The rally in oil prices has opened the door for some of the larger Gulf economies to loosen fiscal policy, but governments in Bahrain will need to continue with efforts to repair their dire balance sheets. In the event fossil energy prices stay above USD 110/pb for a prolonged period of time, we would expect that self-help measures could prove sufficiently efficient to avoid further fiscal consolidation. Alternatively, we think that both countries will need to turn back to the rest of the Gulf for further financial support to help service their large external debts and keep dollar pegs intact.
Bahrain is the smallest oil producer and the smallest economy in the GCC. The Kingdom has a diversified and dynamic economy compared to its regional peers, as reflected by still robust, albeit slowing, growth dynamics in the non-oil sector. It also has a very high per capita income. Bahrain’s credit profile is, however, relatively weak overall due to persistent fiscal deterioration, which started with the global financial crisis and continued with the Arab Spring in 2011 and the structural drop in energy prices since 2014. The government debt-to-GDP ratio has more than doubled since 2014 and is set to hit 102% in 2019.
Despite a relative high debt-to-GDP ratio, we have a positive credit outlook for Bahrain. The country enjoys strong political and financial support from its GCC neighbors, from which it received a USD 10bn (26% of 2018 estimated GDP) financial assistance package in October 2018. Since then, fiscal reforms have picked up with spending cuts, for instance, as well as the introduction of a value-added tax and a voluntary retirement scheme.
GDP forecast 2024: 3.1 %