Bahrain’s Economy in 2015: Expectations and Challenges

This report discusses a series of expectations and challenges that face Bahrain’s economy in 2015 in the light of fierce regional competition and complex international conditions like the drop in oil prices. In short, the absence of a political solution (evidenced by the democratic forces’ decision to boycott the parliamentary and municipal elections in the end of November 2014) leaves implications on the various aspects of the Bahraini economy, including labour, economic growth and the ability to retain and attract investment opportunities. It addresses the economic situation and challenges 1) Unemployment 2) the budget deficit 3) public debt 4) credit rating.

1.The Unemployment Challenge

Unemployment is expected to be one of the most prominent challenges facing Bahrain’s economy in 2015 due to interrelated causes of falling oil prices and the continuation of the political crisis as well as the alarming current population statistics. According to a study published in the Youth Employment Month in October 2014 by the World Economic Forum, the annual forum in the Switzerland’s Davos, that the unemployment rate in Bahrain has reached 7.4 percent. This percentage is the second-worst amongst the GCC after Oman, which suffers an unemployment rate of 8.1 percent.

This figure was mentioned back in 2012, and probably since then, the unemployment crisis has worsened in the last two years, given the impact of the ongoing political challenge on the economic outlook. Some of the negative developments since February 2011 has led some financial institutions to reduce their activities in Bahrain and relocate them to Dubai. The financial sector is the second largest contributor to GDP after the oil sector, it is a preferred choice to the national labour due to the working conditions and salary bracket.

Not surprisingly, the figure issued by the Economic Forum contradicts with the country’s official statistics, which alleges that the unemployment rate is in the range of 4 percent. But contrary to the tradition, the Ministry of Labour has avoided responding to the Economic Forum’s research data, perhaps acknowledging the accuracy of the information contained in the study and the desire to avoid a collision with international organizations.

Moreover, the World Economic Forum’s report revealed that the unemployment challenge is more serious amongst the youth who make up the demographic majority of citizens against the backdrop of accumulated population growth. Unemployment amongst youth is 27.5 percent, which is second-worst in the GCC, after Saudi Arabia, where it is 27.8 percent. The unemployment rate amongst youth in Bahrain is realistic, given the numbers of unemployed, which has increased after the February events of 2011 in the absence of equal opportunities among citizens evidenced by hiring nationals from other countries such as Yemen, Jordan, Syria and Pakistan to work in the security sector and others from the Philippines, for example, to work at the national airport.

The employment challenge becomes more complex in the view of disguised unemployment and a lack of employment due to the acceptance of some of the work force to work part-time or work for less than 8 hours per day, as well as the acceptance of some to jobs that do not fit with the qualifications and experience of the employee, given the limited alternatives versus living pressures. Therefore, it is not unlikely for unemployment rates rise in 2015 in light of the continued extraordinary political and economic conditions that prevailed in the country since the beginning of 2011.

2.Unemployment Rates in Bahrain

Source: World Economic Forum, Oct 2014

Rethinking Arab Employment

3.Limited Economic Growth

In addition, the report predicts the global economic outlook for the country, issued by the International Monetary Fund in the month of October 2014, that the GDP of Bahrain achieves positive growth after subtracting the inflation factor of 2.9 percent in 2015, compared with 3.9 percent in 2014. The increase is not unexpected for 2015 when compared to 2011, a year which started with political problems, where the level of economic growth reached a record 2.1. For comparison purposes, the Fund expects the Qatari economy to achieve a growth of as much as 7.7 percent in 2015, up from 6.5 percent in 2014 due to the advanced implementation of the associated World Cup projects 2022. Certainly, the expected level of economic growth for Bahrain will not be able to eliminate challenges such as the level of unemployment and the credit and economic competitiveness, and certainly not the deficit in the national budget.

 4.The Budget Deficit

A drop in oil prices in the second half of 2014 for about $80 a barrel makes it more difficult to achieve a break-even point where there isn’t any surplus or deficit in the public budget. According to the International Monetary Fund, a break-even point requires an average oil price of about $120 per barrel, which is unattainable in the current conditions in the global oil markets.

