Bahrain’s economy is holding up in the face of low oil prices as policymakers bank on infrastructure spending and the private sector to offset shrinking energy sector revenues, officials and businessmen said this week.
The tiny kingdom of about 1.3 million people is among the financially weakest of the Gulf Arab oil exporters, lacking the huge hydrocarbon and fiscal reserves of its neighbours.
Because of the plunge of oil prices since last June, Bahrain’s state budget deficit is expected to balloon to 9.3 per cent of gross domestic product this year from an estimated 5.0 per cent in 2014, according to a Reuters poll of analysts.
So government spending growth is likely to flag, weakening a major support for the economy. But Jarmo Kotilaine, chief economist at the Bahrain Economic Development Board, said construction growth actually accelerated late last year – the sector grew 12.3 per cent year-on-year in the third quarter, up from 3.1 per cent in the second quarter.
This was because of a pipeline of infrastructure projects, which will have a considerable indirect impact in stimulating other parts of the economy in coming months, Kotilaine said.
“The projects are primarily funded from the GCC Development Fund, private capital, government funds, or FDI (foreign direct investment),” he told Reuters. “They are hence not sensitive to oil price variations.”
After the Arab Spring uprisings in 2011, rich nations in the six-member Gulf Cooperation Council set up a $20 billion fund to help Bahrain and Oman maintain social stability through housing and job-creating projects.
Kotilaine, whose public agency is responsible for attracting foreign investment, also said Bahrain had managed to diversify its economy enough in recent years to make lower oil prices less damaging. Oil now represents only about a fifth of Bahrain’s gross domestic product, down from 44 percent in 2000, he said.
“As a result of these factors, we are projecting non-oil growth of around 4.5 per cent in 2015 – in line with the estimated non-oil growth of 4.6 per cent in 2014 – and we expect this momentum to continue in the medium- to longer term.”
Meanwhile, Bahrain is a mature oil producer so future growth in that sector is likely to be minimal with offshore production at capacity and very gradual gains expected from the kingdom’s onshore field, Kotilaine said.
Overall GDP expanded 5.1 per cent from a year earlier in the third quarter of this year, slowing from 5.6 per cent in the second quarter, according to the most recent data.
A big question overhanging the economy is what measures Bahrain will take to limit state spending and raise revenues as its budget deficit swells.
On April 1 the government plans to start raising the price of natural gas for industry. Other economically painful steps are likely to follow, but they are politically sensitive, and would be made more difficult by low-level unrest in Bahrain’s Shi’ite community that has continued since 2011.
The release of the state budget for 2015 has been delayed by parliamentary elections in late November, which were boycotted by the Shi’ite opposition, and it is not clear when the budget will be announced.
A risk for the economy is that dwindling government revenues because of cheap oil could reduce deposits in the banking system, tightening liquidity and hurting bank lending.
Domestic assets of banks in Bahrain shrank 4.0 per cent from a year ago in November, the most recent month for which data is available. Lending to the private sector was falling even before oil started dropping; it sank 6.0 percent in November, its seventh fall in a row and the biggest monthly drop so far.
However, Bahrain’s central bank governor Rasheed al-Maraj suggested the drop was due to loan repayments and said underlying growth in consumer lending and some corporate lending remained strong. He predicted a pick-up in the coming year.
Mohammed Ali Bucheery, vice president at Tamkeen, a semi-government agency that supports Bahrainis working in the private sector and is funded by fees charged on foreign workers, said there was no sign so far of a significant economic slowdown.
“If there is a long-term effect on the economy by the oil prices, we will see that down the line, where the number of foreign workers drops significantly. We don’t see that happening now.”
Mahmood al-Kooheji, chief executive of Bahrain state fund Mumtalakat, which invests in strategic Bahraini enterprises and manages around $10 billion of assets, said the fund would pursue business projects as usual in 2015 and had no plans to sell off any assets.
Former JP Morgan Chase banker Khaled Amro al-Rumaihi was appointed chief executive of the Economic Development Board this week, replacing transport and telecommunications minister Kamal Ahmed. Local businessmen said the appointment might aim to reinvigorate the agency’s role in attracting foreign investment.