Bahraini GDP growth will average 3.8% a year in 2011-15. Regional economic recovery and higher average oil prices in 2010 pushed growth up to 4.5% after a slowdown to 3.1% in 2009. Bahrain's financial sector, the cornerstone of the country's diversification strategy, will suffer as a result of the recent unrest, which will take a toll on Bahrain's long-cultivated "business-friendly" image. Services credits are expected to dip this year, harming the country's growth prospects. However, we expect hydrocarbons to continue to be a major contributor to growth, and efforts to move its hydrocarbons exports up the value chain (through higher-value-added refining for example) will secure the importance of oil despite the country's low reserves. Private consumption may be boosted in 2011 by the government's one-off payment to Bahraini families, but the increasing political instability will be very damaging to the country's tourism industry, particularly tourism associated with events such as the Formula One Grand Prix. The government will increase spending on subsidies and housebuilding in 2011, but we expect private financing to supplement public investment later in the forecast period.

Export growth will be driven mainly by goods, as services income will suffer as a result of the unrest. An additional aluminium production line in 2011 could raise capacity at the Alba smelter to 1.5m tonnes/year; there is a risk, however, that demand may not be strong enough to support the higher capacity, particularly since the Gulf Aluminium Rolling Mill Company (Garmco) has announced that it will diversify its sources away from Alba after 2012. Moreover, the regional aluminium market is becoming more competitive, with new smelters in Saudi Arabia and the UAE. Logistics services operated through a major port and a regional airline, Gulf Air, will also contribute to the export of services. Bahrain is particularly well-placed to take advantage of a growing Iraqi market, which it can service via Gulf Air or its port facilities. Import growth will remain strong, given Bahrain's limited domestic production base and high level of capital investment. As ever, risks stem from prices for Bahrain's main exports, oil and aluminium.

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