Bahrain: Risk Assessment
Country Risk Rating
Business Climate Rating
- Higher degree of economic diversification among GCC with the world’s largest aluminum smelters
- Developed banking sector
- Financial support from the GCC countries
- Weakened external position, the wide budget deficit
- Growing public debt
- Dependence on oil in terms of fiscal revenues
The economy expected to recover on higher oil revenues but at a slow pace
After contracting in 2020, Bahrain is expected to post a positive growth rate in 2021, although the pace of the recovery is expected to remain slow. The economic expansion will be supported mostly by higher oil prices and reduced OPEC+ cuts on oil production. Aluminium production is expected to inch up in 2021 (1% YoY), in line with the recovery of Chinese demand and rebound in metals prices. However, profit margins would remain under pressure as key consumer sectors such as automotive and construction will experience a limited recovery worldwide. Tourism revenues, which normally account for nearly 7% of GDP, will remain constrained even if a vaccine or a treatment to COVID-19 is found because travellers will stay cautious (especially Saudis who represent most of the visitors). As a result, the current account deficit is expected to remain high in 2021, although slightly reduced by higher oil prices. Private consumption should increase in 2021, but the risk of the second round of lockdowns in case of a second wave of the pandemic will weigh on its recovery. As of October 2020, Bahrain had 81,200 cases and 317 deaths. Any return to anti-COVID-19 measures similar to that of the March-May period would plunge the economy back into recession. On the other hand, the signature of a peace deal with Israel may pave the way for an increased number of tourist arrivals, as well as the implementation of joint projects within the technology, energy and transport sectors.
Fiscal dynamics remain persistently weak
Lower oil revenues (nearly 55% of fiscal revenues) and a USD 1.5 billion fiscal stimulus package (around 4% of GDP, which includes payment of salaries by the unemployment fund, exoneration of electricity and water bills, exemption of companies from certain fees, widened size of the SME liquidity fund, etc.) have widened the budget deficit of Bahrain in 2020. These measures were expanded and extended until the end of 2020. The budget deficit is expected to shrink to pre-crisis levels in 2021, on the back of slightly higher oil prices and fiscal consolidation. In April 2020, the government already asked ministries and government agencies to slash spending by 30% and reschedule some construction projects. This means that the public sector might delay payments to private sector companies. Nevertheless, Bahrain’s fiscal break-even price is estimated at USD 83 per barrel for 2021, among the highest in the GCC countries. Consequently, the large budget deficit will continue to increase the public debt-to-GDP ratio (estimated at 130.6% in 2021 compared to 12.6% in 2008). This will force the government to increase its borrowing from international debt markets. To do so, the government has increased the debt ceiling to USD 40 billion from USD 35 billion in August 2020, the first increase since 2017. After avoiding a credit crunch in 2018 thanks to a USD 10 billion bailouts by Saudi Arabia, the UAE and Kuwait, Bahrain raised USD 4 billion through two bond issuances in May and September of 2020. Foreign reserves fell as low as USD 769 million in April, before rising to USD 1.9 billion following the bond issuances. With reserves covering less than two months of imports, the vulnerability of the currency peg (0.376 Bahraini dinars to USD) and the risk of reserves depletion is increasing. As a result, the country’s dependence on foreign aid, particularly from its GCC neighbours, will remain significantly high.
Domestic and regional politics on the front burner
Located between Iran and Saudi Arabia, Bahrain has a big geostrategic importance. The country represents a balancing point between those two countries, which reflect respectively the Shiite and Sunni worlds. This situation leaves an open door for Bahrain to get involved in regional tensions. In September, Bahrain and Israel agreed to normalize diplomatic and other relations, following the United Arab Emirates. Bahrain has been encouraged to strike this deal mainly on the back of concerns about its Shi’a majority being influenced by Iran. The country has experienced social and political stability issues on the matter, as the Shi’a majority complained about a disproportionate representation and lack of economic and political rights. . After Bahrain’s late Prime Minister Sheikh Khalifa bin Salman al-Khalifa passed away in November 2020, Bahrain’s King has named crown prince Salman al-Khalifa as the new prime minister. However, this is not expected to change the balance of power in the political scene. The deal with Israel will reinforce already-close ties with the United States, which are considered as a protection against aggression from Iran. However, coupled with economic hardship and falling income levels, this deal could create popular discontentment as the biggest opposition group, the Al-Wefaq National Islamic Society, which is outlawed by the Bahraini government, said that the normalization of the ties with Israel had no legitimacy.