................................................................................................................................8
The non-oil sector will continue to drive economic growth in Bahrain, as external financial assistance and investment in the
manufacturing sector mitigate the impact of lower public spending. A strong pipeline of infrastructure projects will continue to underpin
long-term growth.
GDP By Expenditure.................................................................................................................................................. 9
TABLE: GDP GROWTH FORECASTS....................................................................................................................................................................10
TABLE: GOVERNMENT CONSUMPTION FORECASTS.......................................................................................................................................10
TABLE: PRIVATE CONSUMPTION FORECASTS..................................................................................................................................................10
TABLE: FIXED INVESTMENT FORECASTS..........................................................................................................................................................11
TABLE: NET EXPORTS FORECASTS....................................................................................................................................................................11
Fiscal Policy And Public Debt Outlook.................................................................................................................. 11
Fiscal Consolidation Hampered By Social Instability................................................................................................................11
Bahrain will continue to post large fiscal deficits over the coming years, as the intensification of social tensions since early 2016 limits
the government's ability to cut social transfers and key infrastructure projects.
Structural Fiscal Position........................................................................................................................................ 12
TABLE: MAIN REVENUE AND EXPENDITURE CATEGORIES, 2015...................................................................................................................13
TABLE: FISCAL AND PUBLIC DEBT FORECASTS...............................................................................................................................................13
Monetary Policy ....................................................................................................................................................... 14
Limited Impact From Delayed Hiking Cycle................................................................................................................................14
The Central Bank of Bahrain will follow moves from the US Federal Reserve and delay its hiking cycle, raising interest rates by only 25
basis points in 2017. This will provide only modest relief to Bahraini households and corporates, given that the liquidity squeeze has
already started. Amid subdued demand-pull inflation, smoother monetary contraction carries limited inflationary risks.
Monetary Policy Framework.................................................................................................................................... 15
TABLE: MONETARY POLICY FORECASTS.......................................................................................................................................................... 15
Chapter 2: 10-Year Forecast................................................................................................................... 17
The Bahrain Economy To 2025............................................................................................................................... 17
Diversification And Political Stability Key To Long-Term Growth............................................................................................17
Bahrain's economy will post moderate levels of growth over the coming decade as the economy continues to diversify away from oil,
assuming that political stability is maintained.
TABLE: LONG-TERM MACROECONOMIC FORECASTS..................................................................................................................................... 17
Chapter 3: Political Outlook................................................................................................................... 21
SWOT Analysis......................................................................................................................................................... 21
BMI Political Risk Index........................................................................................................................................... 21
Domestic Politics..................................................................................................................................................... 22
Regime To Retain Strong External Support................................................................................................................................22
Bahrain's strong global ties will continue to support the stability of the al-Khalifa regime. The military partnership with the US is unlikely
to end given Bahrain's strategic position in an unstable region, despite US criticism over human rights violation and Bahrain's improving
relations with Russia. Saudi Arabia will continue to exert a key influence over the kingdom's domestic and foreign policy.
TABLE: POLITICAL OVERVIEW............................................................................................................................................................................. 22
Long-Term Political Outlook................................................................................................................................... 24
Sectarianism Poses Biggest Long-Term Threat........................................................................................................................24
Bahrain's political future is complicated by growing tensions between the Sunni elite and the Shi'a majority, labour and population
imbalances, the rising dependence on Saudi Arabia, and economic vulnerability. We believe the most likely long-term scenario is for
partial liberalisation to be brought about by political and economic necessity, although there is no guarantee that this would be peaceful.
Chapter 4: Operational Risk................................................................................................................... 27
SWOT Analysis......................................................................................................................................................... 27
Operational Risk Index............................................................................................................................................ 27
Operational Risk....................................................................................................................................................... 28
TABLE: OPERATIONAL RISK................................................................................................................................................................................. 28
Business Crime ....................................................................................................................................................... 29
TABLE: BUSINESS RESPONSE TO RISK.............................................................................................................................................................30
Government Intervention ........................................................................................................................................ 32
TABLE: BUSINESS TAXES..................................................................................................................................................................................... 32
Chapter 5: BMI Global Macro Outlook................................................................................................... 37
Global Macro Outlook.............................................................................................................................................. 37
Broad Recovery But Three Notes Of Caution.............................................................................................................................37
TABLE: GLOBAL FORECASTS, 2015-2020........................................................................................................................................................... 37
TABLE: DEVELOPED STATES, REAL GDP GROWTH, %.................................................................................................................................... 38
TABLE: EMERGING MARKETS, REAL GDP GROWTH, %...................................................................................................................................39
TABLE: MACROECONOMIC DATA and FORECASTS..............................................................................................................................................41

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