The economy grew by +3.9% last year, by far the highest rate in the GCC region, even though real GDP growth moderated to +3.4% y/y in Q4 from an average +4.1% in the first three quarters. The slowdown at the end of the year came against the backdrop of an emerging financial crisis – Bahrain reportedly asked Saudi Arabia and the UAE for financial aid in order to replenish its depleted FX reserves. In the wake of low oil prices, Bahrain had posted large fiscal and current account deficits in 2015-2017, on average -17% and -4% of GDP, respectively. With oil prices currently above 70 USD/bbl, the external shortfall is set to wane in 2018 but the fiscal deficit should remain high as Bahrain’s fiscal breakeven oil price is estimated at close to 100 USD/bbl. Support from the GCC neighbors is likely to come as needed, however, on the condition of fiscal consolida¬tion. We expect this to curb GDP growth in the short term and forecast +2.4% for 2018.
