Buoyed by the solid performance of the non-oil sector, Bahrain’s economy has maintained steady growth throughout 2016, though future development could be impacted by rising public debt.
Non-oil activity, which accounts for 80% of GDP, expanded by 2.7% year-on-year (y-o-y) in the first quarter of the year and 3.6% in the second, according to the latest quarterly report from the Bahrain Economic Development Board (EDB).
The EDB also listed social and personal services, construction and financial services as the fastest growing sectors in the second quarter.
Weaker performance in the hydrocarbons sector – which contracted 1.7% in the second quarter after expanding 4.5% in the first three months – was reflected in a slight cooling of GDP growth to 2.8% by year end, down on the 2.9% posted in 2015.
Looking ahead, the EDB forecasts economic output will increase by 2% in each of the next two years, driven mainly by non-oil growth, which is expected to hit 2.4% in 2017 and 2.3% the following year.
The IMF was marginally less optimistic about the kingdom’s growth prospects for 2016 and the medium term.
According to the IMF’s “World Economic Outlook” report released at the end of October, Bahrain’s economy will close out the year with GDP growth of 2.1%, which is expected to slow to 1.8% and 1.6% in 2017 and 2018, respectively.
Even with government measures to boost revenue, the IMF estimates state debt will rise by 24% to BD8.99bn ($23.9bn) – or 75% of GDP – by the end of this year, partly due to increased spending on infrastructure and development programs.
Debt levels are expected to continue to rise through to the end of the decade, according to the IMF, hitting BD10.5bn ($27.9bn) in 2017 and BD14.2bn ($32.7bn) by 2020.
Ratings under review
While some aspects of the economy are performing strongly and growth remains solid, international ratings agencies sounded notes of caution and lowered Bahrain’s ratings in the first half of the year.
In mid-February ratings agency Standard & Poor’s (S&P) cut Bahrain’s rating by two levels, from “BBB-” to “BB”, affirming its stable outlook for the kingdom. While noting the government was implementing reforms aimed at shoring up the kingdom’s fiscal position – including curbing spending and working to reduce debt levels – the S&P report said the impact of low energy prices would continue to strain Bahrain’s debt metrics.
Among the reforms to reduce expenditure and improve the state’s balance sheets were reductions in petrol and gas subsidies introduced in January. Government estimates put the savings to the budget through subsidy reductions and spending cuts at $1.6bn by 2019, while a planned goods and service tax should also bolster state coffers.
Moody’s also moved to downgrade Bahrain’s rating in the first quarter, when it lowered its long-term issuer grading from “Baa3” to “Ba1”, designating a negative outlook. The agency also highlighted that a further downgrade was possible in the event of instability in the domestic or regional political environment, or if state measures to limit exposure to debt and risk proved unsuccessful.
Later in June Fitch revised its position on Bahrain, lowering both its long-term foreign currency and local currency default ratings from “BBB” to “BB+”.
The second half of 2016 saw inflation begin to moderate, having reached 3.8% in April – the highest level since December 2013.
In August consumer price inflation fell to 2.6% y-o-y, reflecting lower food and non-alcoholic beverage prices, though housing and utilities costs – which account for 24% of Bahrain’s inflationary basket – rose by an annualized 3.8%.
IMF projections put consumer price inflation for the year at 3.6%, dropping slightly to 3% in 2017.
Tapping the bond markets
Part of the budgetary gap was closed with a $2bn bond offer launched in October, which drew high levels of interest, being oversubscribed by a factor of 3.5. The offer was split equally between a 12-year conventional bond and a seven-year sukuk (Islamic bond), with the former to yield at 7% and the latter priced at 5.6%.
Bahrain had already tested the bond market earlier in the year, raising $600m in February through five- and 10-year bond retaps and a further $435m via a privately placed sukuk in May.
In November there was media speculation that Bahrain would again look to the international bond market early in the new year, though on November 17 the central bank issued a statement saying it had no current plans to issue further conventional or Islamic bonds.
Oxford Business Group