Market Report, "Bahrain Business Forecast Report Q3 2013", published

Elevated oil prices, a ramp-up in government spending, and financial support from Saudi Arabia should help bolster growth in 2013. That said, a return to pre-crisis rates of real GDP growth above 7% remain off the cards in the near term.

In light of record oil revenues, we expect government consumption to outperform over the coming quarters, which should support activity in the non-hydrocarbon economy. Efforts to address the shortage of affordable housing will see government CAPEX accelerate.

Bahrain's reputation as a stable and welcoming location to do business in the Gulf has suffered as a result of the volatile political climate. At the moment, it remains to be seen if Manama will be able to compete with Doha and Dubai in attracting investment into the all-important hospitality and financial services industry.

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The economy's medium-term outlook remains contingent upon a lasting solution being found to the current political crisis. Unfortunately, we maintain our relatively guarded outlook on the prospects that the government and opposition can come to some form of agreement in the near term, despite efforts at reconciliation in February 2013.

Major Forecast Revisions

Bahrain's economic growth should accelerate over the next few quarters, driven by a recovery in hydrocarbon output as well as rising business activity in the non-oil economy. The government will continue to support growth through loose fiscal and monetary policy, while an influx of aid from the GCC will bolster investment spending. We forecast real GDP growth of 3.7% (slightly up from 3.5% previously) this year and 3.2% in 2014, from 3.4% in 2012.

Key Risks To Outlook

A more pronounced regional crisis stemming from an uptick in tensions between Iran and the West could see risk premiums spike higher, particularly for Bahrain.

A marked drop in oil prices concomitant with a slowdown in growth in Europe, the US and China would pose a significant risk to the country's near-term growth outlook, and likely lead to a marked deterioration to the country's balance of payments and fiscal dynamics. In terms of the latter, Bahrain's breakeven oil price is now between US$115-120/bbl, which is by far the highest in the Gulf.

Failure to find a lasting solution to the political crisis could see the opposition becoming increasingly radicalised, and resort to militant tactics such as improvised explosive devices. This would result in Bahrain's 'safe haven' status suffering irreparable damage.

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