Second thoughts? IMF updates its outlook for Bahrain
On May 21, 2014, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Bahrain. GDP grew 5.3 per cent in 2013, supported by a rebound in the hydrocarbons sector, while non-oil activity slowed to three per cent, largely reflecting weak investment sentiment and the delay in the 2013–14 budget approval.
Within non-oil activity, transport and tourism continued to expand, reflecting buoyant activity in the service sector, particularly hotels and restaurants and social and personal services. Unemployment remains low, at 4.2 per cent at end-February 2014. Inflation picked up in late 2013 (four per cent year on year at end 2013) reflecting price increases in housing, but has fallen in March to 2.3 per cent year on year. Private sector credit growth remained moderate at about 6.6 per cent at end-2013 (6.2 per cent in 2012), while deposits grew by nine per cent for the same period (4.6 per cent in 2012).
The IMF says Bahrain’s fiscal deficit has continued on a rising trend in 2013, although by less than budgeted. The better fiscal turnout is largely related to the under-spending of the capital budget. The overall deficit (including extra-budgetary operations) is estimated at 4.3 per cent of GDP, up from 3.2 per cent of GDP in 2012—the fiscal breakeven oil price increased to $125 per barrel in 2013 from $119 per barrel in 2012. Government debt increased by eight percentage points of GDP in 2013, to 44 per cent of GDP. While the government has increased its reliance on external financing, government external debt as a share of GDP remains low, at 20 per cent of GDP. Bond yields and Credit Default Swap spreads are now back to their pre-2011 levels, but are higher than levels experienced in late 2012–early 2013. The current account remains strong with an estimated surplus of 7.8 per cent of GDP in 2013. Official reserves coverage fell marginally from about 10 months of imports in 2012 to nine in 2013.
The banking sector is in good health, and the performance of the challenged Islamic retail banks has improved marginally. The capitalisation of the banking system is high on average and non-performing loans (NPLs) to gross loans have continued on a downward trajectory. The Islamic retail banking segment has been tackling high NPLs due to concentrated exposures to local and regional real estate; while capital buffers for this sector declined slightly in 2013, the capital adequacy ratio remained high. After several years of posting losses, the sector’s profitability has moved into positive territory, with the Islamic banking segment undergoing some consolidation in 2013. Bahrain has not been affected by the recent bouts in market volatility. Its stock market index increased 17 per cent in 2013 and about 7 per cent since the start of 2014 (as of end-March 2014).
The economic outlook is characterised by moderate growth and higher public debt, with average annual inflation projected to be subdued in 2014 and over the medium term. The most immediate policy challenges are to correct the fiscal imbalances and stabilize government debt, while balancing growth and debt sustainability considerations. Over the longer term, the challenge is to reduce fiscal dependence on oil revenues and resume robust economic growth.
The IMF noted that the banking sector is generally sound. The Central Bank of Bahrain (CBB) was commended for its efforts to bolster the regulatory and supervisory frameworks, including by putting domestically systemically important banks under a more stringent supervisory regime. Nonetheless, the IMF encouraged the CBB to ensure that Islamic retail banks build deeper capital cushions and that their business model is sufficiently robust and also stressed the importance of developing plans for emergency liquidity assistance for wholesale banks, and reviewing crisis preparedness plans in view of possible spillovers from global financial markets.