The approved budget for the fiscal year 2014 is made up of a deficit of $914 million dinars ($ 2.4 billion) through the assumption of an average price of $90 a barrel. Oil revenues are substantial to the country’s income since it constitutes three-quarters of the public treasury income despite all the allegations a diversified economy.

The 2013 budget was approved with the same average price of oil and a deficit of about 833 million dinars have been recorded but an actual deficit of $410 million due to the increase in revenues on which was possible with the high oil prices at the time and the decrease in expenses on the other hand. The budget deficit for 2013 is alarming as it was accounted for about 3.7% of GDP, one of the high figures globally and regionally, as a contrary to the agreed terms of the Gulf Monetary Union project, which restricts the public budget deficit at 3% of GDP. Many possibilities were not available to improve the financial situation through the fiscal year of 2014, through the reduction of costs and increasing the public debt to deal with the deficit, which are difficult choices in all circumstances.

5.Bahrain’s Budget for 2013 and 2014

(BD millions)

Source: Based on the statistics from the Ministry of Finance – Kingdom of Bahrain

6.Economic competitiveness

On the other hand, you cannot ignore the subject of the competitiveness of the Bahraini economy when compared to its neighboring countries, specifically the Gulf countries due to regional competition. The World Economic Forum’s Global Competitiveness Report ranks Bahrain low in the economic competitive field, compared with the rest of the GCC countries, except Oman. Bahrain was ranked 44 internationally comparing to 12 and 16, 25 and 40 of UAE, Qatar, Saudi Arabia and Kuwait respectively. It is noted that Bahrain’s rank is substantially lower than some of the GCC countries, Qatar and UAE in particular.

The Competitiveness Index is characterized by its comprehensive view of 12 variables including infrastructure, economic stability, health, education, higher education and training, efficiency of the goods market, efficiency of the labour market, the development of the capital market, technical readiness and market size as well as innovation. Perhaps Bahrain stands out on a Middle East level in the field of technical readiness, especially in the field of telecommunications due to allowing competition in all areas of the industry. It actually serves as a model for other sectors of the economy as it has reached maturity in providing mobile and fixed lines with the testimony of international institutions such as the World Bank, which is considered the only case in the Arab world. Bahrain has succeeded in removing all barriers to entry of new competitors to the telecommunications sector, which contributed to balancing out the difficulties faced by other sectors in the national economy.

7.Absence of Inflationary Pressures

Among other positive things, the price index and inflation rate are not expected given the economic growth rate the absence of a possibility of an increment in government expenditures in light of falling oil prices. According to official statistics, the rate of inflation of the consumption index has reached 2.8% in the third quarter of 2014, which means no major change in prices.

The falling oil prices reduces the potential for rising prices of imports, as customary major oil-importing countries such as India, China, Japan and Korea raise their export prices of products and consumer goods to compensate. Looking back, the price of oil rose to a historic level of $147 per barrel in June 2007 which paved the way for what is known today as imported inflation.

Generally, Bahrain imports around 80 percent of its need of food, one of the highest figures on a global level, that is the case due to the lack of local alternative because of Bahrain’s limited agricultural land and salinity of the soil as well as the availability of alternative imported food products from Saudi Arabia, Jordan and other neighboring countries. In total, it is expected that the increase of the index of consumer prices remains in the range of 3 percent during the year in which the research was held, which is considered a normal range.

8.Credit Rating

It is difficult to predict an improvement in the financial scene in Bahrain in light of the complex public finance situation against the backdrop of falling oil prices and expectations of rising public debt. Bahrain received a (BBB) rating by Standard & Poor’s credit rating institution, by the end of 2014. However, this assessment is considered the lowest in the investment rating category and suggests the ability of country to meet its financial commitments but with the assumption of the country’s vulnerability to bad economic conditions. This means that the country will be paying additional interest or higher than normal due to the credit rating challenge it faces.

