Martes, Abril 18, 2017

THE ECONOMIC OUTLOOK OF THE KINGDOM OF BAHRAIN for the year 2017

Economic Outlook of Bahrain 2017

 

Real GDP growth of the Kingdom of Bahrain for 2017 is expected to remain robust at average of 2.8% as compared with 2.3% in 2016. Private consumption will continue to make a large contribution in growth.

Despite largely a favorable outlook the country will need to pay careful attention to several potentially important downside risks to growth:

·       Growth in trade has slow down over the past five years as in the rest of the world. This is partly due to factors that cannot be influenced by policy such as China economy is slowing down; increased focus on area of comparative advantage may help boost   exports. The increasing prevalence of non-tariff barriers (NTB’s) could further impede trade activities.


     ·       Persistent low interest rates, if not managed appropriately may result in market instability.  In              particular the banking sector needs to be carefully monitored.

     ·       Plateau productivity growth threatens a long term growth prospects. Promoting enhanced                    productivity requires reform to the business environment and policies to foster emergence of                productivity including developing domestic capacities to benefit from international knowledge            and technology flows

Recent Developments in Regional Integration

 Integration remains a good way for the region to build resilience and improve growth prospects. This is especially true in the current context of slower global growth and the implementation of more inward-looking policies in some parts of the world. The GCC region has the number of sector plans to facilitate the free flow of goods, services, investments, capital and skilled labor. Recent achievements have been made in key policy areas; trade in goods; trade in services, investments and capital markets, competition and consumer protection, infrastructure and connectivity, SMEs, food, agriculture, tourism, human and social development, and the initiative for GCC integration. However, the overall progress of integration is relatively slow with many regional initiatives delayed by challenges in the timely and effective implementation of supportive domestic policies. Such supportive policies facilitate deeper cooperation and improve a long term commitments to regional integration.

 Developing Renewable Energy

Long term projection by the International Energy Agency (IEA) show the largest used of energy consumption is expected in the region as a result of a variety of socio-economic factors, including increasing population, sustained economic growth and increasing access to electricity. Total energy supply is expected 4406 million tons of oil equivalent in 2015 to 6998 in 2040, with fossil fuel remaining the main source of energy used in the region. Much of the region has adopted specific targets for implementation of  renewable energy capacities, as well as policy mechanics to foster the development that are not yet competitive with  the  conventional energy sources

 FDI will be an important channel for investment in renewable that also enables the transfer of capital, technology and expertise. Dubai and Qatar received the largest inflows in the region, accounting for more than 60% of the total. FDI is also helping to support the expansion of job. Setting the right condition for the    development of renewable energy in GCC region will require solutions to challenges in grid access, administrative barriers and energy pricing mechanisms.

 Key Structural Policy Challenges

 Domestic level of structural policy reforms is critical in providing the conditions to maintain robust and sustainable growth in the Kingdom of Bahrain economies. In pursuing their plans for national development, common priority areas are reforms that   include   infrastructure, educational and skilled development, tourism, FDI and energy. Other important issues to be addressed by the country diverse in using digital economy, economic diversification, capital market development and entrepreneurship.

 Risks and Policy Challenges
The Kingdom of Bahrain is expected to experience favorable growth over and medium terms. The growth potential is critical for policymakers to implement effective policies to cope with various risks, including:
1.      Coping with slow export growth
2.      Price of Oil in the world market is low.
3.      Managing the impact of zero and negative interest rates; and
4.      Address the slow in productivity growth.

 New trade strategies are needed to deal with the reversal in the export recovery. Global trade volume grow has slowed down substantially for the last three years. Bahrain is poised to register its 20th straight quarter of less than 3% growth since 2011Q4. Given a current backdrop of depressed oil prices, the trend of trade revenue depicts grimmer picture. Recent trend maybe promising, but they also suggest that Bahrain have to calibrate their medium trade program in a way that would allow their exporting sector to focus on other markets.

