_Is Bahrain the next commercial hub in the GCC?
Across the GCC nations a range of economic diversification efforts are starting to pay dividends, with sectors such as business and financial services, Fintech, industrial and manufacturing starting to become integral to regional economies.
From 2011 to 2014 the average annual GDP growth rate of GCC nations stood at 5.0%; post the collapse, in the period from 2015 to 2018, we have seen average GDP growth slow to 2.2%. As most GCC nations relied on revenues from the hydrocarbon sector as the main source of funds for government spending, the resulting impact on spending and debt to GDP ratios has been profound.
This has been the case for Bahrain more so than any other GCC nation, where the gross general government debt increased from 44% of GDP in 2014 to an estimated 88% in 2018. More so, as a result of this indebtedness raising additional debt has become more challenging. These factors have had a marked impact on economic activity, with GDP growth expected to have slowed again in 2018. Initial estimates expect Bahrain’s GDP growth rate to register at 2.6% in 2018, down from 3.8% a year earlier.
Given the strong challenges the Kingdom faces, Kuwait, Saudi Arabia and the UAE stepped in to provide a US$10bn aid package in late 2018. The money will support a new fiscal program designed to eliminate the country’s sizeable budget deficit by 2022.
In addition to this, the government of Bahrain has enacted a range of reforms to help ease the fiscal burden and help diversify the economy. These reforms range from the implementation of Value Added Tax (VAT) at 5%, public sector reforms to reduce the wage bill burden, long-term investor visas and legal reforms to help reduce the cost of doing business.
Outlook
On the back of these reforms, easing of regulations, continued investment in large-scale projects and higher oil prices, GDP growth looks set to strengthen to 2.8% and employment is expected to expand by 2.5% in 2019. Additionally, the fiscal situation is likely to improve given the introduction of VAT alongside fiscal consolidations. Finally, whilst the introduction of VAT is likely to increase the rate of inflation, we do not expect this to be a substantial increase given the relative consumer friendliness of the VAT regime in Bahrain compared to other GCC nations.
For more information on the Bahrain commercial and hospitality market, read the Knight Frank report here:
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