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Bahrain is likely to miss target on balancing books

Bahrain non-oil economy VisitBahrain
Bahrain's economy is driven by a broad rebound of regional tourism, transportation and hospitality, amid higher oil prices
  • Potential for lower deficits and positive economic outlook
  • New tax reforms include corporate income tax
  • Government driving non-oil activity to spur employment and investment

Bahrain is unlikely to hit a target of balancing its books in 2024 but could see lower budget deficits as the government pursues non-oil growth.

Preliminary fiscal data for year-end 2022 points to a minor deficit of 1.1 percent of GDP, underpinned by a 97 percent year-on-year increase in nominal tax revenue after doubling the rate of VAT. 

This marks Bahrain’s first primary surplus position since 2011 – excluding net interest payments on the government’s outstanding debt – and its strongest non-oil revenue growth result since 2012, said Giulia Filocca, S&P primary credit analyst. 

“Although we assume the fiscal balance target is unlikely to be reached by 2024, there remains potential for lower deficits should the government fully commit to budget consolidation measures,” said Filocca, as S&P affirmed its B+/B rating on Bahrain and maintained its positive outlook on the economy. 

Deficits between 2017 and 2021 averaged 8 percent but S&P forecasts a big drop to just over 3 percent over 2022-26.

This is driven by a rationalisation of cash subsidies, introduction of new tax reforms including corporate income tax, and an ongoing reduction in capital expenditure. 

According to Filocca, contained fiscal deficits helped reduce Bahrain’s gross government debt to about 116 percent of GDP in 2022 from a peak of 130 percent in 2020. 

At the same time, Bahrain’s economy registered its fastest pace of real GDP growth (4.9 percent) in a decade last year, driven by a broad rebound of regional tourism, transportation and hospitality, amid higher oil prices.  

Bahrain also posted a record current account surplus of 15.4 percent of GDP in 2022, bolstered by high oil prices and a boost in aluminium production. 

Filocca said Bahrain is expected to achieve another current account surplus of 8.8 percent this year.

Bahrain economic forecasts (S&P Global Ratings)

20222023202420252026
Nominal GDP ($bn)4446474951
Real GDP growth (%)4.92.82.42.42.4
Balance/GDP (%)(1.1)(3.0)(3.4)(3.3)(3.2)
Note: ( ) denotes deficit

Aluminium exports, comprising 45 percent of total non-oil exports, remain “robust”, thanks to the completion of the Aluminium Bahrain (Alba) Line 6 expansion project. 

In tandem, the Central Bank of Bahrain’s foreign exchange reserves rose to $5 billion in February, their highest level since the oil price slump in 2014-2015. 

S&P said it expects Bahrain’s economic growth to decelerate to about 2.8 percent in 2023.

This will be offset by the government’s efforts to drive non-oil activity over the medium term, spurring domestic employment and attracting investments in strategic sectors such as tourism, housing, roads, airports, and electricity. 

Associated projects include the building of five offshore cities, the development of the Bahrain metro, and the Bahrain Petroleum Co refinery modernisation project, the ratings agency added. 

S&P also forecast strong inflows of foreign direct investment of about 3 percent of GDP over the next four years, supported by a shift in GCC financial support toward longer-term investment over direct aid. 

Inflationary pressures increased to 3.6 percent on average in 2022 but are forecast to fall to 1.2 percent this year.

The latest available data shows deflation of 0.1 percent year-on-year in March, reflecting an ongoing decline in hotel and restaurant, communication, and clothing prices. 

The research note also pointed to economic benefits from proximity to the large Saudi Arabian market.

About 75 percent of Bahrain’s total oil production of about 200,000 barrels per day coming from the Abu Safa oil field shared with its neighbour. 

The Bahraini government updated and extended its fiscal balance programme in October 2021, changing the target date for a balanced budget to 2024 from 2022 with assumed oil price of $60 per barrel in all years.

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