EXECUTIVE SUMMARY
““Bahrain’s 2017 so far can be described as healthy growth, but with some concerns about how future international markets may counteract the strong growth which the Kingdom has seen. The data which we have varies from Quarter two or Quarter three. Our primary source is the Economic Development Board quarter three report on Bahrain’s economic growth (unless otherwise stated).””
INTRODUCTION
In general, I believe that while Bahrain has posted some strong results regarding economic growth, this is no time for celebration. The reason is, there are three concerns/factors which may hamper our current economic growth. The first being oil prices and the potential for further deteriorating Bahrain's fiscal status, the second is potential global financial crises, which may affect not only Bahrain's economy but the world economy as a whole, and third, capital markets and investors seem to be hesitant indicating that some uncertainty is on the horizon.
IMPRESSIVE ECONOMIC GROWTH
First we start with the good news. Bahrain has posted a Quarter 2 real growth of 3.30%. However, further analyzing this, the non-oil sector during quarter two is 4.3%, despite decreasing from 5.7% earlier on this year. The vast majority of this growth is thanks to Hotels and Restaurants (12.90%), social and personal services (9.90%), and financial services (7.90%).
Inflation seems to generally be anchored as of now, with results of inflation rate at 1.10% (year to date). What the EDB report does not mention is changes in wages. I’ve taken the liberty of finding changes in wages by looking at the LMRA database. As a result, we can positively conclude that Real private wages grew by 2.80%, although public sector real wages contracted by 0.43%. However, the contraction in public sector real wages is not a large concern, as the labor market has grown by 1.20%, with Bahraini individuals working in the private sector by 0.30%, and expatriates by 4.70%. While public sector wages on average are still higher than those of private wages, in times of fiscal difficulties, rises of private sector wages may induce individuals to shift from the public sector towards private sector if this trend were to continue, thus meaning the Bahraini government can downsize its operations where needed.
Overall, from the results posted above, we can see that Bahrain's economy is growing and adapting far better than the remainder of the GCC (as highlighted in the report), Bahrain currently possess strong Economic growth compared to the rest of the GCC. The fact that government services only grew by 3.1%, and that Non-oil private sector rose by 5.7%. This indicates that Bahrain's private economy is adapting towards the changes in the oil market. In comparison towards the rest of the GCC, we see that the rest of the GCC have either launched massive fiscal stimulus (such as the New Kuwait program) and are currently in low growth or even contraction (like the case with Saudi Arabia). Therefore, while we should be proud and cheerful that Bahrain's Economy has grown tremendously well, there are some areas of concerns which can reverse such growth for not only Bahrain but for the GCC.
CONCERNING ISSUES
The first area of concern which Bahrain and the GCC should watch is oil prices. While EDB has indicated that the potential for Supply overhang has diminished as of now, this doesn't necessarily mean that the risk of supply overhang in the oil market is eliminated. Furthermore, if oil prices are to hit 60USD, then suppliers in the United States may start introducing oil supply by as much as 400,000 barrels per day. As of now, current oil prices are at 59.93USD. Furthermore, the recent increase in oil price is not entirely due to increases in demand for oil (although some improvements do exist due to the general state of the world economy performing better), but that particular oil-producing countries and locations are in extreme moments of volatility. Examples of this are in Venezuela, where output, in general, has been affected by the socio-political events. While the increase in oil prices has reduced pressure on Bahrain's fiscal situation, this is by no means a steady and prosperous position. With the risk of supply overhang still at large, and the potential of new entrants into the market, there may be a significant possibility that oil prices will decrease, not increase in the future. Thus this may hamper the fiscal position of Bahrain even further.
The second area of concern is the potential deterioration of the global economy as a whole. While some areas of the EDB report highlights growth in the world economy and its stability (especially with the reversal of Quantitative Easing), there are some indicators which point out that financial crises could potentially happen soon. Two examples are the following, The US Auto-loan industry is currently having a more substantial degree of defaults (and growing), and the yield curve continues to flatten and may invert. While these are a few of many indicators which are indicating trouble in the global economy, it is not definite that a financial crises/recession will happen within this year or next year. However, when looking at these indicators, some skepticism and due diligence are needed to make sure that policymakers and economists which are stakeholders of the Bahraini economy do not become blindsided if a financial crises/recession does occur between now and the end of 2019.
The third area of concern is capital markets and investors are not confident in the current environment despite the impressive economic growth Bahrain is achieving. As with the rest of the GCC, Bahrain's capital markets have stagnated and have seen little growth. This indicates that investors are not willing to invest in newer projects with the current environment. Additionally, the rate of credit provided towards the economy has also stagnated. This again, shows that investors are not confident in this current climate. Therefore, by looking at the lack of confidence with private investors, we can conclude that outlook towards a healthy growing economy seems minimal.
INTERESTING DEVELOPMENTS IN THE KINGDOM
One rather interesting development which caught my attention is that Bahrain is currently planning to build a 100MW solar power plant, which is scheduled to be commissioned by 2019. Bahrain is also presently aiming at producing 5% of energy from renewable sources by 2025, and 10% in 2035. The reason on why this intrigues me is because Bahrain seems to take a different approach from relying on fossil fuel sources of energy production when in comparison with other GCC countries. In recent news, Saudi Arabia is attempting to go nuclear, and the United Arab Emirates new nuclear plant is set to produce electricity this year. The UAE has also stated that their new nuclear production will be able to provide power at 25% less cost than gas oriented production. Take into consideration that this does not include harmful externalities like carbon pollutants in the production of gas-oriented electricity. As a result, I ask the question, why not go Nuclear like the rest of the GCC? Of course, this isn't an issue which should be of massive concern as of now, and potentially, this can be explored in a different article.
Barakah Nuclear Power Plant under construction, 2 Reactors are ready to be commissioned in 2018
CONCLUSION
In conclusion, while Bahrain shows some impressive economic growth given the current condition of the GCC, we must not become complacent about the reality that could potentially lie ahead. While I am thankful towards the work which EDB has put towards this document highlighting different areas of the Bahraini economy in quarter three 2017, I would also like to shed a light which may be used towards the readers and EDB themselves. Therefore, I would say that Bahrain in 2017 had a good year, and when the final two or one quarter come out for different economic indicators on Bahrain growth. I believe they will shed a positive light, however, moving on into 2018, we must also be aware of the potential scenarios that have a possible likelihood of happening.
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