NBK ECO­NOMIC RE­PORT

Kuwait Times - - BUSINESS -

Bahrain’s eco­nomic growth is set to hold steady in 2016, as a re­silient non-oil econ­omy helps weather some of the on-go­ing weak­ness in the oil sec­tor. We fore­see growth in real GDP to hold at around 2.9 per­cent year-on-year (y/y) in 2016, be­fore climb­ing to around 3.4 per­cent y/y in 2017 on stronger non-oil growth. Growth in real oil GDP is set to re­main flat in 2016 and 2017 amid steady oil pro­duc­tion lev­els. Real non-oil growth is ex­pected to re­main broadly sta­ble at a rel­a­tively solid 3.6 per­cent y/y in 2016 be­fore edg­ing up to­wards 4 per­cent y/y on high lev­els of in­vest­ment.

In the first quar­ter of 2016, real GDP growth re­cov­ered rel­a­tive to 4Q15 and ac­cel­er­ated to 4.5 per­cent y/y. How­ever, the ac­cel­er­a­tion was mostly at­trib­uted to a one-off jump in real oil GDP growth. In­deed, growth in real GDP slowed once again to 2.5 per­cent y/y in 2Q16, af­ter real oil ac­tiv­ity con­tracted by 1.7 per­cent y/y.

In con­trast, growth in real non-oil ac­tiv­ity climbed from 2.8 per­cent y/y to 3.6 per­cent y/y dur­ing the same pe­riod, help­ing shore up some of the weak­ness in oil ac­tiv­ity. Non-oil GDP recorded its high­est growth rate in a year in 2Q16, thanks to faster than ex­pected uti­liza­tion of GCC grants, which helped prop up in­vest­ment. The GCC pledged $10 bil­lion in in­vest­ment over ten years which Bahrain has vowed to de­vote to in­fra­struc­ture and hous­ing de­vel­op­ments.

In­fla­tion in the con­sumer price in­dex (CPI)rose for the most part of 1H16,af­ter sub­sidy cuts in the food and hous­ing com­po­nents led the re­spec­tive in­fla­tion rates higher(Chart 3). How­ever, the ini­tial im­pact of the sub­sidy cuts ap­pears to have waned; CPI in­fla­tion peaked at 3.8 per­cent y/y in April and as of Oc­to­ber, stood at 1.5 per­cent y/y on the back of a slow­down in in­fla­tion in the hous­ing com­po­nent and a de­cline in food prices.

De­spite the on­go­ing ease in the over­all in­fla­tion rate, we ex­pect in­fla­tion to still edge up slightly and av­er­age around 2.5 per­cent in 2016,fol­low­ing the multi-month high read­ings recorded in 1H16.

Bahrain is fore­cast to see one of the largest bud­get deficits in the GCC re­gion. With the breakeven oil price es­ti­mated at around $120 per bar­rel amid a weak oil price en­vi­ron­ment, the bud­get deficit is ex­pected to ex­pand to roughly 17 per­cent of GDP in 2016 be­fore nar­row­ing to around 14 per­cent of GDP in 2017.

Bahrain re­mains adamant about im­pos­ing fis­cal re­forms in line with the IMF’s rec­om­men­da­tions to help shore up its pub­lic deficit. So far, it has agreed to cut gov­ern­ment ex­pen­di­tures by 30 per­cent. Spend­ing cuts have been con­cen­trated on sub­si­dies; pub­lic spend­ing lev­els on in­fra­struc­ture and de­vel­op­ment projects have re­mained broadly sta­ble. In Au­gust 2015, the gov­ern­ment lifted sub­si­dies on meat prod­ucts. In De­cem­ber 2015, the cabi­net ap­proved a new pric­ing sys­tem for diesel, kerosene and jet fuel to re­duce sub­sidy costs and bet­ter re­flect price in­creases in other GCC states. In 1H16, it ap­proved the re­moval of sub­si­dies on util­i­ties.

How­ever, en­gag­ing in fur­ther sig­nif­i­cant cuts in pub­lic spend­ing re­mains a chal­lenge, es­pe­cially since the two po­lit­i­cally sen­si­tive ar­eas of spend­ing, namely sub­si­dies and pub­lic wages, make up two-thirds of to­tal gov­ern­ment spend­ing.

Given that the bud­get deficit is ex­pected to re­main high in spite of sub­sidy cuts, Bahrain will con­tinue to turn to both do­mes­tic and in­ter­na­tional bond mar­kets, to help fi­nance its deficit. In 2015, Bahrain is­sued a to­tal of $6 bil­lion in bonds, $1.5 bil­lion of which was in eu­robonds. So far in 2016, the gov­ern­ment of Bahrain has is­sued $3.4 bil­lion in bonds, $2 bil­lion of which was is­sued ex­ter­nally. Sub­se­quently, the debt to GDP ra­tio is pro­jected to re­main at around a high of 60 per­cent of GDP in 2016.

Fis­cal deficit and debt con­cerns have led to a bout of down­grades of the na­tion’s long-term credit rat­ing. In June, Fitch, in line with the other two ma­jor rat­ing agen­cies, down­graded Bahrain’s long-term credit rat­ing to be­low in­vest­ment grade sta­tus. The down­grades have no doubt made it more dif­fi­cult for the gov­ern­ment to ne­go­ti­ate bet­ter bond deals.

Bank­ing sec­tor

Af­ter re­main­ing mostly steady in 2015, lat­est data re­veal a slow­down in pri­vate sec­tor claims growth (Chart 6). Growth slowed from 5.4 per­cent y/y in Fe­bru­ary to 3.3 per­cent y/y in March. We ex­pect growth in this seg­ment to have eased fur­ther in 2016 amid tighter liq­uid­ity con­di­tions.

To­tal de­posit growth has been weighed down by an on­go­ing de­cline in gov­ern­ment de­posits (Chart 7). Gov­ern­ment de­posits have con­tin­ued to con­tract on lower oil rev­enues and high lev­els of gov­ern­ment spend­ing. Ac­cord­ing to the lat­est data, gov­ern­ment de­posits fell by 6.3 per­cent y/y in March. Growth in pri­vate sec­tor de­posits also re­mained weak dur­ing the same month, af­ter it came in un­changed from Fe­bru­ary at 1.9 per­cent y/y.

Growth in the broad M2 money sup­ply re­mains weak mainly on tepid growth in quasi-money sup­ply. This, in turn, has con­tin­ued to push in­ter­bank rates higher. In March2016, M2 money sup­ply growth came in at a mere 2.0 per­cent y/y. Bahrain’s one-month and three-month in­ter­bank rates wit­nessed sharp in­creases in 2016. As of the end of Novem­ber they were up 20 ba­sis points (bps) and 27 bps year-to-date, re­spec­tively.

Bahrain stock mar­ket

In tan­dem with re­gional mar­kets, the Bahrain All Share In­dex­has been weighed down by de­pressed global oil prices. The weak oil price out­look con­tin­ues to act as a damper on in­vestor con­fi­dence and thereby mar­ket per­for­mance.

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