Bahrain: Twin surpluses expected this year

Bahrain's GDP grew by 4.3% y/y in Q4 of 2021, bringing full year 2021 GDP growth to 2.2%.  The non-oil sector recorded an expansion of 4.8% y/y in Q4 2021 with transportation, hospitality, financial services and utilities posting strong growth.  Bahrain’s Finance Ministry forecasts real GDP growth at 4.1% in 2022, higher than our forecast of 3.4%.

Bahrain: Quarterly real GDP growth

Source: Haver Analytics, Emirates NBD Research

The World Bank expects Bahrain’s economic growth to accelerate to 3.5% y/y in 2022 boosted by the surge in energy prices. The World Bank said that the rebound was mainly underpinned by growth in non-hydrocarbons, aided by strong expansion in the transportation and communication sector, one of the hardest-hit by the pandemic.  The expansion of the Sitra oil refinery and development of the Khaleej Al Bahrain shale oil project will support the country’s growth outlook going forward, it added. However, the World Bank noted that over the medium-term, Bahrain’s non-oil economic activity will be dampened by fiscal consolidation.

Twin surpluses

Improved dynamics in the hydrocarbon sector will benefit both the current account and budget balances over the next couple of years. Preliminary data show Bahrain’s current account recorded a surplus of USD 2.6bn in 2021 or 6.7% of GDP. Aside from an improvement in net oil exports, non-oil exports jumped 53% y/y last year.  We expect the current account surplus to widen to 9.1% of GDP in 2022. Net foreign assets at the central bank rose to USD 4.3bn at the end of February, roughly three months’ import cover. 

We expect the budget will move from an estimated deficit of -6.6% of GDP in 2021 to a surplus of 3.6% of GDP this year and remain in surplus through 2023. 

VAT increase, food prices drive inflation

Inflation in Bahrain has accelerated this year, reaching 3.2% y/y in February from -0.4% y/y in December 2021. The doubling of the VAT rate to 10% from the start of this year has been the main source of consumer inflation, but higher food prices have been a key driver as well.  Food CPI was up 12.1% y/y in February, and restaurant prices have increased 13.1% from a year ago. For now, the pass-through of higher global oil prices remains limited, with transport CPI up 2.7% y/y in February. We expect CPI to average 3.0% in 2022, up from -0.6% in 2021.

Fitch affirms Bahrain’s rating with stable outlook

Fitch Ratings has affirmed Bahrain's long-term foreign currency debt rating at 'B+' with a stable outlook. The agency noted that Bahrain's ratings are supported by strong financial backing from partners in the GCC, the high level of economic development and a robust macroeconomic outlook. Weak public finances, high fiscal dependence on oil revenue, low levels of FX reserves and political constraints on fiscal reform all weigh on the ratings, although fiscal consolidation has made significant progress since the launch of the 2018 Fiscal Balance Programme (FBP), which was refreshed with additional measures in late 2021. The government estimates that by 2024 the new measures (including the VAT hike) will save the budget around 5% of GDP.  

Fitch also expects that Bahrain will continue to receive support from Saudi Arabia, the UAE and Kuwait. The agency noted that the updated FBP was accompanied by a statement of ongoing support from Bahrain's GCC partners who are providing financing from the USD10bn package agreed in 2018 alongside the initial FBP. As of end-2021, USD3.1bn of the GCC package remained to be disbursed, which would cover half of Bahrain's USD6bn of maturing Eurobonds and Sukuk in 2022-2024.