Oil activity is expected to increase by 1.4 percent by the year 2019

Bahrain’s non-oil growth will remain strong for the next two years as GCC investments keep infrastructure spending levels high, offset oil sector weakness and maintain overall growth near to 3 percent, according to a new report from NBK Economics.

As per the report, oil sector output is expected to be flat, particularly due to the OPEC oil production cut that has been continued through to the end of 2018. With a compliance rate of 54 percent so far in 2017, Bahrain could potentially cut oil output further in 2018.

In 2019, however, oil activity is expected to increase by 1.4 percent, with a new 350,000 barrel every day offshore oil pipeline connecting Bahrain to Saudi Arabia replacing the present 230,000 barrel every day pipeline which was forced to permanently close in October following an explosion.

The report depicts that the non-oil sector is expected to proceed to grow at between 3 and 3.5 percent in 2018 and 2019, mainly due to expanded spending in infrastructure, which has been strengthened by the Gulf Development Project’s 2011 pledge to provide $10 billion in grants over the next decade.

Additionally, non-oil growth has been bolstered by profits in the financial services sector, which averaged 6.4 percent growth year-on-year in the first three quarters of 2017.

The report mentions that similar upward trends have been seen in other non-oil sub fields, like personal services, transportation and communications.

The report also states that employment, which has been strong if earasible since the second half of 2014, increased 7 percent year-on-year, up 6.6 percent year on year in the previous quarter.

Inflation is expected to increase in 2018 due to the planned implementation of value-added tax as well as firmer housing and food inflation.

VAT is expected to add 2 percent to the total inflation for one year, from approximately 1 percent in 2017 to 2.5 percent in 2018, where it will remain in 2019, the report predicts.

NBK also hopes that while Bahrain’s deficit is expected to narrow, it will “remain worryingly large” at around 9.7 percent in 2018 and 8 percent in 2019.

In reply to the high deficit levels, in late 2017 the government gave a $3 billion three-tranche bond with premiums of 5 to 8 percent and maturities between 7 and 30 years.

Assuming an average interest rate on government debt at around 5 percent, NBK believes that debt interest payments will contain between 2 and 3 percent of GDP.

 

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