Bahrain
Bahrain
Last updated: December 2023
Bahrain has higher per capita incomes and a stronger business climate rank compared to MENAP neighbours (Middle East, North Africa, Afghanistan and Pakistan). Creditworthiness is on a par with regional peers, while growth projections lag the regional average. The energy sector remains a strong driver of Bahrain’s economy, but ongoing diversification will support growth in non-energy sectors and help reduce vulnerability to global energy shocks.
The above chart is a cobweb diagram showing how a country measures up on four important dimensions of economic performance—per capita income, annual GDP growth, business climate rank and creditworthiness. Per capita income is in current US dollars. Annual GDP growth is the five-year average forecast between 2024 and 2028. Business climate is measured by the World Bank’s 2019 Ease of Doing Business ranking of 190 countries. Creditworthiness attempts to measure a country's ability to honour its external debt obligations and is measured by its OECD country credit risk rating. The chart shows not only how a country performs on the four dimensions, but how it measures up against other countries in the region.
Economic outlook
Despite elevated oil prices, Bahrain’s real GDP growth slowed from 4.9% in 2022 to 2.7% in 2023. The slowdown reflected declining oil production due to shutdowns for maintenance. Higher interest rates, restrained fiscal spending and base effects also contributed to slower economic growth.
The IMF expects growth to accelerate to 3.6% in 2024 on the back of continued improvements in non-hydrocarbon revenues, as tourism and broader services activity recovers further, infrastructure projects are continually implemented and financial services expand. IMF projections for growth in the non-hydrocarbon sector remains high at 4.3% in 2024, through the combination of public and private investment under the Economic Recovery Plan. Tourism is poised to benefit from growing demand for Bahrain’s attractions and events. Ongoing investment in aluminium manufacturing to supply ongoing infrastructure development will boost domestic employment. And FDI should rise on the back of the ‘golden licence scheme’, which includes prioritised land allocation for investments, infrastructure services, utilities and streamlined access to government services. However, continued fiscal consolidation in the near term is likely to weigh on non-oil GDP growth.
Risks to growth are tilted to the downside. Bahrain’s external debt has exceeded 115% of GDP since 2020, and foreign exchange reserves are low, raising debt sustainability risks. A steep drop in oil prices could damage Bahrain’s public and external finances as oil accounts for more than 63% of total budget revenues.
Long term growth hinges on diversifying the economy in line with implementation of projects related to Economic Vision 2030. This includes previously mentioned sectors, and the Financial Services Development Strategy, which aims to encourage fintech investment. If successful, this can help increase long term demand for Bahrain’s digital payment services and attract overseas investment. To achieve long term improvements in living standards and generate the necessary skills to support economic diversification, the National Employment Program is centred around making local citizens a preferred choice for private sector employment. The scheme allows businesses to take advantage of financial incentives—wage subsidies to private companies—to build a domestic skills base. Overall, IMF forecasts point to more moderate but sustainable growth to 2.7% per annum from 2026 to 2028, as the effects of structural reforms filter through the economy.
Household incomes have been volatile due to the country’s dependence on oil. Income growth should become less volatile as Bahrain increasingly diversifies its economy. The IMF expects GDP per capita to increase towards US$31,100 in 2028 from around US$28,500 in 2023.
Country risk
Country risk in Bahrain is high. The OECD country credit grade is 6, indicating a high chance the country will be unable or unwilling to meet its external debt obligations. The three major ratings agencies have sub-investment grade sovereign credit ratings.
The risk of expropriation is low to moderate. The US investment climate statements indicate that there have been no reported cases of expropriation in recent years. Bahrain’s involvement in international trade agreements and investment treaties, as evidenced in US-Bahrain agreements, can protect foreign investors from expropriation, except those for a public purpose.
Political risk is moderate to high and includes risks related to escalation of regional geopolitical tensions that could hinder trade and investment. Social and religious tensions pose security and economic risks.
Bahrain scores highly on Worldwide Governance indicators of control of corruption, rule of law, regulatory quality and government effectiveness. But Bahrain scores in the lowest quartile for voice and accountability and underperforms the MENAP average. Political stability and absence of violence is in line with political risk.
Bilateral relations
Bahrain was Australia’s 46th largest trading partner in 2022. Total goods and services trade amounted to $1.9 billion in 2022, up more than 30% from 2021. Australia has a trade surplus with Bahrain. From Bahrain’s perspective, Australia was Bahrain’s third largest source of imports in 2022, comprising mainly purchases of Australian aluminium ore including alumina. Wheat, non-ferrous waste and scrap, meat and vegetables are other major Australian exports to Bahrain. On the import side, aluminium, fertilisers, woods, cereals, and iron and steel bars were Australia’s biggest imports from Bahrain in 2022. The rise in the trade surplus with Bahrain was attributed to an increase in the price of aluminium in 2022 and the ongoing diversification strategy of Bahrain to a manufacturing industry.
Student enrolments continued their downward trend from their peak in 2009, falling from around 300 students in 2009 to 25 students in the nine months to September 2023. Although competition from international institutions exists, education is a key sector offering strong export potential for Australia as Bahrain implements its Economic Vision 2030 plan to increase its domestic education and training skills.
Investment between Bahrain and Australia is small. Bahrain investment in Australia remained stagnant at $23 million in 2022 whilst Australian investment in Bahrain was around $36 million in 2022 after peaking at $313 million in 2015. There are opportunities for Australian investment to help develop Bahrain’s agriculture and water resources, but also to export aluminium ore and alumina. Should the Australia-Gulf Cooperation Council (GCC) come into force, further trade and investment opportunities are likely, especially in infrastructure, education and professional services.
