Hong Kong: Fitch says it reflects constant hydrocarbon volumes (after a fall in 2016) and a moderation of non-hydrocarbon growth to 3% from an estimated 3.4% in 2016. Spending on projects financed by the USD7.5billion GCC development fund provides crucial support to growth amid government retrenchment. USD3.9bn of projects had been awarded to contractors as at end-2016 up from USD1.1billion at end-2015. Growth is also supported by state-owned enterprise projects (in oil, gas, and aluminium).
Banks are well placed to extend more credit to the economy and the government, enjoying profitability, high levels of capitalisation and liquidity, and low nonperforming loan levels. Higher policy rates and yields on government bonds have not yet translated into significantly higher private sector borrowing costs. Fitch expects credit to the private sector to expand by 4%-5% per year in 2017-18, from an estimated 3.5% in 2016.
The GCC development fund reflects the broader support that Bahrain enjoys from some GCC countries, particularly Saudi Arabia and Kuwait. Bahrain gets most of its oil from the Abu Sa’afa field shared with Saudi Arabia (it is entitled to 50% of production, but has sometimes received significantly more as a form of support). In Fitch’s view, further material support from the GCC would be forthcoming in case of extreme political, financial, or fiscal instability, given Bahrain’s small size and strategic importance. The expectation of such support has supported Bahrain’s market access and US dollar peg despite a low level of foreign exchange reserves, which had fallen to an estimated 1.2 months of current external payments at the end of 2016.