Continued fiscal consolidation and reform, combined with steady growth, were the hallmarks of Bahrain's year in 2017, with a similar outlook forecast for the coming 12 months.
Bahrain’s economy expanded faster than expected, at 3.4% year-on-year in the first half of 2017, underpinned by a 4.7% expansion in the non-oil economy, according to data released in November by the Bahrain Economic Development Board (EDB). In contrast, the oil sector contracted by 1.9% during the same period.
Despite the solid performance in the first six months, at the end of August the IMF said it expected GDP expansion to ease marginally in the second half of 2017, taking full-year growth to 2.3%, down from 3% in 2016 and below the EDB’s projection of 3.1%.
While hydrocarbons’ share of GDP was projected to increase over 2016 levels, when the sector contracted by 0.1%, it still remained low, at negative 0.6%, eroding some of the gains made by the non-oil component, which was on track to increase by 2.9%.
The IMF forecast GDP expansion would slow further in 2018, to 1.6%, on the back of ongoing fiscal consolidation, although the EDB’s full-year growth projection is a more optimistic 2.7%.
Greater debt sustainability reached
One factor constraining growth in 2017 was the fiscal deficit, which stood at 18% of GDP in 2016. The debt level continued to restrict public spending over the year; however, efforts to reduce it proved successful, with the IMF expecting the gap to have narrowed to 12% by the end of 2017.
The improved performance came as a result of increased revenue generated through higher oil prices and continued prudent fiscal management, the fund said, though it noted that rising interest payments and debt repayment may slow the pace of reduction in 2018.
Foundations laid for improved investment climate
Bahrain saw a strong increase in foreign investment inflows in 2017. According to data issued by the Central Bank of Bahrain (CBB), foreign direct investment (FDI) reached $695m by the end of October, more than double the $280m year-end figure for 2016. The CBB took steps to further enhance the climate for doing business over the course of the year, announcing a series of reforms to encourage FDI flows.
In mid-November the bank lifted restrictions on Bahrain-domiciled real estate investment trusts (B-REITs) to allow all types of investors to buy into such programmes, before issuing directives the following month that expanded the categories of locally domiciled mutual funds to include exchange-traded funds.
Inflation remained low in 2017
Inflation remained muted throughout most of 2017, running at around 1.5% in the first half of the year, though the consumer price index began edging up in the third quarter, reaching 1.8% as of September on the back of higher food and housing costs.
The introduction of the GCC-wide value added tax, which will see a 5% levy imposed on most goods and services, is one of the factors expected to impact inflation in 2018.
While the tax is forecast to make a significant contribution to addressing Bahrain’s fiscal deficit, it may also impact consumption levels during the year, as the effect on costings and demand are absorbed.
Credit ratings revised
Bahrain enters 2018 with its credit ratings under pressure, a factor which could impact borrowing costs.
In early December Standard and Poor’s lowered its long-term foreign and local currency sovereign credit ratings from “BB-” to “B+”, while raising its outlook to stable. The agency said the downgrade reflected Bahrain’s weak external liquidity and increasing financial risk due to more limited access to international capital market financing.
The move came six months after fellow ratings agency Fitch revised its outlook f from stable to negative, citing the slow pace of reining in government debt, though it affirmed the sovereign’s long-term foreign and local currency issuer default ratings at “BB+”.
In mid-December the CBB raised its key policy interest rate on the one-week deposit facility by 25 basis points to 1.75%, in line with similar increases witnessed in some other Gulf countries and tracking the US Federal Reserve.
The bank also adjusted its other benchmarks, increasing the overnight deposit rate from 1.25% to 1.5%, its one-month deposit rate from 2.15% to 2.4%, and its lending rate from 3.25% to 3.5%.
Banks in a position of strength
Bahrain’s banking sector maintained its solid position during 2017, with liquidity and capitalisation levels strong.
The sector’s capital adequacy ratio was 19.8% of risk-weighted assets as of the end of the third quarter, according to data issued by the CBB in early December, and retail deposits were up 4.5% in the 12 months to the end of October at $45.1bn.
In its latest report, the IMF acknowledged the stability of Bahrain’s banks, noting that the sector appeared well placed to face moderate credit and liquidity shocks, with most banks having relatively robust liquidity positions heading into 2018.
