Economic growth is projected to slow to 3.2% in 2018 from 3.8% in 2017 on the back of fiscal tightening.
Oil GDP is expected to remain flat after a 0.3% contraction in 2017 and just 0.1% growth in 2016. Oil production remains depressed by capacity constraints and declining output at the onshore Bahrain field. Significantly, the 2018 breakeven oil price for Bahrain is USD 95.2, above the current market price of OPEC’s basket.
Housing and utility costs, which account for 24% of consumer expenses, rose 1.2% from a year earlier in August. Compounding that, Bahrain is expected to see a decline in consumer spending along with an increase in price inflation after VAT is introduced by year-end.
Fiscal consolidation and 15% higher oil revenue mean the overall budget deficit declined to 14.3% of GDP in 2017 from around 17.6% in 2016. The deficit is expected to decrease to 8.9% of GDP in 2018 due to spending cuts and higher oil prices, but remains much higher compared with the average of 0.9% in 2000-2013.
We expect the upcoming bailout programme sponsored by Kuwait, - Saudi Arabia and the UAE to be contingent on fiscal consolidation in Bahrain's 2019 budget. This could create further pressures on recurrent government expenditures such as public wages, subsidies and transfers, which strongly underpin consumer purchasing power.
Government debt is expected to rise to 98.6% of GDP in 2018 from 90.6% of GDP in 2017. This contrasts with just 27.1% of GDP on average between 2000-13.
Bahrain has approved rules allowing foreign companies to establish independent subsidiaries in the kingdom and to do business without a local partner.
Bahrain’s Cabinet formally endorsed the new rules in September, two years after the country approved 100% business ownership in certain sectors.
Foreign investments in Bahrain have touched USD 810M so far this year, rising from USD 733M for the full 2017.
Data from UN development agency UNCTAD shows Bahrain reporting the fastest FDI growth rate in the GCC in 2017.
Manufacturing and logistics accounted for most foreign investment in the first nine months of this year.
Some companies are also locating operations in Bahrain to take advantage of reforms in Saudi Arabia, which aims to develop non-oil industries such as mining, light manufacturing and tourism.
On 24 November, Bahrain will hold parliamentary elections, the first since Al Wefaq, a prominent Shi’a political group, was banned in 2016. The barriers to political influence for Shi’a citizens could cause some of them to boycott the elections or lead to political unrest.
In May 2018, Bahrain barred members of dissolved political parties (including Al Wefaq) from running.
Elections in 2014 were boycotted by the Shi’a opposition over accusations that constituency changes would still favour the Sunni majority in parliament represented by the ruling family.
In Bahrain’s last parliamentary poll in 2014, approximately 350,000 Bahrainis were registered to cast votes.