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The socio-political turmoil in Bahrain, which broke out in February 2011, obscures its economy’s

by Courtesy

MIDDLE EAST– Kingdom of Bahrain
Analysts: Chuan Shyang Lin , Hafiza Abdul Rashid

Summary
The socio-political turmoil in Bahrain, which broke out in February 2011, obscures its economy’s near- and medium-term prospects. Amid the unrest, economic activities will be predisposed to disruptions, if not already; perhaps more so following the declaration of martial law by the government in mid-March 2011. Meanwhile, the impact of the unrest on Bahrain’s reputation as a stable and liberal financial centre could have adverse medium-term implications for its economy. Notably, the financial- and banking-services sector is the single largest economic sector in Bahrain, accounting for about a quarter of its gross domestic
product (“GDP”).

We believe that the Bahraini government’s net-asset position could help shield its fiscal health from short-term economic shocks, even as it provides the government with the flexibility to extend fiscal support to the economy. We believe, however, that the positive implication of this cushion may also struggle to find a voice amid the uncertainties surrounding the social, political and economic landscapes in Bahrain.

Economy
Recent political upheaval casts cloud of uncertainty over prospects of Bahrain’s small, external-sector-driven economy. Concern lies in the longer-term impact on Bahrain’s reputation as a relatively stable financial centre in the region.

Critical issues
The political turmoil and violent clashes in Bahrain have negative implications for its position as a regional financial hub, as well as for its economy in general. The financial- and banking-services sector is a major contributor to Bahrain’s economy, accounting for about a quarter of its real GDP. Amid the tension, we believe that foreign and offshore banks operating there may consider relocating to an alternate base in the near to medium term, especially if the situation is prolonged. Economic uncertainties and the repatriation of foreign assets out of Bahrain could pose challenges on both the fiscal and monetary-policy fronts. …more