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Frontier country report | June 8, 2015
Limited fiscal flexibility
Government assets, % of GDP
Budget breakeven oil price 2015, USD/bbl (rhs)
Sources: IMF, Deutsche Bank Research
Oil price drop results in a sharp deterioration of fiscal and current
account balances
Although Bahrain’s economy is more diversified than that of most other GCC
countries, the hydrocarbon sector still accounts for roughly 90% of fiscal
revenues and 70% of merchandise exports. Consequently, the recent drop in
crude oil prices has led to a sharp deterioration in fiscal and external accounts.
The government has not yet outlined a comprehensive fiscal consolidation plan
to counter the effect of the estimated 67% yoy decline in oil revenues. Given
simmering political tensions it will be difficult to implement large cuts in
expenditures without risking social discontent. Consequently, we think that the
fiscal breakeven oil price will remain elevated at around USD 118/bbl, the
highest within the GCC and significantly higher than DB’s oil price forecast of
USD 59/bbl (Brent). This means that the fiscal deficit will likely widen to around
15% of GDP in 2015. Furthermore, lower oil exports will push the current
account into deficit for the first time in more than a decade.
Limited fiscal and external buffers and high debt
Contrary to other oil exporters in the region, Bahrain entered the period of lower
oil prices with limited fiscal and external buffers. FX reserves stood at USD 4.9
bn at end-2014 (14% of GDP) and assets in Mumtalakat, the sovereign wealth
fund, at USD 7 bn. This means that Bahrain’s ability to fund its large twin deficits
by drawing on its savings is low. The deficits thus largely have to be financed by
domestic and external borrowing and this will further increase Bahrain’s already
high debt level. The public debt level is projected to increase to 54% of GDP in
High and rising public debt level
Simmering political tensions
Bahrain was the only country in the GCC that experienced widespread political
unrest in the wake of the Arab Spring revolutions in MENA. The root of the
tensions lies in the large divide between the Shia majority and the Sunni elite.
There have been attempts by the Crown Prince to ease tensions and initiate a
national dialogue but it remains to be seen whether those initiatives will bear
Gross public debt, % of GDP
Strong political and financial support from its neighbours
Source: IMF
Bahrain maintains close ties to other GCC countries, especially Saudi Arabia.
Saudi Arabia provided military support during the 2011 unrest and is likely to
continue supporting the ruling al-Khalifa family. Additionally, the GCC provide
financial support, primarily through the USD 10 bn GCC development fund.
Were the need to arise, the GCC is likely to provide additional emergency
support to Bahrain.
Global Macro & Sovereign Risk Contact
Oliver Massetti | [email protected] | +49 69 910-41643
© Copyright 2015. Deutsche Bank AG, Deutsche Bank Research, 60262 Frankfurt am Main, Germany. All rights reserved. When quoting please cite
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| June 8, 2015
Frontier country report