Bahrain: Risk Assessment
Country Risk Rating
Business Climate Rating
- One of the most diversified economies in the region with a higher share of services and manufacturing sectors in GDP
- Presence of a strong aluminum sector, a key contributor to national output
- Low level of inflation and interest rate environment encouraging business operating conditions
- Very high external debt-to-GDP ratio (both public and private)
- High budget deficit despite a progressive narrowing from 2021 onwards
- Fiscal revenues still dependent on oil despite a relatively diversified economy
A steady growth
The Bahraini economy should steadily grow in 2022, after its sharp contraction in 2019 and its relatively solid recovery in 2021. Exports (net exports should stand at around 10% of GDP in 2022) will be a key contributor, followed by private consumption (40% of GDP). Indeed, as of early November 2021, the country had been able to fully vaccinate 65% of its population of 1.7 million, which, in turn, allowed the progressive lifting of the temporary bans against COVID-19 in the second half of 2021. The normalized mobility will strengthen household spending, but the latter will only grow gradually. As a result, the consumption-driven sectors, such as retail, would reach their pre-COVID level towards the end of 2022. Bahrain, one of the world's largest aluminum producers, will benefit from strong global demand for metal products (around 20% of total exports) on the back of stimulus packages prioritizing infrastructure investments and transition to a greener economy across the globe, as well as a resilient manufacturing activity. Investments are expected to stand at around 30% of GDP in 2022. The tourism sector will remain essential for the recovery of the Bahraini economy, as it usually accounts (including its indirect effects) for 10% of GDP. Nearly 60% of tourist arrivals to Bahrain are from the Middle East. In this sense, removing measures against COVID-19 will help tourism revenues recover. The re-opening of the King Fahd causeway by Saudi Arabia, linking the Kingdom to Bahrain, the opening of the Bahrain International Exhibition and Convention Center due in 2022, as well as the country's liberal social and political climate will be among the key factors to support tourism revenues, despite rising regional competition. Overall, net exports of goods and services should increase by 2.6% in 2022 after an estimated 9% rise in 2021.
The fiscal position remains weak, with a high level of public debt
Higher commodity prices will support fiscal revenue growth, with hydrocarbon making up around 70% of total revenues. The government seeks to boost revenue, as it announced in September 2021, and would double the value-added tax to 10% to curb the budget deficit. On the other hand, although the 2021-2022 budget included some reforms like reducing electricity and water subsidies and operating expenses, higher energy prices may blunt the will to restrict spending. Even though the budget deficit will slightly recede in 2022, after widening close to 20% during the COVID-19 pandemic in 2020, it will remain prominent in the upcoming period. As such, Bahrain will miss its target of achieving a balanced budget by 2022, as announced originally in its Fiscal Balance Program (launched in 2018). In October 2021, the government announced it would push back this target by two years to 2024. With the fiscal breakeven oil price estimated to stand at USD 106.6 per barrel in 2022 according to the IMF, the provision of public jobs for citizens, and the subsidy system remaining mainly in place, the fiscal position will remain weak. The public debt will remain significant, keeping the borrowing needs high. Therefore, Bahrain's neighbors' willingness to provide funds is essential. In 2018, Bahrain received a USD 10 billion aid package over five years from Saudi Arabia, Kuwait, and the United Arab Emirates to help the country avoid a credit crunch. Despite the two-year delay in achieving the goal of a balanced budget, these three countries repeated their support for Bahrain, which will continue to encourage investors to lend funds to finance Bahrain's debt on capital markets. The trade in goods and services surplus should continue rising thanks to higher commodities-related revenues and progressive return of tourists, without reaching its pre-COVID level yet. Demand for imported machinery meant for local infrastructure projects and higher transport costs will weigh. Foreign workers' remittances and repatriated income by foreign portfolio investors will maintain the current account deficit.
No significant tensions are expected shortly, but long-standing political challenges persist
Bahrain has a functioning parliament, and no significant political tension is expected in the short term. However, the feeling of the Shia population (around 60% of the population) to be marginalized in political and economic terms may be a challenge in the upcoming period.