Bahrain

The hydrocarbon sector is all-important for the Bahraini economy even if the latter is relatively diversified compared to that of fellow members of the GCC regional grouping. The extraction of hydrocarbons accounted for approximately 18% of GDP in 2022 (vs. 36% in Saudi Arabia for example). Nonetheless, oil and gas account for around 75% of government revenues. Bahrain’s fiscal and current account breakeven oil prices are among the highest in the region, estimated at about 113 and 75 USD/bbl in 2022, respectively.

As a result, Bahrain's fiscal and external vulnerabilities increased rapidly in the wake of the collapse of global oil prices in 2014-2016. At the end of 2017, they caused a financial crisis after the financing of huge fiscal and external deficits brought the central bank's FX reserves down to about USD1.6bn (import cover of just 0.8 months). In 2018, Saudi Arabia, the UAE and Kuwait agreed to provide a USD10bn financial support package to Bahrain. Although not disclosed, the aid was likely conditioned on strict fiscal consolidation, which curtailed growth in the non-oil sector in the following years. At the start of 2019, Bahrain introduced a 5% VAT. Not yet recovered from the previous crisis, Bahrain’s fiscal and external accounts were again hit by the double whammy of the global Covid-19 pandemic and the oil price slump in 2020.

In the medium term, Bahrain’s public finances will remain a cause for serious concern. It posted an average annual fiscal deficit of -14% of GDP in 2015-2021, which pushed up public debt from USD15bn (44% of GDP) in 2014 to USD50bn (129% of GDP) in 2021. And despite the surging global oil and gas prices in 2022, Bahrain still posted a fiscal shortfall, albeit a smaller one than in previous years. We forecast continued annual fiscal deficits of -3% or more of GDP in 2023-2024, and public debt to remain at a very high level.

External finances experienced a respite in 2022, thanks to the high oil and gas prices, but will remain worrisome in the longer term as well. The current account balance shifted from 12 years of large surpluses to annual deficits in 2015, at an average annual -3.9% of GDP in 2015-2019 and -9.6% in 2020. It moved back to sizeable surpluses in 2021-2022, thanks to rising hydrocarbon revenues. Bahrain’s foreign assets also improved somewhat but have remained critically low. The latest available data for 2022 show the central bank’s official FX reserves at just over USD4bn, sufficient to cover only 1.6 months of imports (well below an adequate level of at least three months). Meanwhile, Bahrain’s gross external debt has been very high for more than two decades. After declining to USD40bn in 2015 (still high in relation to GDP at 129%), it rose again to USD96bn in 2021 (247% of GDP) and is forecast to remain well above 200% of GDP in the next few years. In contrast to the public and external debt levels, as well as compared to the richer GCC countries, Bahrain’s sovereign wealth fund is small, estimated at USD18bn in mid-2022.

Overall, the country’s debt position appears unsustainable in the medium term. However, we expect Bahrain’s rich Gulf neighbors to continue to support it, if needed, in order to avoid a full-blown financial crisis that could spill over to the region.

The business climate in Bahrain is generally adequate, ranking average in our assessment of 185 economies. The World Bank’s annual Worldwide Governance Indicators survey suggests that the regulatory and legal frameworks are generally business-friendly while weaknesses remain with regard to perceived corruption. The Heritage Foundation’s Index of Economic Freedom survey 2022 assigns Bahrain rank 74 out of 184 economies, reflecting strong scores with regard to tax burden, trade freedom, investment freedom and financial freedom, but judicial effectiveness and government integrity provide room for improvement. With regard to environmental sustainability, Bahrain scores badly, owing to the non-existence of renewable electricity output, a high level of water stress and a very low recycling rate. It does somewhat better with regard to energy intensity, CO2 emissions and climate change vulnerability. Overall, however, Bahrain ranks only 189th out of 210 economies in our proprietary Environmental Sustainability Index.