The recent decision by Standard & Poor’s to revise the outlook for Bahrain from negative to stable could not have come more timely. S&P cited proper reasons for the decision, including reduced political tensions and steady public sector spend.

The move came shortly ahead of the launch of a fresh round of national dialogue aimed to address outstanding socio-political challenges facing the country since February 2011.

While no one is expecting a categorical solution for all outstanding issues, many hope that the new dialogue would help overcome some of the more critical matters that triggered the political crisis.

Nonetheless, the rating of BBB clearly suggests that S&P continues to assign Bahrain the lowest rating among fellow Gulf Cooperation Council (GCC) countries. To be sure, BBB is the lowest investment rating — not the best to raise sovereign funds.

Certainly, evidence points to Bahrain’s improved economic performance on the one hand and serious challenges on the other.

On a positive note, the Economic Development Board (EDB), a local entity entrusted with developing economic policies and strategies, projected a modest real growth rate of 2.4 per cent for 2012. However, EDB now believes the economy grew 3.9 per cent last year. This growth compares favourably with the 1.9 per cent achieved in 2011.

Debt levels soar

This is understandable on the back of stronger public sector spend, though at the cost of increasing debts. The authorities opted to increase original statistics for fiscal years 2011 and 2012 by nearly 20 per cent if only to appease public sector employees and pension beneficiaries.

Another positive aspect relates to the near absence of inflationary pressures, standing at around 3 per cent in 2012. This is in line with prevailing rates in other GCC economies.

On the other hand, Bahrain’s economy is experiencing sustained rise in government debt levels — from 20 to 25 per cent of gross domestic product (GDP) to nearly 40 per cent in the span of a few years.

Other studies claim that actual government debt, when considering all public sector commitments, increases to as high as 56 per cent of GDP. Nevertheless, Bahrain’s public debt remains manageable by virtue of falling below 60 per cent of GDP, as suggested by the Gulf Monetary Union (GMU) project.

However, Bahrain followers are observing with caution a steady rise in the government’s appetite for borrowing while overlooking the adverse effects of such a policy on future choices. Also, the crowding out effect cannot be ruled out as public sector borrowing restricts options available for private sector investors, including financing terms.

Budgetary shortfall

Yet another problem concerns Bahrain’s budgetary shortfalls, projected to be 6.1 per cent and 6.6 per cent of GDP in 2013 and 2014 respectively, more than double the GMU stipulation.

Yet, chances of budgetary reversals are not substantial as authorities used an average price of $90 (Dh330) per barrel of oil in preparing the two budgets. The actual oil price for the nature of crude from Bahrain is not particularly higher. The petroleum sector is vital by comprising three quarters of both the treasury income and total exports.

Yet, there is the unemployment headache among Bahraini nationals, standing at below 4 per cent by official statistics but considerably higher according to other sources. Demographic realities only add to the challenge, including a population growth rate of more than 2.5 per cent annually.

In a snapshot, economic prospects for Bahrain are improving.

The writer is a Member of Parliament in Bahrain.