Bahrain forecasts 3.1% growth for 2017, yet debt challenges remain

Strong growth in non-oil sector will drive expansion, says chief economist of state development agency

Bahrain's capital Manama has become clearly visible from Al Khobar in Saudi Arabia. Picture for illustrative purposes. Getty Images

Bahrain, the smallest GCC economy, projects annual GDP growth of above 3 per cent for the next two years led bythe non-oil sector, but the economy will continue to grapple  with high public debt levels, according to the chief economist of the Bahrain Economic Development Board, the state investment agency.

In the first half of 2017, year-on-year growth accelerated to 3.4 per cent. GDP growth for the upcoming fourth quarter is predicted to reach 3.3 per cent as a conservative estimate, according to Jarmo Kotilaine. In 2016, Bahrain's GDP grew 3.2 per cent– almost entirely led by the non-oil sector, which grew by 4 per cent.

“There is good momentum in the economy, and the overall business environment is looking more optimistic due to the positive impact of stabilising oil prices,” said Mr Kotilaine.

The agency expects growth for this year to slow to 3.1 per cent and annual non-oil growth to hover around 3 per cent in the medium term, he said.

The agency's projection are more bullish than the IMF's forecasts.

In August, the IMF projected Bahrain’s real GDP growth would slow to 2.3 per cent and 1.6 per cent in 2017 and 2018, reflecting ongoing fiscal consolidation and weaker investor sentiment. 2016 GDP growth stood at 3 per cent, the IMF said.

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Particular growth sectors include: hotels and restaurants, which reported 12.9 per cent year-on-year growth in the first half of 2017, ; "social and personal services" (including private healthcare and education), which recorded  10 per cent growth, financial services, with 7.9 per cent, and transportation and communications, which registered 7 per cent growth.

“Overall, we would expect the same growth rates for these sectors in 2018,” said Mr Kotilaine. “There is a fairly consistent pattern that has emerged, and the factors that have been driving that pattern – above all the infrastructure pipeline and to some extent regulatory reform – remain very much in place.”

Beyond 2019, Bahrain's real GDP growth is likely to diminish slightly as a result of fiscal consolidation, and other reform measures that include the introduction of a GCC-wide 5 per cent value added tax (VAT). .

Mr Kotilaine said VAT was “the biggest single item in terms of possible remedies” for Bahrain’s substantial fiscal imbalance.

Government debt in Bahrain is forecast to have increased to 83.7 per cent of GDP in 2016 from 44 per cent of GDP in 2014, placing Bahrain in breach of the 60 per cent debt-to-GDP stability criteria, according to the World Bank.

This year, ratings agencies including Moody’s and S&P Global Ratings downgraded the kingdom’s sovereign credit rating, citing weak external liquidity and increasing financial risk.

On Saturday, BMI Research, a unit of Fitch Group, said Bahrain is likely to require “a bailout by regional peers over the coming months in order to cover its debt payments and maintain the currency peg, amid dwindling reserves and rising debt-servicing costs”.

“Absolutely [VAT] will go some way towards helping to reduce the public debt,” Mr Kotilaine said.

"What is important about VAT is that for the first time ever it will create a broad revenue base in the non-oil sector of the economy."

Other planned taxes, such as the GCC-wide excise tax on harmful goods such as cigarettes and fizzy drinks, as well as ongoing improvements in the administration of real estate taxes in Bahrain will also help, the chief economist added.

Bahrain has yet to announced a date for the introduction of VAT and excise tax.