Positive steps have been taken towards resolving the domestic political stalemate, with a national dialogue restarting and the reformist Crown Prince promoted to First Deputy Prime Minister. However, progress has been slow and low-level violence continues.
Growth has rebounded after the political unrest in 2011, picking up to 3.4% in 2012 from 1.9% the year before. The normalisation of oil production, after technical problems, should allow growth to strengthen to 5.5% in 2013. Capital spending, manufacturing investment and a further recovery in tourism will support non-oil growth of around 3.5%.
Fiscal deficits pushed the debt-to-GDP ratio to 36.6% of GDP at the end of 2012, on par with the ‘BBB’ median. Fitch expects debt-to-GDP to be above the peer median by end-2014. However, owing to government deposits in the banking sector worth 18% of GDP, net debt-to-GDP is forecast to remain significantly below the ‘BBB’ median.
At 3.2% of GDP in 2012, the general government deficit is greater than the ‘BBB’ median. Savings to capital expenditure resulting from the use of GCC development funds are forecast to lower the deficit to 2.1% of GDP in 2013, when Fitch estimates the fiscal breakeven oil price will be around USD115/b. Tackling wages and subsidies (around 60% of total spending) is challenging in the current political environment.
The external position is much stronger than ‘BBB’ rated peers. A current account surplus of 12.1% of GDP is projected for 2013, which will be the 10th consecutive year that a surplus has been recorded. Bahrain’s overall net creditor position, 81.1% of GDP at end-2012, is the strongest of any similar-rated sovereign.
GDP per capita and broader human development and business environment indicators are close to the ‘A’ median. The strong regulatory framework and local skill base, combined with low costs, are key supports to the financial sector.
The banking sector is large, at 750% of GDP, but has weathered a number of global, regional and local shocks in recent years. Assets of the wholesale banking sector (480% of GDP) have begun to pick up after five years of decline. The government is addressing vulnerabilities within Islamic retail banks.