BAHRAINI ECONOMIC OUTLOOK DECLINING, AND HIGHLY

C O N F I D E N T I A L MANAMA 000054

SIPDIS

DEPARTMENT FOR EEB, NEA/RA, AND NEA/ARP
BAGHDAD FOR AMBASSADOR ERELI

E.O. 12958: DECL: 01/29/2019
TAGS: ECON EFIN BA
SUBJECT: BAHRAINI ECONOMIC OUTLOOK DECLINING, AND HIGHLY
SENSITIVE TO OIL PRICE FLUCTUATIONS

REF: A. MANAMA 2

B. MANAMA 53

Classified By: CDA Christopher Henzel for reasons 1.4 (b) and (d)


1. (C) Summary: Bahrain's financial services sector has begun
to feel the effects of the global economic crisis, leaving
the economy vulnerable to disruption by oil price
fluctuations. Decreasing liquidity and slumping real estate
prices have delayed major development projects, and Moody's
downgraded its sovereign outlook for Bahrain from A-stable to
A-negative. End summary.


2. (C) On January 9, Moody's Investors Services downgraded
its sovereign outlook for Bahrain from A-stable to
A-negative, largely as a result of the decline in oil prices
that have accompanied the financial crisis. Although oil
makes up less than 25 percent of Bahrain's GDP, it accounts
for nearly 75 percent of government revenues. Moody's
commented that unlike other Gulf states, Bahrain simply
doesn't have the foreign reserves to soften the blow of the
oil price decline (ref A). Central Bank of Bahrain (CBB)
Director of Banking Operations, Sheikh Salman bin Isa Al
Khalifa, told econoff that the CBB does not anticipate any
immediate problems as a result of the change in Moody's
outlook forecast, noting that the actual rating remained an
"A." Both Fitch and Standard & Poor's have left their
sovereign forecasts as "stable" for the time being.


3. (C) Falling real estate values and decreasing liquidity in
the financial sector (ref B) have begun to pass through to
other sectors of the economy, further dampening the economic
forecast. The $2.4 billion Diar Al Muharraq real estate
project has recently been suspended due to insufficient
financing. An additional $545 million real estate joint
venture between Nass Corp. and S.A. Murray & Roberts was
frozen in January -- company officials blamed the move on
tightening credit markets. On January 18, the GOB moved to
protect Bahraini jobs from the economic contraction when the
King told media that Bahraini citizens should not be fired as
companies downsize due to the financial crisis.


4. (C) Comment: Although Bahrain has one of the most
diversified economies in the region, its largest sector --
financial services *- is entering a period of decline and
does not provide an effective hedge against oil price
decreases. If another major sector -- such as travel and
tourism -- declines as well, Bahrain's economy will be
completely at the mercy of world oil market fluctuations.
Bahraini citizens will be partly shielded from some of this
trauma as expatriates are absorbing most (but not all) of the
job cuts for now.

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Visit Embassy Manama's Classified Website:
http://www.state.sgov.gov/p/nea/manama/
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HENZEL