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Country Report Bahrain

Country Report

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Economic growth in Bahrain is forecast to slow to around 1.8% in 2015. Government finances are strained due high social spending and large energy subsidies.

Strengths (+) and weaknesses (-)

(+)      Strong external position

Bahrain has been running current account surpluses for over a decade which resulted in a net international investment position of 76 % of GDP in 2013..

(-)       Strong dependence on Saudi Arabia

Saudi Arabia wields strong influence over domestic policy as Bahrain depends on the Saudi Kingdom for its oil exploitation and domestic stability trough the Peninsula Shield Force.

(-)       Narrow economic base

The oil sector dominates the economy, as it contributes 20% to GDP, accounts for 90% of total government revenues and for 67% of total export revenues. 

(-)       Deep divide between Sunni elite and Shi’a opposition

This long-standing divide has spurred frequent protests and violent confrontations in the past three years and the conflict is unlikely to be resolved in the near term

Key developments

1. Oil price decline affects growth

With declining oil prices hurting public consumption and investment , Bahrain’s GDP growth is expected to fall from 4.5% in 2014 to 1.8% in 2015. The effect of the fall of oil prices is smaller for Bahrain than for many of its neighbours, as a large part of Bahrain’s hydrocarbon exports are refined energy products produced from imported crude coming from Saudi Arabia. However, Bahrain’s fiscal position and current account balance were much less positive than those of its neighbours before the oil price decline started. This year’s fiscal deficit is forecasted to increase to about 10% of GDP, while the current account is forecast to deteriorate from a surplus of 7% in 2014 to a deficit of about 2% this year. The deterioration of the fiscal position has led a rapid rise in the public debt, which is expected to hit about 71% of GDP in 2015. The fiscal position is problematic, but Bahrain has the implicit backing of Saudi Arabia and appetite for its debt has remained robust. 

Figure 1: Oil prices declined sharply
Figure 1: Oil prices declined sharplySource: Macrobond
Figure 2: GDP growth slows further
Figure 2: GDP growth slows furtherSource: Macrobond

Although the current account is negative, previous current account surpluses have led to a large net foreign assets position (76% of GDP in 2013). Moreover, the current account will improve, if  oil prices recover. Meanwhile, energy re-exports have remained steady and there no signs that Saudi Arabia will be scaling back its oil production any time soon. Moreover, aluminium output is set to rise, as the government is investing in upgrading the capacity of the current aluminium plant. 

Figure 3: Twin deficits in 2015
Figure 3: Twin deficits in 2015Source: Macrobond
Figure 4: Modest next oil exports
Figure 4: Modest next oil exports Source: Macrobond

2. Saudi Arabia prevents Shia emancipation

The tensions between the disadvantaged Shia majority and ruling Sunni minority have been on the rise lately as the leader of the main opposition party al-Wefaq, Sheikh Ali Salman, was arrested in December last year and Shia cleric Sheikh Isa Qassim’s house was raided by security forces just a month earlier. These type of incidents contribute to the already wide-spread discontent with the Sunni-government. However, Bahrain is seriously constrained in its ability to grant any concessions to the Shia population by its dependence on Saudi Arabia. Saudi Arabia, wary of problems with its own Shia minority and of expanding Iranian influence on the Arabian Peninsula, has extensively contributed troops to the Peninsula Shield Force, a joint military force of the Gulf Cooperation Council. Part of this force is positioned in Bahrain to maintain order and deal with potential unrest. In addition, Bahrain’s budget deficit and debt, partially fuelled by extensive social welfare programmes aimed at keeping the population calm, has the implicit backing of Saudi Arabia. Prime minister Khalifa bin Salman al-Khalifa, King Hamad bin Isa al-Khalifa’s uncle, wields considerable influence with the backing of Saudi Arabia and is likely to block any political reform that would accommodate the wishes of the Shia population.

3. Sustained unrest prevents non-oil growth

Initially peaceful protests by predominantly Shia’s or groups demanding more political freedom that started in 2011 have gradually given way to sustained low-capability militancy. Bahrain’s security forces try to counter these activities with mass arrests, detentions, and security cordons erected around Shia villages but part of the damage has already been done: The widespread unrest and violent oppression has damaged Bahrain's reputation and undermined its attempts to position itself as a regional financial hub capable of competing with Dubai and Qatar. Next to the financial sector also tourism and investment growth are negatively affected.

Factsheet of Bahrein
Factsheet of BahreinSource: EIU, CIA World Factbook, UN, World Economic Forum, Transparency International, Reporters Without Borders, World Bank.

Background information

Bahrain is the smallest country on the Persian Gulf with just over 1 million inhabitants, half of which being expatriates. The discovery of oil in 1932 brought rapid modernization to Bahrain. Also, it was the first Gulf state to take serious action in the late 1990s to diversify its economy to prepare for the post-oil and post-gas period, and, as such, it is one of the more diversified economies in the region. Bahrain jointly extracts oil with Saudi Arabia from the Saudi Arabian owned Abu Saafa oil fields. Oil produced there is subsequently imported and processed further in Bahrain. Petroleum processing and refining accounts for 67% of Bahrain's total export receipts and contributes about 90% to total government revenue. The services sector is dominated by banking and finance. The latter represents some 25% of GDP, although business conferencing and tourism contribute significantly to GDP too.

Bahrain’s political and economic power effectively lies with the Sunni minority, with the royal family having a dominant say. A constitutional reform in 2001 established a partly elected parliament with loose ‘societies’ acting as proxy for political parties, which are not allowed.Bahrain is far more liberal and woman-friendly than Saudi Arabia and Iran. The Shi’a population is the largest ethnic group with 56% of the population, while Sunnites make up 25% of the population.

Economic indicators of Bahrein
Economic indicators of BahreinSource: EIU
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