Bahrain Country Risk Report 20 2018
Higher oil prices will provide a tailwind to the Bahraini economy over the coming two years, as resultant increases in government revenues facilitate a delay in fiscal consolidation. Over the medium term, however, some austerity measures will be necessary and as such we forecast growth to slow from 2020.
Bahrain's social climate will remain fraught in the coming quarters, with the unpopular house arrest of an ailing Shi'a cleric and planned parliamentary elections likely to exacerbate sectarian tensions.
Although we see little imminent risk to the government's ability to retain power given continued Saudi backing, the social unrest will undermine fiscal consolidation efforts.
Rising oil prices will ease the pressure on Bahraini government finances in the short term, reducing the risks of a credit default in the short term. With that said, the temporary improvement in revenues will reduce the pressure on the government to make unpopular decisions and, with oil production set to head steadily lower, fiscal pressures are likely to re-emerge in the medium term. Higher oil prices will accelerate the narrowing of Bahrain's current account deficit in 2018 and 2019 but the shortfall will begin to grow again from 2020. Inflows to the financial account from regional peers will be sufficient to cover the current account shortfall; however, in the event that these are not forthcoming, we believe that the risks to the currency peg would become severe.
The Central Bank of Bahrain will outraise the Federal Reserve in 2018 owing to price and currency pressures. However, we have revised downwards the magnitude of additional central bank hikes relative to the Federal Reserve due to lower-than-expected inflation and higher oil prices.
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