Credit growth at Bahrain’s banks will accelerate for the rest of 2018, boosting asset growth, however tightening fiscal policy could curb economic activity and limit asset growth from next year, according to a report.
Credit growth is forecast to reach 7 per cent in 2018, up from 2.5 per cent in 2017, said the report by BMI Research on Friday. “From 2019 onward, however, we expect tighter fiscal policy to weigh on economic growth and soften credit demand, while also capping government bond issuance,” BMI said.
This will limit overall asset growth to average around 3.1 per cent annually in the next five years, compared to a rate of 5.7 per cent over the past decade.
Throughout the second half of 2018, robust economic activity in Bahrain – GDP growth is set to average 3.8 per cent due to regional oil gains – will fuel demand for business loans and mortgages. Lending to the construction sector in particular will continue, while an increase in Bahrain’s housing stock will support mortgage demand.
Loan growth in Bahrain grew to 8.1 per cent year-on-year between January and May compared to a 0.6 per cent contraction during the same period in 2017, according to BMI.
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Then, from the first quarter of 2019, overall asset growth will start to decelerate as the government attempts more ambitious fiscal consolidation. Tighter fiscal policy will have a “two-pronged effect” on banks’ balance sheets, BMI said, weighing on credit demand and slowing banks’ bond uptake.
“Banks’ uptake of government securities will taper off as the government works to gradually narrow its fiscal deficit,” the report said. The trend has already started to play out in 2018, with banks’ bond holdings growing by an average 7.2 per cent year-on-year between January and May, compared to 16.1 per cent in the same period last year.
BMI forecasts the fiscal deficit to stand at $2.6 billion in 2019, compared to $3.5bn in 2017.
The upcoming bailout package from the UAE and Saudi Arabia will help ensure stability of the Bahraini banking system, the report added.
