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Growth to stay modest; budget worries persist

Economic activity grew by a robust 5.5% y/y in 2013, on the back of a strong recovery in oil production.  Oil sector growth soared to a staggering 15.3% y/y in 2013, after technical problems at the Abu Safa oil field (a major source of oil output) were rectified. The surge in oil growth more than offset the slowdown in non-oil growth, keeping overall growth on an upward trajectory. However, oil growth is expected to undergo a major correction this year, and moderate to around 2% y/y, driving overall growth lower. Non-oil growth is expected to stabilize at around 3% y/y: whilst the execution of large GCC funded infrastructure projects should give some impetus to this sector, it will continue to be undermined by relatively subdued private sector activity. We expect real non-oil GDP to average at just below 3% y/y over the forecast period.

Headline inflation has been slowing since the start of this year, on the back of decelerating housing rents and food prices. As of April, the overall inflation rate stands at 2.0% y/y. After reaching new heights for most of 2013, housing rents have significantly moderated, and as of April stand at 2.0% y/y, compared to the 8.8% y/y average seen in 2012. The significant slowdown in housing rents is mostly attributed to the influx of housing projects rolled out by the government, with the aid of its GCC peers and the private sector. Food inflation is expected to climb in the short to medium term in-line with international food prices.

But the relatively more modest growth in housing rents and soft growth in the consumer price index’s other components are expected to more than offset potential rises in food inflation. Against a backdrop of modest economic growth, headline inflation is forecasted to remain in check and edge down from 3.2% y/y in 2013, to 2.5% y/y this year.

Public finance
In 2013 the budget deficit almost doubled to $1.1 billion, but came in below forecasts as spending rose at its slowest pace since 2009. The budget balance has remained in deficit for five consecutive years now and stood at 3.3% of GDP in 2013 up from 2.0% in 2012.
The government has proposed some reforms to put the budget on a more stable long-term trajectory, though they remain on hold due to the lack of political agreement. If such reforms are not implemented, the deficit is expected to continue to widen to around 5% during this year and the next, as current expenditures continue to climb.

Current account

The current-account surplus rose slightly from 7.2% of GDP in 2012 to 7.8% in 2013 as exports witnessed a slight up-tick. The pickup in exports, albeit a relatively weak one, came as oil exports edged back on to positive turf and non-oil exports surged by 23% y/y.
Import growth slowed down from 9.4% y/y in 2012 to 3.1% y/y this year, due mainly to a fall in oil imports, after the restoration of the nation’s Abu Safa oil field. In spite of a gradually recovering non-oil export sector, lower oil prices are expected to drive the surplus to a slightly lower, but still healthy, 6% of GDP over this year and the next.

Banking sector
Bank credit growth appears to have bottomed out and has been gradually recovering since the end of last year. As of March, banking credit growth stands at 5.9% y/y, and is set to maintain its moderate pace as new projects are executed and business confidence is gradually restored. Personal loans growth remains robust and in double digit territory since mid of last year. However, the growth in business loans (which make up a bulk of total retail banking) continued to decelerate in March, and was down by 1.8% y/y, its lowest growth rate in three years.
Annual growth in the broad M2 money supply measure remains relatively weak and slowed down to 5.3% y/y in March, after averaging at around 8% y/y during the first two months.
Growth in the short-term measure M1 continued to climb in March and came in at 6.3% y/y. Money supply growth is expected to strengthen in the medium term as demand picks up. The banking sector remains weak: in March commercial banks assets fell again, by 1.4% y/y, amid ongoing deleveraging in the wholesale banking segment. Whilst retail bank assets are showing some recovery, wholesale bank assets continue to decline, falling by 5.1% y/y in March. The Central Bank of Bahrain (CBB) has maintained its one-week policy rate — its key policy rate — at 0.5%, slightly above that of the US Federal funds target rate of 0.25%.

Financial markets

The Bahrain stock market has been witnessing a rally since the start of this year. The Dow Jones Bahrain Index on average rose by 24% y/y, between January and May of this year, significantly better than last year’s performance. Furthermore, the index is edging towards its highest level in four years. The improvement in the stock market’s performance is indicative of some recovery in sentiments.


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