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Last updated: March 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 lags. Bahrain’s economy is dependent on energy exports to drive output and incomes; however, Bahrain has been increasingly diversifying its economy to services sectors to 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 2023 and 2027. 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

On the back of a robust recovery in tourism, particularly from Saudi Arabia, and solid performances in the transport and communication industries as the domestic and global economies reopened, real GDP growth accelerated to 3.4% in 2022 from 2.2% in 2021.

The IMF expects growth to slow to 3% in 2023, as higher inflation and interest rates weigh on domestic consumption and sluggish global growth dampens demand for hydrocarbon exports. Public and private investment will be the main driver of growth in 2023 as Bahrain continues to advance economic and business reforms to help promote innovation and entrepreneurship. For example, the Bahrain FinTech Bay is the largest financial technology hub in the MENAP region and provides access to training and funding for finance startups. Strong momentum in the tourism sector is likely to continue in 2023 on the back of another year of open international borders; Bahrain aims to increase the economic contribution of services under its Economic Vision 2030 plan. Completion of the diving waterfront and Bahrain Bay beach projects in 2019 and ongoing hosting of the Formula 1 Grand Prix supports demand for Bahrain’s tourism.

Risks to growth are tilted to the downside. Bahrain’s external debt is above 200% of GDP and foreign exchange reserves are low, raising debt sustainability risks. A steep drop in oil prices could further damage Bahrain’s public and external finances as oil accounts for around 70% of government revenues and 60% of total export receipts.  

Long term growth hinges on implementation of projects in line with the Economic Vision 2030 plan. Bahrain aims to improve living standards, enhance productivity and increase education and workforce skills to help diversify its economy. For example, the National Employment Program aims to help Bahraini youth gain skills and employment in the private sector by subsidising a percentage of wages. If successful, the program will help increase productivity and address skills mismatches in the labour force.

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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$32,000 in 2027 from around US$28,500 in 2022.

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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.

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The risk of expropriation is low to moderate. The US investment climate states that there have been no reported cases of expropriation. Bahrain’s involvement in international trade agreements and investment treaties protects foreign investors from expropriation, expect those for a public purpose.

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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.  

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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.   

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Bilateral relations

Bahrain was Australia’s 42nd largest trading partner in 2021. Total goods and services trade amounted to $1.4 billion in 2021, up almost 45% from 2020. From Bahrain’s perspective, Australia is Bahrain’s third largest source of imports, comprising mainly purchases of Australian alumina, meat, dairy products and wheat. Fertilisers, aluminium, cereals, woods and iron and steel bars were Australia’s biggest imports from Bahrain in 2021.

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Student enrolments continued their downward trend from their peak in 2009, falling from around 300 students in 2009 to 25 students in October 2022. 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.  

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Investment between Bahrain and Australia is small. Australian investment in Bahrain was around $55,000 in 2021. There are opportunities for Australian investment to help develop Bahrain’s agriculture and water resources. Should the Australia-Gulf Cooperation Council (GCC) come into force, further trade and investment opportunities are likely, especially in infrastructure, education and professional services.

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