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.
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
