2015 breakeven oil price $94

2014 breakeven oil price $123

Although many of Bahrain’s Shia majority population continue to feel marginalised, the levels of violence and instability seen in the past four years have reduced. However, the fall of oil and gas prices by more than 50 per cent in mid-2014 has struck a new blow to an economy that remains dependent on hydrocarbons and which has struggled since 2011.

At its peak, the social instability disrupted much of the country’s daily activity, leading to a bad investment climate for foreign firms looking to invest in the GCC. While Manama remained focused on restoring calm, hydrocarbons prices began to drop, further damaging the economy. This set off a downward spiral that the government is working to correct.

Foreign dependence

Manama aims to push the private sector to drive much-needed growth, but the economy remains extremely dependent on support from GCC funds, particularly from Saudi Arabia and the UAE.

In 2013, oil and gas sales accounted for more than 88 per cent of government revenues. At the end of the third quarter of 2014, Bahrain’s debt stood at 43.4 per cent of GDP, compared with 25.2 per cent in 2010, before the civil unrest began.

GDP by sector 2014
  2013 2014 2015f 2016f
Real GDP growth % 3 4.2 3.6 3.3
Non-hydrocarbon 3 4.6 4.5 3.9
Hydrocarbon 15.3 2.9 0 0.5
Nominal GDP growth % 8.3 3.1 2.1 5.8
Inflation (CPI %) 3.3 3 3 3
Current account (% of GDP) 7.8 5.7 2.9 2
Fiscal balance (% of GDP) -3.3 -3.9 -4 -1.5
f=Forecast; CPI=Consumer price index. Source: Bahrain Economic Development Board

If oil prices remain at their current levels, Bahrain will become more dependent on Saudi Arabia. Support from Riyadh has gathered pace since the unrest in 2011, but has been politically problematic. Saudi Arabia is seen as propping up a governing Sunni minority against popular unrest from a predominantly Shia population. As Manama continues to struggle, this support is likely to continue as Saudi Arabia looks to alleviate the perceived risk of Iranian influence in the island nation.

The main challenge facing Bahrain this year will be curbing public spending while raising revenues to prevent the fiscal deficit from escalating out of control. The 2015/16 budget sets aside BD754.1m ($2.1bn) to be spent on subsidies this year and BD652.9m in 2016, which is a significant reduction compared with the BD935m assigned last year.

Bahrain’s budget also reflects a 61 per cent year-on-year increase in budgeted debt despite reduced capital spending.

Total revenues are expected to hit BD2.1bn, 25 per cent lower than last year, and the lowest projected since 2010. Total budgeted expenditure should reach BD3.6bn, which is 3.5 per cent lower than the year before. Further to this, the government’s budgeted spending for capital expenditure, which is based on an oil price of $60 a barrel, is 21 per cent lower than last year.

As such, it came as no surprise when US ratings agency Standard & Poor’s (S&P) downgraded the sovereign wealth fund Mumtalakat’s rating from BBB-/A-2 to BBB/A-3. Mumtalakat was placed on negative outlook in December 2014 by S&P, reflecting the fund’s financial reliance on the government.

Private participation

Despite this, the rhetoric coming out of Bahrain has been positive. Analysts and government officials tell MEED the fiscal and macro-economic policy will encourage the private sector to contribute to attempts to diversify the economy and stimulate growth.

Following the partnership between the government and the private sector to develop a major public housing scheme in 2013, analysts said Manama would now be forced to look towards private business to compensate for the reduction in government capital expenditure.

In March this year, Jarmo Kotilaine, chief economist at the country’s Economic Development Board, told MEED that increasing private investment, foreign direct investment and funding from the GCC Development Fund will help finance new infrastructure schemes, filling in the gaps left by government cuts.

For the rest of 2015, foreign funding and the private sector are expected to help the construction industry overcome any falls in government spending. The Finance Ministry also confirmed that an average of $10m a year from GCC funds will be spent on road projects over the next seven years. Further to this, the redevelopment of the new airport is being financed by Abu Dhabi and a new causeway to Saudi Arabia is being built with money from Riyadh.

While these schemes will certainly pump much-needed fuel into the economy, the source of the funds – Bahrain’s Sunni-ruled neighbours – may carry precarious social implications for the large Shia population in the country. Manama must address this issue before planning new projects.