External financing from the rest of the GCC will help to shield the Bahraini non-oil sector from the ongoing retrenchment in public spending. Despite the negative impact of subsidy cuts on internal demand, we forecast Bahrain to grow at a relatively robust rate of 2.7% this year and 2.9% in 2017.
Bahrain's reputation as a stable and welcoming location to do business in the Gulf has suffered as a result of the volatile political climate. At the moment, it remains to be seen if Manama will be able to compete with Doha and Dubai in attracting investment into the all-important hospitality and financial services industry.
The economy's medium-term outlook remains contingent upon a lasting solution being found to the current political crisis. Unfortunately, we maintain our guarded outlook on the prospects that the government and opposition can come to some form of agreement in the near term.
Bahrain's weak medium-term fiscal prospects will force the government to make difficult choices. We believe that Manama will have little option but to introduce new taxes over the coming years, while the issue of spending consolidation will loom large on the agenda. Support from Saudi Arabia could delay these pressures, but would entail a significant loss of sovereignty.
The Central Bank of Bahrain (CBB) will continue to follow a pro-cyclical monetary policy over 2016, raising interest rates in line with the US Federal Reserve's moves. Although the government's subsidy cuts will trigger inflation, continued strength in the US dollar and subdued commodity prices will help to offset inflationary pressures.
A more pronounced regional crisis stemming from an uptick in tensions between Iran and the West 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 'safe haven' status suffering irreparable damage.
|e/f = BMI estimate/forecast. Source: Central Bank of Bahrain, CIO, Ministry of Finance, BMI|
|Real GDP growth, % y-o-y||4.5||2.9||2.7||2.9|
|Nominal GDP, USDbn||33.8||35.3||37.5||39.9|
|Consumer price inflation, % y-o-y, eop||2.5||0.7||3.5||3.3|
|Exchange rate BHD/USD, eop||0.38||0.38||0.38||0.38|
|Budget balance, % of GDP||-3.6||-10.6||-10.3||-8.2|
|Current account balance, % of GDP||3.3||-3.3||-4.5||-2.6|
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