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MANAMA: Bahrain’s economy will recover next year to register growth of 3.5 per cent, according to a report by Mitsubishi UFJ Financial Group (MUFG).
The Japanese bank holding and financial services company said it remains “cautiously constructive” on Bahrain, with confidence in the sovereign’s ability to meet funding shortfalls.
The positive thesis is centred on the basis that the Fiscal Balance Programme (FBP) remains credible, the policy framework is relatively robust and that demonstrable headway is being made by the government in its implementation.
MUFG also said the country’s medium-term story remains positive and provides the government with further opportunity to consolidate should the need arise (for instance, through the raising of taxes) and support from neighbours, particularly Saudi Arabia, remains assured.
An easing of the Covid-related disruption for the rest of this year would bring the economy some relief, and the bank has a “strong expectation” that Bahrain’s wealthier neighbours will offer support, continuing to deliver on the FBP agreed in late 2018.
Thus far, Bahrain has drawn down $4.6 billion of the $10.3bn package (the package was offered on favourable terms, carrying an interest rate of zero per cent and doesn’t have to be repaid for 30 years, with a grace period on repayments of seven years).
With Covid-19 slowly ebbing away, the authorities are looking to life post oil-virus shocks, knowing that a continuation of its FBP reform pledges will offer it further financial instalments.
At the outset of the oil-virus shocks, the Bahraini authorities were quick to react, laying out plans to counter the downturn, including delays to the payments of fees, taxes and utility bills and a support programme for the private sector through the banks.
Whilst these were welcome steps, the sovereign was already committed to tightening fiscal policy as part of a five-year FBP to restore budget stability underwritten by support from Saudi Arabia, Kuwait and the UAE, said the report.
With the consolidation steps and a recovery in oil prices, MUFG sees the fiscal deficit narrowing from 11.3pc this year to 8.2pc in 2021.
Lost service receipts will also push the current account deficit sharply wider this year to -3.8pc of GDP.
In May, the authorities tapped the market with a $1bn 10-year bond issuance and a steady tightening of spreads on its existing paper suggests appetite for Bahraini risk has stabilised.
The country’s foreign assets recovered in May to $1.8bn; however, these levels equate to 1.3 months of import cover, whereas the IMF recommendation for pegged currencies is three months of import cover.
For the Mena region as a whole, MUFG forecasts overall real GDP growth to contract by 5.5pc this year from 0.3pc growth last year, with real GDP growth in the GCC region falling by 5.2pc this year from 0.8pc growth last year.
This year’s losses for the region will be broad, deep and immediate with the eventual recovery lagging much of the rest of the global economy, it said.
Most immediately, the lockdown imposed in response to the pandemic has been far-reaching and long.
As the domestic economy normalises, growth should recover, bolstered by a pick-up in oil output as OPEC+ production restrictions ease.
At around 3.6pc, however, the recovery will leave overall output for the Mena region, 1.9 percentage points smaller at the end of next year than at the start of this year.
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