Domestic Demand
 The strong growth in export, foreign direct investments (FDI) and domestic demands help to support recent growth. Private consumption and fixed investment has been important driver of economic activity in Bahrain as has the expansion of the services sector. The movement in oil prices has seriously affected the exports but the small amount of recovery is anticipated and will remain unchanged for the next five years.
 While manufacturing growth has been slow recently, the service sectors continue to expand quickly driven by    strong domestic demand. Construction of new residential and commercial has been strong and the government must continue to focus on the development of infrastructure projects that connects to other countries like Qatar and Saudi Arabia will definitely improve trade among these countries. GCC as well as Bahrain will be affected by China’s slow growth from 6.7% in 2016 to an average projected GDP of 6% in 2017. Industrial   overcapacity continues to be a challenge and export growth has been weak. India on the other    hand will see high and relatively stable growth over the projection period at an average of 7.3%, Philippines continue to strengthen its GDP growth rate of 7% followed by Indonesia, Malaysia, Vietnam and Cambodia. Japan and Korea are still the most prioritized country when it comes to imports of electronic goods. Liberalizing reform could help to support robust growth and improve currently weak private investment.

 In the financial sector, persistent low interest rates in advanced economies, if not managed by the policymakers through vigilant supervision, may result in domestic instability. Apart from its palpable influence in securities trading, the decrease in the cost of borrowings in large economies has strained the balance sheet of financial sector corporation as fixed income earnings decline. At this point, the macroeconomic fundamentals are stable enough to keep near term risk in bay.

 Bahrain would be able to ride out the wings in the mood of investors when monetary policy direction in advance economies changes hinges mainly on how reforms would improve the standing of key financial institutions as well as systematically relevant public corporations. Global liquidity flooding operations that began in 2014 have driven the ratio of domestic dit-to GDP upwards across the country.

The political crisis in Bahrain in 2011 reflects the cautious stance of monetary officials in mirroring the extent of quantitative easing in advanced economies, presumably to maintain financial market discipline. This could be one of the channels that could explain why the impact of low interest rates over ease on domestic real sectors has been mixed.

Yet even with some caution in monetary policy making, and then ensuring credit expansion has exposed vulnerabilities in bank supervision frameworks in light of the continued weakness in the international markets and subdued oil prices.  Instances of loan default among highly leveraged corporations have increased and bank portfolios have generally deteriorated as a consequence even though banks in the country remain well capitalized. Bahrain’s banking system, in particular, stands outstanding in terms of relatively high level and growth of its non –performing loans (NPL) ratio. It is vital that banks maintain a healthy portfolio because fixed income earnings are already under stress owing to the decline in yields, which dragged down profitability. To their advantage, prudential regulations in many Gulf Countries are strong as a result of a series of measure undertaken years before but the continuation of reforms in Bahrain banking system will be needed. In addition to the impact on the financial sector, downside risk of fiscal stability caused by interest rates in advance economies are benign at the moment. The current evidence concerning impact of low interest rates on the real economy is mixed

 Recent Macroeconomic Development and Near Term Proposal

 

Near term growth prospects are solid despite sluggish global growth.

Overall Bahrain have remained solid against increased uncertainty in the form of weak demand in advanced countries like the United States and the Euro area, divergent monetary policy in the  advanced economy and persistently low global economy commodity prices. Growth in the global trade has sharply decelerated in real terms since 2011. The major drivers of weak global trade are slow economic growth and lower investment growth. This synchronized slowly down in productivity growth and still posing economic growth.

 

The economic growth has slowed down in the short term. Private investment weakened temporarily due to monetary tightening (during the tapertantrum) and highly leveraged banks and corporate (leverage ratio was about 0.79 in March 2017. An improvement of the investment climate and reliance in public infrastructure can help catalyze private investment. The investment is expected to boost GDP growth.

 

The country has experienced an expansion in economic activity with an economic growth of 2.0 % in 2016. With inflation of 1.5% in December 2016 (lower that inflation targeting zone of 3+/1), it boosted over inflation to 2.3% in January 2017 with resultant economic growth. Key economic factors are private consumption supported fixed investment and service sector. The service sector (particularly in tourism) is a main driver of growth. The government has also recently boosted public spending on infrastructure, education and healthcare.

 

The country’s main export is petrol and oil and further decline have reduced their export benefits. This has narrowed the merchandise- trade and current account surpluses and widened deficits. Diversification in export sector would help buffer persistent global lower commodities.

 

 

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