Public financing is the main vulnerability, with an overall fiscal deficit of 10.5% of GDP and gross government debt reaching 133.4% of GDP in 2024. The upward trend continued in 2025, reaching 142.5% of GDP, the highest level in the entire Middle Eastern region after Lebanon, with debt service accounting for 33% of total government revenue. The debt should stabilize around 140% by 2028. This implies high financing needs, higher interest costs and periodic refinancing risk. Reflecting these pressures, S&P downgraded Bahrain’s sovereign rating from B+ to B in April 2025 and revised the outlook to negative, underscoring growing concerns over fiscal sustainability. 

Historically, Bahrain has relied on financial support from wealthier Gulf neighbors to stabilize its economy, and such assistance is expected to continue although Saudi Arabia and the UAE have signaled that future aid will depend on meaningful economic reforms and alignment with regional priorities. However, without decisive fiscal-consolidation measures, the country’s debt burden will remain on an upward path. Transparency concerns further complicate the outlook: During the latest IMF review, Bahraini authorities blocked the publication of the Article IV report, limiting visibility on fiscal risks and reform progress. Overall, Bahrain faces mounting challenges to restore fiscal sustainability, with external support acting as a temporary buffer rather than a long-term solution.

In that context, Bahrain tapped international market twice in 2025, most recently in October, issuing a total of USD5bn, in a combination of conventional bonds and sukuks that were heavily oversubscribed and above market expectations as Bahrain is expected to borrow less in the coming years ahead of potential less attractive market conditions. Bahrain’s banking sector has remained sound during the ongoing easing cycle, with non-performing loans slightly decreasing in 2025 to 2.6%. Major banks have been able to increase profitability in the current environment. However, the banking system remains highly exposed to the sovereign as it is the main financer of Bahrain’s fiscal deficit. It is estimated that 75% of the country’s public debt is held domestically.

Bahrain’s business environment ranks mid-tier globally, reflecting a generally pro-business regulatory framework but with structural challenges. According to the 2025 Heritage Foundation Index of Economic Freedom, Bahrain stands at 55th worldwide, supported by strong scores in tax burden, monetary freedom, trade freedom and investment freedom. These strengths align with government efforts to maintain an open economy, including 100% foreign ownership in most sectors, streamlined business licensing and active promotion of public-private partnerships to deliver infrastructure projects amid fiscal constraints.

However, weaknesses persist. Judicial effectiveness and fiscal health remain low, as highlighted by both Heritage and the World Bank’s Governance Indicators, which also flag corruption risks and bureaucratic inefficiencies. Fiscal pressures from declining oil revenues are prompting new taxes, including a low-rate corporate income tax and higher excise duties, though VAT remains at 10% to preserve competitiveness. Regulatory updates in financial services aim to strengthen Bahrain’s position as a regional hub, with the central bank expanding oversight into emerging niches.

On sustainability, Bahrain ranks poorly, 195th out of 210 economies, underscoring minimal progress on green transition, which could become a future compliance burden for investors. Overall, while Bahrain offers trade openness, investment freedom and evolving financial regulation, governance shortcomings and weak environmental policies weigh on its long-term attractiveness.

Policy continuity in Bahrain remains exceptionally strong, anchored by the Al Khalifa monarchy’s centralized control over decision-making. This concentration of power ensures stability and predictability in governance, which is generally positive for investors and regional partners. However, underlying social tensions, particularly among marginalized groups, persist and occasionally resurface, maintaining a low-to-moderate risk of localized unrest. While these incidents rarely escalate into systemic instability, they underscore the need for cautious monitoring.

Regionally, Bahrain’s strategic alignment with GCC partners and the US provides a significant geopolitical buffer, reinforcing security and economic support. At the same time, this alignment exposes Bahrain to spillover risks from broader Middle East tensions, including regional conflicts and energy market volatility. Such dynamics could amplify domestic vulnerabilities if external shocks occur.

Looking ahead, the 2026 parliamentary elections are unlikely to produce meaningful policy shifts, given the monarchy’s dominance and the limited role of elected bodies in shaping core decisions. Nonetheless, the electoral process may temporarily heighten political noise and revive calls for incremental reforms, particularly around governance and representation. Overall, Bahrain’s political outlook for 2026 is characterized by stability at the top, tempered by structural social and regional risks.