Bahrain Country Risk Report Q4 2018
Growth will remain robust in 2018, as rising oil prices enable substantial investment spending from the government and the GCC. By 2019, however, the imple-mentation of VAT and tighter government finances will take a toll on both private consumption and fixed capital formation.
Continued repressive measures against the political opposition will solidify the government's position ahead of November elections. While critically weak finances and recurring unrest pose notable risks, near-unconditional support from Saudi Arabia virtually guarantees the government's survival.
The recently announced bail-out package by Saudi Arabia, the UAE and Kuwait will bolster investor confidence, limiting pressure on Bahrain's foreign reserves and tempering the country's borrowing costs. While we expect the GCC will demand Bahrain enact some spending cuts in return for assistance, the extent of fiscal consolidation will be limited, keeping structural risks high.
The Central Bank of Bahrain will raise interest rates faster than the US Federal Reserve in H218 to temper inflation expectations and support foreign currency inflows. That said, the recent announcement of a bailout programme by Gulf neighbours will help ease pressures on the currency, enabling the CBB to keep rate hikes modest.
Regional assistance will be vital to keep the external and fiscal accounts sustainable in the medium term. If this assistance is not forthcoming, there will likely be a credit default 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 continuation of this trend could result in Bahrain's relative 'safe haven' status suffering irreparable damage.
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