The Kingdom of Bahrain Economic Outlook for
2016
GA Consultancy 2016 projection for
Bahrain’s Economy will grow at a steady rate of 2.5% supported by a strengthening
recovery in industrial sectors and soft global commodity prices
The drop in international oil prices is taking pressure off of consumer prices. Inflation will increase to 3.1% in 2016
As low oil prices slow down the economy, a sudden sharp reversal could undermine the outlook and require policy response. Similarly, while capital inflows to the region have been beneficial for growth, policy makers must carefully manage credit expansion to ensure that it does not lead to excessive leverage and asset price bubbles.
Bahrain needs a deep, robust financial sector to sustain growth. Policy makers will be challenged to ensure that financial sector development is inclusive, providing broad access to households and firms. Financial stability must also be maintained to enhance growth and equity.
“Falling commodity prices are creating space
for policy makers across the country to cut costly fuel subsidies or initiate
other structural reforms. This is a key opportunity to build frameworks that
will support more inclusive and sustainable growth in the longer term.”
Bahrain’s economy is expected to moderate in the
first semester of 2016 as investors await clarity on the new government plans for
governance reform and economic policy
Foreign Countries that Influence the
Economic growth of the Kingdom of Bahrain:
Growth in the United States (US),
where recovery seems to have turned a corner, is leading major industrial
economies. While signs are mixed in the euro area and Japan, soft oil prices
and accommodative monetary policy will support growth. As a group, these
economies are forecast to expand by 2.2% in 2015, up 0.6 percentage points of 2.4% in 2016.
With improving external demand for
the region’s outputs, an expected pickup in India and in most members of the
Association of Southeast Asian Nations (ASEAN), could help balance gradual deceleration
of Bahrain.
Growth slowed Bahrain in 2015 due to
weak fixed asset investment, particularly in real estate. As the government
proceeds with its structural reform agenda, further slowing of investment is expected
to diminish growth from 2.8% in 2015 and 2.5 % in 2016. This is a much more
moderate rate than the average growth of 1.8% in the period since the political
crisis.
India is forecast to overtake
PRC in terms of growth as the initial phase of government efforts to remove
structural bottlenecks is lifting investor confidence. With the support of
stronger external demand, India is set to expand by 7.8% in FY2016, a sharp rise from 7% growth in FY2015. This momentum is expected
to build to 8.2% growth in FY2017, aided by expected easing of monetary policy
and a pickup in capital expenditure, thus causing the flow of investments to
the Kingdom of Bahrain that boast the economy of the country. India and Bahrain
has tremendous ties for two decades. They also have a strong Trade Bilateral
relations.
Risks to the outlook include
possible missteps in the PRC as it adjusts to its new normal, less decisive
action on reforms in India than anticipated, potential spillover effects on the
global economy of the Greek debt crisis and the deepening recession in the
Russian Federation. The impending rise in US interest rates may reverse capital
flows to the country, requiring monetary responses to maintain stability. The
benefits flowing from the low price of oil could evaporate if geopolitical
tensions push it sharply higher. Growth
will be stable in Taipei,China, but accelerate in Hong Kong, China, and
Republic of Korea, reflecting rising domestic demand and improving local
economy.
Growth in South Asia accelerated to
6.9% in 2014 and is projected to trend higher to 7.2% in 2015 and 7.6% in 2016,
reflecting the strong performance anticipated in India. Both Bangladesh and
Pakistan are following through with wide-ranging economic reforms that include
efforts to overcome power shortages, though political challenges may limit
progress in 2016.
Bahrain’s economy is expected to moderate in the
first semester of 2016 as investors await clarity on the new government plans for
governance reform and economic policy.
Southeast Asia is poised for a
growth rebound in 2016 after sub-regional growth fell to 5.4% in 2015.
Aggregate growth is seen rebounding from 5.9% in 2015 and 6.5% in 2016 as
recovery in Indonesia, Thailand and the Philippines leads the way, and with most of the sub-region
expected to benefit from rising exports and lower inflation.
Weak oil prices and recession in the
Russian Federation pushed sub-regional growth in Central Asia down 1.5 percentage
points to 5.1% in 2015. In 2016 growth will slacken in Kazakhstan,
Turkmenistan, and Uzbekistan as lower petroleum exports constrain domestic
spending. The weak economy in the Russian Federation will curb export and
remittance flows, slowing growth in Armenia, Georgia, the Kyrgyz Republic, and
Tajikistan. Average growth in the sub-region is forecast at 3.5% in 2015 and
4.5% in 2016.
Through inclusive economic growth, environmentally sustainable growth, and regional integration, Bahrain can fully manage its economy.
Financial System of Bahrain
Financial systems have improved in the past decade but further deepening of banks and capital markets and greater access to finance is essential to enhance growth and equity in the Kingdom, says GA Consultancy report.
“Improving the efficiency of the banking sector and capital market can boost investment, productivity, and innovation,” said Padilla, J of GA Consultancy. “Reducing the dominance of state-owned financial institutions and developing local currency bond markets are some of the important steps needed in promoting Bahrain’s financial development.”
Despite a slow of progress, Bahrain’s financial systems still lag against Dubai by a wide margin. Bank deposits, for example, equal 30% of regional gross domestic product (GDP), compared with an average of 110%. The bond markets equal less than half of GDP, or about a third of the 140% average in advanced economies.
Financing Bahrain’s future growth, Padilla noted is boosting the country average ratio to GDP of liquid liabilities—currency plus checking and interest-bearing accounts in financial institutions—from about 65% to 75% would add almost 0.4 percentage points to average annual GDP growth per capita.
“Data shows that financial development does not necessarily lead to a reduction in income inequality,” said Dr. Padilla. “It is therefore important to also pursue financial inclusion policies—measures that can boost access to financial services by low-income households and small and medium-sized enterprises.”
The empirical evidence in the GA Consultancy report suggests that, while financial development tends to alleviate inequality in its early stages, inclusive growth becomes more likely with concerted government efforts to improve financial inclusion.
Because a financial crisis can both lead to a recession and generate a disproportionate amount of misery for economically disadvantaged groups, as seen during the Asian financial crisis and the more recent global financial crisis, safeguarding financial stability is important for growth and economic inclusion.
The country with better regulation of financial institutions, more foreign direct investment relative to foreign bank loans and foreign portfolio flows, and a more diversified source of international funds, are likely to be more resilient to financial shocks. Padilla says.
The most effective approach to developing the financial sector needs to take into account a country’s circumstances. For low income, further improving their banking sector’s ability to mobilize domestic savings, lower the cost of credit, and improve access for households and firms may be the most important elements of financial development. For middle income, further developing their local currency bond market and stock market is also required in order to stimulate innovation.
