Bahrain’s economic performance has proven resilient to shocks and real GDP growth averaged more than 4.5% between 2007 and 2013, according to S&P.
“Bahrain’s proximity to Saudi Arabia, its strong regulatory oversight, a relatively well-educated workforce, and low cost environment still provide incentives for investment and provide potential for the future growth of the non-oil economy, representing approximately 75% of total GDP,” S&P in a statement said.
“Furthermore, measures to ease restrictions on foreign participation in the labor force have improved flexibility for employers. Regulations that afford flexibility to foreign investors when managing their relationships with local businesses (who by law hold majority stakes in all businesses) are also signs of a relatively business-friendly policy setting. However, the already high level of competition in financial services, locally and regionally (particularly from Dubai) limits the scope for growth at Bahrain’s offshore and retail banks. As a result of this and the reduced confidence triggered by lower oil prices, we think the need to bring foreign talent into the workforce will slacken. We expect that slower rates of immigration, which are a key determinant of population growth, will feed through into higher GDP per capita growth figures,” it added.
“Despite Bahrain’s relatively large financial sector and high number of majority-government-owned companies, we consider its contingent liabilities to be limited. On average, banks display high regulatory capital positions. We expect that competition will continue to strain profitability at Bahraini retail banks, encouraging further consolidation. Although the size of the overall banking system has declined by about 25% since its peak in 2008, driven by offshore banks’ balance sheet downsizing, in our base-case scenario we assume that outflows, in terms of both external funding and the physical presence of international banks, will be contained. Bahrain’s retail banks carry a large credit exposure to the real estate and construction sector (about one-fifth of total lending as of Sept. 30, 2014). In our view, this economic sector remains in a correction phase, which contributed to the building up of a relatively large percentage of problem assets,” it said.
“We do not expect that the Central Bank of Bahrain would act as lender of last resort for offshore banks. We view the Bahraini government as a potential source of support for wholesale institutions not covered by parent entities or home countries but still important from a systemic or reputational standpoint. Consequently, we include all wholesale banks’ external liabilities in our assessment of Bahrain’s external financing needs.”
“We expect the current account to remain in surplus, although we forecast that it will decline significantly and in line with our lower oil price assumptions, given that approximately 80% of exports are linked to oil.
“Bahrain’s services balance is related to the profitability of the financial sector and could therefore deteriorate slightly under the impact from weaker oil prices. We expect that corresponding outflows from the financial account will consequently decline, albeit with a potential time-lag, as prices feed through the financial system. We continue to believe that Bahrain’s external stock position could be significantly overstated because it is clouded by statistical discrepancies and the size of the financial system, much of which has limited bearing on the domestic economy.
“We understand that the recent elections were held without any major violations. Although we anticipate that Bahrain’s political tensions will continue, we also believe that the overall security environment is calmer. Although we consider that the government has established a post-crisis status quo, Bahrain still faces occasional street protests, entrenched polarization between the Shia and Sunni communities, internal communal divisions, and an uncertain economic policymaking agenda,” it S&P said.