Along Avenue 28 in central Manama, in early February, police officers wearing bulky body armour and brandishing shotguns dot pavements that shimmer with broken glass.

The heavy security presence on the street has proved to be a necessary measure to stop disruption from protesters and keep traffic flowing in the city centre.

As the 14 February anniversary of Bahrain’s 2011 uprising approaches, the country is wrestling with continuing unrest and a deteriorating economic outlook that has been exacerbated by the collapse in the price of crude over the course of 2014. Some 80 per cent of Bahrain’s exports are linked to oil.

Day-to-day business isn’t disrupted by the protests on the whole, but there is reputational damage

Paul Gamble, Fitch Ratings

“This drop in oil prices has come at the worst possible time for Bahrain,” says Reda Faraj, a member of Bahrain’s Shura Council, a legislative body appointed by the country’s King Hamad bin Isa al-Khalifa. “To help meet the demands of the public, we need to create jobs and build houses, but our resources are increasingly limited.”

Election boycott

Hostilities between protesters and the security forces have increased in recent months, after talks broke down between the government and Bahrain’s biggest opposition party, Al-Wefaq, ahead of parliamentary elections in November last year.

The elections were ultimately boycotted by four opposition groups that are critical of the current political system and are calling for parliament to be given more powers to effectively represent the electorate.

Under the current system, the king’s uncle, Prince Khalifa bin Salman al-Khalifa is prime minister, a post he has held for more than 45 years, and members of the ruling family make up about half of the cabinet.

The dominance of a single Sunni family over a country with a Shia majority population has given the political protests a distinct sectarian flavour, with many demonstrators demanding more jobs for Shia citizens in the army, police and key government ministries, which are currently dominated by Sunni Muslims. Since the November boycott, the government has taken a harder line with opposition figures, which has included stripping activists of their citizenship and detaining key individuals.

The leader of Al-Wefaq, Sheikh Ali Salman, was arrested in late December and put on trial on 28 January, charged with promoting the violent overthrow of the political system.

Salman’s arrest prompted violent rallies at the end of 2014, with protesters throwing stones at security forces, who replied with teargas and bird shot.

Faraj says businesses are being scared away by the ongoing disruption from protests, and the country is in danger of becoming locked in a cycle of economic stagnation and civil unrest. “The truth is that capital is cowardly,” he says. “The more time drags on, the more the problem is compounded. Solving it tomorrow will be more difficult than today.”

Paul Gamble, an analyst for the US’ Fitch Ratings, agrees that the outlook is difficult for Bahrain.

“Day-to-day business isn’t disrupted by the protests on the whole, but there is reputational damage,” he says. “When companies look at the region and choose where to invest, the ongoing protests make Bahrain less appealing.”

Public debt

Failure to revive the economy in the wake of 2011 and the fall in oil prices have led to a surge in public debt, with Fitch Ratings forecasting that Bahrain’s government debt will reach 52 per cent of GDP in 2015, up from 21 per cent in 2009.

On 9 February, the US’ Standard & Poor’s (S&P) cut Bahrain’s credit rating, leaving its long-term sovereign bonds just one notch above junk. The ratings agency has forecast that even with severe cuts in some areas of spending, the country’s deficit will expand to 8 per cent of GDP in 2015.

Just where the expected reductions in spending are going to come from is uncertain. After the November elections, Bahrain delayed its budget announcement until March. For 2014, the budget breakeven oil price was estimated at $125 a barrel by S&P.

Subsidies, which represented 30 per cent of total government expenditure over 2014, are an obvious target for cuts, but analysts warn that anything that raises the cost of living for those who are less wealthy could add to the civil instability.

“It’s going to be tough for them to sustainably bring down the deficit without far more widespread subsidy reforms,” says Gamble. “The current political climate complicates this process.”

Large infrastructure projects have been highlighted as a key element of Bahrain’s plans to get the economy on track. In 2011, the GCC approved a $10bn stimulus package for the country that would be distributed over the course of 10 years. In January 2014, plans to spend $4.4bn of that sum on housing, utilities and education projects were announced by Deputy Prime Minister Sheikh Khaled bin Abdullah al-Khalifa. He said $2.2bn would be spent on housing over three years, while $2.2bn would be spent on power and water schemes.

While the GCC aid has kick-started several schemes in the past couple of years, the overall environment for construction and infrastructure remains subdued as the country’s deteriorating finances make large-scale projects harder to push through.

Since the end of 2011, projects worth more than $32bn have been put on hold or cancelled in Bahrain, and many of the schemes that remain active face an uncertain future.

Among key strategic projects that could suffer are plans to expand the 267,000 barrel-a-day (b/d) Bahrain Petroleum Company (Bapco) refinery on Sitra, an island located off the coast of Manama.

Under current plans, a $6bn refinery upgrade would add an extra 100,000 b/d of capacity, increasing the country’s total refining capacity by 37 per cent and giving government revenues a much-needed boost.

Over the long term, this expansion would help to ease the deterioration in public finances, but in January, Peter Bartlett, CEO of Bapco, warned that the project could be seriously affected by the collapse in oil prices. Others echo this view.

“In the current environment, it is unlikely this project can be carried out in the timeframe that was initially hoped for,” says an official from Bahrain’s National Oil & Gas Authority (Noga), who requested anonymity as he is not authorised to speak to the media. “What will be key is identifying the units that can provide the most benefit and giving these units priority.”

Front-end engineering and design work is currently under way on the project and a final investment decision is due to be made in the first quarter of 2016.

Public and affordable housing is one of the sectors the government has focused on as it attempts to quell unrest. Since 2011, $10bn-worth of construction projects have been put on hold, $3bn of which are residential and mixed-use schemes that have failed to materialise. Yet there are more than 47,000 families on the waiting list for social housing.

In an effort to solve the housing crisis, in May 2014, Housing Minister Bassem al-Hamer announced plans to build 40,000 housing units over eight years.

The plans will see the construction of five new towns, two of which will be partially funded by the GCC aid. One of the five developments, the 5,000-unit East Sitra housing project, saw a $236m engineering, procurement and construction (EPC) contract signed in April 2014.

Housing priority

“Housing is a key element of the king’s efforts to increase political stability,” says Faraj. “The government is determined that even if other projects stall, the housing plan will still go ahead.”

The drop in oil prices and the subsequent deterioration in Bahrain’s economic outlook is likely to put increased pressure on the government to enact political reforms, but pro-democracy protesters are unlikely to win significant concessions.

A flood of new houses coupled with a heavy-handed approach to maintaining public order may not be enough to bring an end to the daily protests, but the country’s rulers can be confident in their support from the rest of the GCC, led by Saudi Arabia.

“Saudi Arabia’s political support for Bahrain was very clearly demonstrated in 2011,” says Gamble, referring to when 1,000 Saudi troops were sent in to help put down protests in Manama. “If there is an economic crisis or a political crisis over the coming months then you would assume Saudi Arabia would be prepared to move in and provide support.”

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