(MENAFN- Arab Times) We expect growth in economic activity to slow down from 4.5 percent year-on-year (y/y) in 2014 to around 2 percent in 2015, on flagging oil GDP growth and constrained non-oil sector growth.
Oil sector growth should decline on lower oil production and prices. Non-oil GDP growth remains vulnerable to internal political concerns. These concerns are somewhat weighing on business optimism, and hindering the potential for stronger gains in the financial services sector (the biggest contributor to the economy after oil), as well as the construction and tourism sectors.
Against a meager economic recovery and low oil prices, concerns over Bahrain's ability to finance its burgeoning fiscal deficits have been on the rise. In early February, S&P downgraded Bahrain's long-term sovereign debt rating from BBB to BBB-. Government debt has ballooned since 2009 and is expected to stand at around 50 percent of GDP in 2015.
Headline inflation remained comfortable in March at 2.2 percent, as ongoing gains in housing inflation were offset by lower food inflation. Housing inflation was at 7.7 percent y/y and food inflation declined by 0.5 percent y/y, during the same period. Subdued economic activity, low food inflation and a gradual moderation in housing rent inflation will help keep the overall inflation rate steady in the period ahead. We expect the headline inflation rate to average around 3.0 percent in 2015, slightly higher than the annual average figure of 2.7 percent in 2014.
Bahrain is set to log in one of the largest budget deficits in the GCC region, with the country's breakeven oil price estimated at around $120 per barrel, coupled with high levels of government spending.
Any significant curtailment in public spending is unlikely in the near future. 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 stir the pot.
Consequently, with fiscal spending forecast to remain high amid dwindling oil revenues, we expect the fiscal deficit to swell from around 4 percent of GDP in 2014 to around 15 percent in 2015.
The current account is projected to post a deficit of around 2 percent of GDP in 2015, on the back of lower oil export receipts. The deficit however is expected to be short-lived. We forecast the balance to edge back on to positive turf in 2016, on the back of higher oil prices and stronger growth in non-oil exports.
Credit growth witnessed a gradual recovery throughout most of 2014. 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. Making adjustments for the break in the data, credit growth was at around 8 percent y/y in February.
Business loans growth, relative to the growth in personal loans, appears to have been more affected by the central bank's reclassification. Adjusting for the reclassification, business loan growth seems to be witnessing a gradual recovery. We expect business loan growth to continue to gradually recover, especially as new or previously stalled projects come to the fore.
Growth in the broad M2 money supply measure remained in recovery mode in 2014. It averaged 7.2 percent y/y in 2014, higher than 2013's annual average of 6.8 percent. M1 growth also witnessed a healthy recovery in 2014, averaging 6.4 percent y/y, higher than 2013's annual average of 4.8 percent. The continued rise in money supply growth is indicative of the relatively accommodative monetary policy. The Central Bank of Bahrain (CBB) has maintained its one-week policy rate at 0.5 percent, slightly above the US Federal Fund's target rate of 0.25 percent.
The banking sector appears to have taken a bit of a hit in the final quarter of 2014, perhaps due to a rise in internal tensions. Total commercial bank asset growth contracted by 1.6 percent y/y in February, as wholesale bank assets remained in decline. Growth in wholesale bank assets, which make up around 60 percent of total assets as of 2014, fell by 6 percent y/y in February. The more domestically-orientated retail banks, however, continue to paint a more positive picture: asset growth was up 5.2 percent y/y in February.
The Bahrain All Share Index continued to rally at relatively high levels at the start of 2015, on reassurance that business sentiment is slowly but surely improving. Although the index recently came off the highs it witnessed at the start of the year, it still remains at relatively high levels.
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