By Sarah Townsend
Move will add to liquidity pressures on most indebted state in GCC, says BMI Research
Bahrain is the GCC country economically most at risk from the US Federal Reserve’s decision to hike interest rates last week, new research claims.
The Fed’s 25 basis points hike in interest rates will add to liquidity pressures already experienced by the Bahraini economy, while doing little to mitigate inflationary pressures as these mostly reflect subsidy cuts, according to a report by BMI Research.
Meanwhile, further hikes over the coming years will drive interest payments up, with Bahrain already the most indebted state in the GCC, the report said.
Immediately after the Fed's decision on December 14, the Central Bank of Bahrain (CBB) raised its policy rate from 0.50 percent to 0.75 percent. All GCC states apart from Oman also took steps to raise interest rates in line with the US.
In its report, BMI predicted that – given the Bahraini dinar’s peg to the US dollar and the weak fiscal position of the Bahraini government, making it unable to defend the peg – the CBB would continue to closely follow the US Fed's moves over the coming years.
This will further increase borrowing costs for households and corporates, “weighing on confidence in the economy”.
The report added: “In addition, Bahrain has the highest debt level (as a share of GDP) among the GCC, with government debt standing at 69.1 percent of GDP in 2016 according to our estimates.
“Therefore, the rate hike will drive interest payments up.”
Why does Bahrain not issue its own currency outside of the privately owned Bahrain Central Bank? Does the Bahrain Central Bank lend money to Bahrain at an interest rate? What supports the Bahrain Dinar, gold?