Bahrain's budget deficit expected to be largest in GCC: NBK

Published November 17th, 2015 - 02:00 GMT

Bahrain’s economic growth in real GDP is expected to slow in 2015 to 2 per cent in 2015 from 4.5 per cent year-on-year (y/y) last year amid a weak oil price environment, a report said.

The oil sector growth is poised to fall on lower oil prices, while non-oil GDP is expected to slow, but only modestly, during the same period thanks to strong fiscal spending and GCC funds targeted at housing and infrastructure developments, added the latest Economic Update from the National Bank of Kuwait (NBK).

However, the kingdom is expected to receive a healthy boost in investment, NBK said.

GCC has vowed to deliver funds amounting to about $10 billion spread over 10 years, to help prop up Bahrain’s economy. Furthermore, according to the country’s Economic Development Board (EDB), the country is expected to invest over $20 billion in industrial and infrastructure projects over the coming years.

“Non-oil GDP growth remains susceptible to internal political concerns, which have weighed heavily on business optimism in the past,” the NBK team said.

“Whilst these concerns have mostly tapered off, they continue to quell business optimism and consequently hinder potentially higher gains in the financial services sector (the biggest contributor to the economy after oil), as well as the construction and tourism sectors.”

Consumer price inflation expected to ease

Headline inflation has so far remained moderate in 2015, as gains in the housing component in the first half of 2015 were offset by lower food inflation. As of August, overall inflation stood at 1.6 per cent y/y, whilst food and housing rent inflation came in at 3.2 per cent and 3.1 per cent, respectively. With housing inflation moderating in the second half of this year and softer food inflation, we now expect headline inflation to slow from an annual average of 2.7 per cent in 2014 to 2.0 per cent in 2015.

Housing inflation has eased notably. In June, price growth in the component witnessed a sharp deceleration, slowing from 7.7 per cent y/y in May to 2.3 per cent y/y, partly due to a correction and partly as a result of higher housing supply entering the market. For a number of years now, Bahrain’s government has been adamant about increasing the number of local housing units and we may be starting to see these units gradually entering the market.

Budget deficit to widen further on lower oil revenues

Bahrain is forecast to pencil in one of the largest budget deficits in the GCC region. With the breakeven oil price estimated at around $120 per barrel, oil prices remaining low and government spending hovering at high levels, we expect the budget deficit to widen from around 5 per cent of GDP in 2014 to around 15 per cent in 2015.

Any significant curtailment in public spending is unlikely; public wages and subsidies (politically sensitive areas of spending) make up two-thirds of total government spending. Given the current political status quo, any major cuts in these two areas could add to political tensions.

Bank credit growth gradually recovering; deposit growth easing

Credit growth, personal lending growth in particular, has remained rather resilient in 2015, in the face of lower oil prices. It is important to note that credit growth has been distorted ever since the Central Bank of Bahrain reclassified some of its financial institutions in May of 2014.

Business loan growth, relative to the growth in personal loans, was more affected by the central bank’s reclassification. Adjusting for the reclassification business loan growth appears to be easing of late on the back of oil price woes. As of June 2015, business loan growth and personal loan growth stood at 2.5 per cent y/y and 13.8 per cent y/y, respectively.

Deposit growth continued to trend lower in 2015, mainly due to a slowdown in government deposit growth. After a short-lived recovery in May 2015, government deposit growth slipped back into negative territory in June, declining by 3.4 per cent y/y. Government deposits are being sapped by high levels of fiscal spending and lower oil revenues.

Growth in the broad M2 money supply measure has been gradually trending lower since the end of 2014, on the back of lower oil prices. Recently, this has helped push interbank rates higher. In June 2015, M2 money supply growth came in at 6.5 per cent y/y.

Bahrain’s one-month and three-month interbank rates have been on the rise recently. The pick-up in both rates could be attributed to the slowdown in deposit growth.

Bank asset growth remains lacklustre; total commercial bank asset growth slid deeper into negative territory after declining by 2.1 per cent y/y in June.

Total bank assets were shepherded lower mainly by losses in the wholesale sector. Growth in wholesale bank assets, which make up around 60 per cent of total assets (as of 2014), contracted by almost 4 per cent y/y in June.

Asset growth among the more domestically-focused retail banks has been on a downward trend since the beginning of this year. In June, it slowed from 2.9 per cent y/y in May to 0.5 per cent y/y.

Bahrain stock market gains constrained by lower oil prices

The Bahrain All Share Index like other GCC markets has been under pressure for most of 2015 as low oil prices weighed on investor sentiment.


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