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Bahrain Country Risk Report Q1 2020

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.

Key Risks

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.


Executive Summary
Core Views
Key Risks
Country Risk Summary
Economic Risk Index
Political Risk Index
SWOT
Economic – SWOT Analysis
Political – SWOT Analysis
Economic Outlook
Economic Growth Outlook
Growth To Hold Up
GDP By Expenditure Outlook
TABLE: GDP GROWTH FORECASTS
TABLE: GOVERNMENT CONSUMPTION FORECASTS
TABLE: PRIVATE CONSUMPTION FORECASTS
TABLE: FIXED INVESTMENT FORECASTS
TABLE: NET EXPORTS FORECASTS
External Trade And Investment Outlook
Lower Oil Prices To Widen Trade Deficit
Outlook On External Position
TABLE: CURRENT ACCOUNT BALANCE FORECASTS
Monetary Policy Framework
TABLE: MONETARY POLICY FORECASTS
Fiscal Policy And Public Debt Outlook
H119 Data Point To Commitment To Fiscal Consolidation
Structural Fiscal Position
TABLE: FISCAL AND PUBLIC DEBT FORECASTS
TABLE: MAIN REVENUE AND EXPENDITURE CATEGORIES, 2018
10-Year Forecast
The Bahraini Economy To 2028
Diversification And Political Stability Key To Long-Term Growth
TABLE: LONG-TERM MACROECONOMIC FORECASTS
THIS COMMENTARY IS PUBLISHED BY FITCH SOLUTIONS MACRO RESEARCH and is NOT a comment on Fitch Ratings’ Credit Rating. Any comments or data included in the report are solely derived from Fitch Solutions Macro Research and independent sources. Fitch Ratings’ analysts do not share data or information with Fitch Solutions Macro Research.ContentsPolitical Outlook
Domestic Politics
GCC Labour Force Nationalisation Schemes Likely To Advance, But Not At 'All Costs'
Long-Term Political Outlook
Social Tensions Pose Biggest Long-Term Threat
Operational Risk
TABLE: OPERATIONAL RISK
Economic Openness
TABLE: FREE TRADE AGREEMENTS
TABLE: TARIFF AND NON-TARIFF TRADE BARRIERS
TABLE: FREE TRADE ZONES AND INVESTMENT INCENTIVES
TABLE: BARRIERS TO FDI
Utilities Network
TABLE: ELECTRICITY RISKS
TABLE: FUEL RISKS
TABLE: TELECOMMUNICATIONS RISKS
TABLE: WATER RISKS
Global Macro Outlook
Downside Revisions To Stabilise Somewhat, But Policy Risks Remain
TABLE: GLOBAL MACROECONOMIC FORECASTS (2018-2023)
TABLE: DEVELOPED MARKETS – REAL GDP GROWTH, % y-o-y
TABLE: EMERGING MARKETS – REAL GDP GROWTH, % y-o-y
Index Tables
TABLE: BAHRAIN – MACROECONOMIC DATA AND FORECASTS

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