Furthermore, Moody’s evaluation of Bahrain was (Baa2). Moody’s is generally known for its harsher ratings . This suggests the possibility of facing difficulties to meet financial obligations. In addition to that, Moody’s continued to consider the outlook for the economy of Bahrain as negative, the only negative within the GCC. This leaves Bahrain to be the only country among the GCC without an A rating according to both Standard and Poor’s and Moody’s.

9.Growing Debt

The alarming level of public debt in the past few years is a source of concern for the people in the field and the relevant authorities such as the credit institutions. Public debt has reached the limit.

Public debt accounted for only 10 per cent of GDP in 2008, but things quickly worsened within several years in the absence of parliamentary control after the withdrawal of opposition MPs in 2010. The public debt amounted to nearly 4.2 billion dinars ($11.2 billion ) by the end of 2012, 40 per cent of the value of the GDP of the country. The public debt increased further to 4.92 billion dinars in June 2014 but fell to 4.88 billion dinars at the end of September 2014.

This limited decline is due to the repayment of some bonds. But it is not unlikely that 2015 witnesses the issuance of development bonds with long maturity to reach 30 years in light of the availability of financial and moral support from Saudi Arabia and the UAE. The bonds would finance vital long term projects that would require long periods to achieve the desired profits.

More importantly, the International Monetary Fund fears a high loan to the value of more than 7.5 billion dinars, or $20 billion by the end of 2019 and probably before that in 2018, accounting for 61 per cent of the size of GDP.

Not surprisingly, the general budget bears the burden of debt service, as the value of the interest on public debt in the year 2013 is about 192 million dinars, up from 150 million dinars in 2012. This means that the interest accounted for is around 6 per cent of the fiscal year expenses in 2013, one of the high percentages globally.

10.Demographic Challenge

On the other hand, no financial changes are expected with regards to the vital statistics especially those of the population during 2015. The population in Bahrain is about 1.3 million people, where citizens constitute 48 percent and the remaining majority are foreigners mostly from Asian countries such as India, Pakistan, Bangladesh, Indonesia and the Philippines . Foreigners constitute the highest proportion of the populations in Qatar, the UAE and Kuwait, but this is different in Bahrain due to its small size and limited resources. Foreigners represent three-quarters of the workforce as the private sector prefers employing them over nationals because many do not mind working for more than 8 hours per day, accept lower salaries and are willing to put up with harder working conditions. The same applies to the employment in security services in the public sector, which is considered unusual.

11.Fear of Resorting to a Reduction in Subsidies

It is feared that the government uses the decrease in oil prices and hence oil revenues as a pretext or excuse to justify a move towards realigning its subsidies program for the purpose of providing public funds or increasing the public treasury revenues. Government support program consists of 1) oil derivatives and gas 2) electricity and water 3) three main commodities: red meat, flour and poultry.

Implementation of the project may start with high-income citizens and the foreign workforce. It is noteworthy that the relevant international bodies such as the International Monetary Fund has been requesting to restrict support for the eligible only, in order to preserve public finances.

For the purpose of compensation, it is not unlikely that the official authorities strengthen financial support for individuals, families and projects which are all relatively new projects and may even increase benefits for the members of the 2014’s Parliament under the pretext of the Council’s ability to achieve major accomplishments.

12.Looking Ahead

It is difficult to predict any serious progress to resolve the challenges facing Bahrain’s economy during 2015 with expected lower oil prices, a financial deficit and continuous population growth. It is not unlikely to face a decline in some vital sectors of Bahrain’s economy due to the fluctuation of oil prices. The oil sector still accounts for about 86 percent of the Treasury’s revenues and almost the same percentage of exports as well as a quarter of GDP.

Public treasury revenues are expected to decrease with the decrease in prices and thus a drop of government expenditure and growth levels are expected. It is not unknown that the private sector depends on the contracts received from the public sector, therefore public spending is considered an indicator of the outcome of the economic situation in the country. The performance of the private sector is usually affected by the performance of the public sector, either positively or negatively.