MANAMA: Bahrain’s economy is seen growing by around three per cent this year and next by a leading international bank.

A report on Central and Eastern Europe Middle East and Africa (CEEMEA) Economics by HSBC Bank for the ongoing third quarter (Q3-2021) has projected slightly lower GDP growth for the kingdom than the forecast by the Finance and National Economy Ministry, but it is close to the consensus view, and a performance that will leave real output below 2019 levels at the end of 2022.

Authored by HSBC Bank CEEMEA chief economist Simon Williams, the report is based on data till April and finds high frequency data pointing to gains in consumption in Bahrain encouraging.

Points of sale (PoS) transactions were up more than 60pc year-on-year (YoY) in April, it notes.

However, much of the gains come from the base effect and in sequential terms the increases were fading even before activity restrictions were re-imposed, as pent-up demand was satisfied.

A breakdown of the PoS data also shows that spending on non-resident cards, which typically account for a quarter of total outlays, was down more than 50pc on its pre-pandemic levels, marking the impact of ongoing travel restrictions, particularly those on the causeway to Saudi Arabia.

HSBC analyses that private sector credit growth in the kingdom also continued to decelerate through the first months of this year and, while GCC-funding has continued to give infrastructure spending some support, MEED data shows the value of projects planned and underway down 13pc YoY in June.

“A fresh surge in Covid-19 infections – the most marked in the Middle East despite the relatively rapid pace of the kingdom’s vaccine roll-out programme – required Bahrain to tighten domestic lockdown restrictions in Q2, creating fresh headwinds to the normalisation of domestic demand and recovery in the vital travel and broader services sector,” Mr Williams says.

“No GDP data has yet been released for 2021, but the recent publication of last year’s outturn showed the economy contracted by close to 6pc – a full percentage point more than we had expected and the steepest downturn in our 30-year data set, underscoring the low point from which recovery must come.”

The bank review of the quarterly growth profile reveals a sluggish turnaround, with Bahrain’s non-oil GDP at the end of 2020 down 5ppt on its pre-pandemic levels.

In contrast, non-oil demand in neighbouring Saudi Arabia had fully recovered by the same stage, the report states.

According to Mr Williams, in addition to subdued growth, the kingdom’s authorities must also manage still-pronounced balance sheet strains.

Higher oil prices offer significant support, and Q1 current account data shows the deficit halved quarter-on-quarter (QoQ) as oil earning rose and the exit of expatriate workers saw remittances fall to their lowest level since the quarterly series began in 2018.

“We expect this consolidation to continue and see a deficit of around 3.5pc of GDP over our forecast period, compared with 9.4pc in 2020,” says Mr Williams.

“We also see the budget deficit narrowing, but the drop to around 6pc of GDP reflects oil revenue gains rather than underlying fiscal adjustment as pandemic-related spending continues to rise.”

The economist is of the opinion that with Bahrain’s debt levels well over 100pc of GDP and savings low, access to deficit finance may require fresh funding from neighbouring states.

“We think this will likely come if required, but uncertainty over funding coupled with large refinancing needs prompted Moody’s and S&P to both put Bahrain’s sub-investment grade credit rating on negative outlook in April and May, respectively.”

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