Bahrain: Risk Assessment
Country Rating1
Rating: A4
Business Climate Rating1
Rating: A4
Risk Assessment2
Continued growth in 2011despite political tensions
The dynamism of the offshore financial sector, which plays a preeminent role at the regional level, spearheaded an economic rebound in 2010. Financial services, the economy's main supply-side component, will again, in 2011, be the lynchpin of strong growth, albeit somewhat weaker than the expansion achieved during the oil boom. And the hydrocarbon sector will continue to make a pivotal contribution to the economy despite the low level of reserves. Although oil production is not expected to vary much, gas production will rise slightly with the efforts focused on higher value-added activities like refining.
Stronger demand will also buoy the economy. An increase in the minimum wage in the public sector, the one-off grant awarded for each Bahraini family in the aftermath of the popular uprising and the continuation of subsidies will underpin private consumption. The limited growth in public investment spending is likely to be offset by the recovery of both foreign and domestic private investment.
After the bankruptcy of institutions owned by two Saudi groups and the financial difficulties experienced by Dubai in 2009, Bahraini banks, with their asset quality deteriorated and profitability eroded, will continue to impose strict standards in evaluating risks.
Erosion of the current account surplus and deterioration of the public deficit
Depleted reserves notwithstanding, hydrocarbons remain by far the primary source of export earnings, generating three-quarters of sales abroad. Supplemented by exports of refined oil and aluminum products, they will doubtless suffice to offset the cost of imports and ultimately maintain a stable trade surplus. The services surplus is expected to grow as a result of the increasing reliance of regional companies on the Bahraini financial sector. Conversely, profit repatriation by foreign firms and expatriates remittances will exceed dividend payments generated by assets abroad with the incomes deficit widening in consequence. And the current account surplus is expected to ultimately erode.
Although fiscal revenues are expected to stagnate, public spending will continue to rise due especially to the ongoing investment and subsidy policy (water, electricity, petrol, food products) benefiting the neediest Bahrainis as well as the specific measures to pre-empt the unrest intensification. The net result of these trends will be an increase in the public deficit financed by bond issuance on the markets. Despite the relatively limited total value of the assets in the sovereign fund ($9 billion), Bahrain's financial position seems relatively satisfactory overall and, if necessary, it will likely be able to count on the support of neighboring Saudi Arabia.
Difficult socio-political climate, but a good business environment nonetheless
In the October 2010 legislative elections, the main Shiite opposition group, the Al-Wefaq Party, although failing to win a majority, came out the winner ahead of the pro-government movement of independents, allied with Sunni parties. In this context, King Hamad ben Issa Al-Khalifa, a Sunni himself, retains control over the executive in the face of a weak parliament. But with Shiites representing 70% of the population, they feel economically and politically marginalized by the Sunnis, which spurs considerable social unrest. In the wake of the Tunisian and Egyptian events, social tensions have further intensified. Protestors, mainly Shiite, claim political change with a constitutional reform including parliament empowerment.
Despite this tense climate and the geopolitical uncertainties, mainly associated with the Iranian nuclear program, the business environment remains good with efforts engaged to spur the private sector, attract additional foreign investment, and develop the domestic skills pool, motivated by the need to diversify the economy.
Strengths
- Leading regional financial center
- Diversified economy (oil, gas, aluminum, petrochemicals, financial services, and tourism)
- Open to foreign investment
Weaknesses
- Depleting hydrocarbon reserves
- Social unrest, uncertain geopolitical environment
- Dependence on human resources from abroad
- Housing and employment crisis