Bahrain Country Risk Report Q1 2020
Bahrain's macroeconomic stability has improved drastically since mid-2018 thanks to financial support by the Gulf, particularly Saudi Arabia, the UAE and Kuwait. Growth came in at 2.7% in Q119 (higher than most in the GCC) and the Kingdom's fiscal deficit has been sharply reduced. Indeed, the Kingdom intends to tap global markets with a eurobond issuance in the next few quarters.
Overall, we expect growth to pick up from 1.8% in 2018 to 2.8% in 2019, before accelerating to 3.1% in 2020. Growth will be mainly underpinned by the con-struction and manufacturing industries, though fiscal consolidation will likely cap wider non-oil sector gains.
The kingdom's fiscal dynamics have improved dramatically in H119, indicating steadfast commitment to the Fiscal Balance Programme. We believe a combina-tion of revenue-raising measures and gradual spending cuts will help bring the fiscal deficit from 6.2% of GDP in 2018 to 5.5% and 4.7% in 2019 and 2020. That said, we note that high debt-servicing costs will weigh on the Kingdom's policy flexibility.
Trade dynamics, on the other hand, will likely deteriorate. Falling oil prices will hamper oil export growth, while sluggish GCC and eurozone growth will dampen the demand for Bahrain's services exports. Meanwhile, the demand for capital inputs will remain robust as the authorities press ahead with large-scale construction projects.
Finally, we highlight that, against the backdrop of low oil prices, Bahrain will look to implement more stringent labour force nationalisation policies in order to absorb the large youth population into the labour force and keep a lid on social discontent.
Regional assistance will be vital to keep the external and fiscal accounts sustainable in the medium term. If this assistance does not remain forthcoming, there will likely be a fiscal crisis and currency devaluation that will weigh on growth and lead to increased political instability.
A more pronounced regional crisis stemming from an uptick in tensions between Iran and Saudi Arabia, and/or the US could see risk premiums spike higher, particularly for Bahrain.
Failure to find a lasting solution to the political crisis has seen elements of the opposition becoming increasingly radicalised, with use of militant tactics such as improvised explosive devices. A deepening of this trend could result in Bahrain's relative 'safe haven' status suffering irreparable damage.
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