Echoing the 2014 crisis with low oil prices and surging debt

Bahrain is forecasted to have grown by +2.6% in 2024 and the pace is projected to be slightly lower at +2.5% in 2025, a downward revised estimate, given the relatively low oil price of the global economy and the postponement of increases in OPEC’s oil-production quotas. This revision is in line with the rest of the Gulf economies, which are all exposed to lower oil revenues from the highs of 2022. While the hydrocarbon sector is all-important for the Bahraini economy, it is more diverse than peers in the GCC. The extraction of hydrocarbons accounts for approximately one-fifth of GDP (compared to more than one-third in Saudi Arabia). Starting in the 1970s, Bahrain diversification strategy ran through the energy-intensive metallurgical industry, mainly aluminum but later also iron. As a result, Bahrain become one of the world’s largest aluminum exporters. Bahrain Aluminum, Bahrain’s publicly owned aluminum company, owns the largest smelter in the world, and 10% of the firm is publicly traded in both Bahrain and London stock exchanges. Under the current strategy, the Bahrain leadership is pushing to develop Bahrain as a global financial center.

Inflation in Bahrain has followed similar dynamics to that of other GCC members. In 2024, inflation reached an estimated 2.8%. In 2025, it is expected to decrease to 2.1% by the end of the year.

Overall, the country’s debt position appears unsustainable in the medium term. After 127% of GDP in 2024, it is expected to grow to 129% in 2025, the highest level in the entire Middle Eastern region after Lebanon. Bahrain’s rich Gulf neighbors have supported the small island’s finances for the last few decades, and this is expected to continue while the status quo and leadership remain in power. Yet, without fiscal consolidation, Bahrain’s finances will not return to a sustainable path. During the latest International Monetary Fund review, Bahrain authorities blocked the publication of Article IV, which would have provided more light on this aspect.

Like other GCC countries, Bahrain has set 2030 and 2050 development plans aiming at diversifying its economy from oil. The Bahrani leadership’s current diversification plan has finance and tourism at its core. On the financial side, over the last decade, Bahrain has made a name for itself as a successful regional finance hub. Over the last five years, Bahrain Bourse has surged by 43% and ranked fourth in terms of returns in the region after the financial centers of the UAE and the Riyadh bourse. However, this is mainly due to a selected number of firms such as Aluminum Bahrain. The financial sector has positively supported Bahrain diversification as more than a 100 fintech firms are now based in the country. Yet, as Dubai and Abu Dhabi are gaining more international traction, some firms, such as BNP Paribas, have decided to reduce their workforce in Bahrain’s capital, Manama.

When it comes to tourism, the Bahrain leadership is in sync with Saudi Arabia as it is developing large infrastructure projects. Over the last few years, Bahrain has opened a substantial number of megaprojects to bidding to achieve such a shift. The Bahrain Metro, a road and rail bridge to connect Bahrain with Qatar, or the Bahrain Marina, are the top examples. However, Bahrain’s sovereign wealth fund is estimated to be much smaller than those of its neighbors: around USD19bn (40% of GDP), compared to the UAE’s USD1,400bn, constraining its capacity to follow a similar model to finance such megaprojects.

Bahrain’s political landscape will remain tense because of latent dissatisfaction with the Sunni Al Khalifa ruling family among the largely Shia population. A decision to re-establish relations with Iran may help reduce tensions in the context of a resurgence of conflict across the Middle East, following events in Israel, the Gaza Strip and the Red Sea. The regulatory and legal frameworks are business-friendly, while weaknesses remain with regards to perceived corruption, judicial effectiveness and government integrity. Regarding environmental sustainability, Bahrain scores badly, owing to the absence of renewable electricity output, a high level of water stress and a very low recycling rate, ranking only 189th out of 210 economies in our proprietary Environmental Sustainability Index.