Bahraini Economy Sinks, Showing the Limits of US Partnership
The negative outlook directly threatens Manama with more debt and consequently, financial instability.
In reflection of Bahrain's mounting economic challenges, Fitch Ratings has downgraded its Long-Term Foreign-Currency Issuer Default Rating (IDR) outlook from stable to negative. The credit rating agency also affirmed the rating at ‘B+’, the same as last year. As the smallest economy in the Gulf, Bahrain is struggling due to both natural resource limitations and dependence on Washington, the latter of which has proven less helpful than expected. Nonetheless, any potential rescue of Bahrain would likely require a bailout from the US and the GCC.
Compounding Pressure
In comparison to the broader oil-rich region, Bahrain's oil and gas reserves are the most modest. However, this has not hindered the industry from being the largest contributor to the nation's economy. Petroleum is its biggest export, and estimates suggest that its government revenue contributions have ranged between 70-86% since 2007. Among these natural limitations is the small geography, which contributes to the smallest population in the GCC further hindering growth and economic diversification initiatives. Consequently, as of 2023, Bahrain ranked eighth in the world for the highest FDI-to-GDP ratio, according to the World Bank.
The aforementioned reflect the recent credit outlook downgrade from Fitch Ratings. Given that the American credit agency is one of the top three, this move directly threatens the country with even higher, unsustainable debt, leading to greater domestic financial strain.
US, Western Ties Yield Limited Gains
As one of the countries that normalised relations with Israel through the Abraham Accords, Bahrain enjoys a strong bilateral relationship with Washington. This includes a Free Trade Agreement (FTA) and a Comprehensive Security Integration and Prosperity Agreement (C-SIPA). In terms of security cooperation, Bahrain stands as the only Arab nation to participate in American naval operations aimed at deterring Houthi attacks. However, the Kingdom has clearly failed to reap the economic benefits of this seemingly grand partnership.
The second Trump term is not expected to bring substantial changes. Rather, his threats of tariffs on various countries, along with his aggressive targeting of China, could further expose the futility of these ties. Despite Bahrain’s top trading partners all being Western-aligned, they are not immune to a US-led trade war. Increasing Gulf-China ties are sure to hit the Kingdom and further undermine its economy.
Financial Call for Help
To offset bankruptcy, Manama is in urgent need of financial assistance from the Western nations and initiatives that have historically propped it up. IMEC-aligned countries in the Gulf are also attractive partners, and neighbourhood integration efforts have ramped up; last month Bahrain’s cabinet approved linking the proposed GCC railway with an internal Bahraini system.
The Kingdom’s precarious situation is further compounded by regional instability that threatens its ever-weak regime. To weather the impending domestic instability, both US protection and financial support from the GCC is needed.