MANAMA — The economic outlook for Bahrain’s economy remains clouded by persistent weakness in government finances, evident by significant fiscal deficits and rising public debt levels, large external financing needs, a general slowdown in non-oil activity and limited prospects for oil sector growth. According to ICAEW’s latest Economic Insight report, economic growth in Bahrain more than halved last year, from 3.7% in 2017 to 1.8% in 2018, with further deceleration seen in 2019 to 1.6% amid a major drive to overhaul government finances, which include spending cuts, new taxes and other fiscal consolidation measures.

“Economic Insight: Middle East Q2 2019”, produced in partnership by ICAEW and Oxford Economics, said the Bahraini economy expanded by its slowest pace in more than two decades last year at only 1.8%. The outlook for this year is similarly challenging as the economy is expected to decelerate further, weighed down by fiscal consolidation measures, lower oil prices and only a modest rise in oil production. But continued project spending, supported by the GCC $10 billion financial package, is expected to balance out the overall impact.

The economic slowdown last year was felt across a range of sectors. The non-oil sector, which comprises over 80% of total economic activity, almost halved to 2.5% in 2018 from 4.9% in 2017. The slowdown was broad-based, but notably in the services sector, where all sub-sectors slowed from 2017 rates. The report expects growth in 2019 in the non-oil sector slowing further to 1.5%, notably below the 4.4% average between 2014 and 2017, weighed down by several fiscal consolidation measures, including the introduction of the 5% VAT earlier this year.

The oil sector on the other hand contracted by 1.1% in 2018, reflecting pre-scheduled maintenance in the first half of last year and the gradual erosion in the overall production capacity in Bahrain. On a more positive note, following Bahrain’s discovery of its largest oil field since 1932 in April last year, the country is likely to start shale oil production by the end of this year, with well-drilling reportedly started a few months ago. However, production is likely to remain slow and gradual, so only a modest 1% rise in oil activity is predicted this year.

Mohamed Bardastani, ICAEW Economic Advisor and Senior Economist for Middle East at Oxford Economics, said: “Despite Bahrain having the most diversified economy in the GCC, 2019 has proven to be a challenging year amid low oil prices and a government financial overhaul. The government’s ongoing efforts to address the fiscal deficit is crucial for the future development of the economy. We expect the introduction of VAT, paired with the $10bn support package from the GCC, should help increase non-oil revenues and better the nation’s economic prospects.”

Bahrain’s oil revenues still disproportionately dominate government finances, comprising more than 70% of government revenues. The forecast for oil prices now stands at $67/b in 2018, some 5.6% lower than the 2018 average of $71bp. This remains substantially below Bahrain’s estimated fiscal break-even point of $113, the highest among GCC peers.

In its efforts to rein in public spending and address large and persistent fiscal deficits and spiraling public debt, the Bahraini Government unveiled in October last year an ambitious Fiscal Balance Program that aims to balance the budget by 2022. This entails slashing public spending, a voluntary retirement scheme for government employees, more efficient distribution of cash subsidies and other measures. The report expects the range of measures to reduce the fiscal deficit from an estimated 10.1% of GDP in 2018 to around 7% of GDP in 2019. Bahrain has relied on external financing to address its persistent deficits in the past few years, leading to a ballooning of public debt as a percentage of GDP from an estimated 42% in 2014 to almost 93% in 2018, the highest in the GCC.

The $10 billion support package from the GCC is expected to help the government address its financial shortcomings and support certain infrastructure projects, balancing the overall economic trajectory over the medium term. The government has already received the first installment of $2.3 billion late last year and is expecting another $2.3 billion this year.

Several important infrastructure projects are expected to be supportive of growth this year as well, including Alba's (major aluminum producer) new Line 6, Bapco’s (main oil producer) modernization program and the airport modernization project, which includes a $1.1 billion passenger terminal due to be completed by Q3 2019. — SG