In 2016, Bahrain's economy proved resilient faced with the sluggish oil market, thanks to an expansionary and counter-cyclical fiscal policy. Aid amounting to USD 5.7 billion granted through the GCC development assistance fund has enabled the Kingdom to maintain substantial investment in the construction of a pipeline project with Saudi Arabia and in the extension of Manama airport. However, activity is expected to slow in 2017. Weak household and investor confidence is likely to limit the expansion of the private sector, even if some sectors will continue to demonstrate dynamism. After being hit by declining mineral prices, the aluminum sector is expected to benefit from major investment after Alba (Bahrain Aluminum) secured a USD 1.5 billion syndicated international bank loan. The construction sector will also benefit from the positive impact of investment. Finally, the financial sector could suffer from weak Saudi economic performance. Inflation will remain steady in 2017, after rising strongly in 2016 as a result of the removal of energy subsidies.

As oil revenues account for over 80% of government income, oil market downturn impacts strongly on Bahrain's public accounts, which have been in deficit since 2009. In 2016, the public deficit remained high despite the fiscal effort agreed by the authorities. Increased oil production in Q1 2016 together with curbs on current spending only slightly mitigated the effect of the contraction in income in 2016. In 2017, the authorities are expected to continue their austerity policy by increasing taxes and administration fees. Likewise, continuing the business reforms of the past two years, remaining subsidies will gradually be reduced. That being sol, political instability in the kingdom will limit the options for more structural fiscal adjustment similar to that observed in the other GCC countries. Civil service salaries, which account for a large part of public spending, are not likely to be cut. Investment in housing for disadvantaged households will be maintained, but will continue to be partly financed by GCC aid. Bahrain is expected to continue borrowing to finance its substantial public deficit. The public debt will grow considerably, but remains chiefly domestic and composed of long-term bonds. However, the share of external finance is increasing in a context of rising debt costs following the downgrade of the sovereign debt rating to speculative by the various rating agencies.

The current account deficit widened in 2016, but it is expected to narrow slightly in 2017 following the expected rise in oil prices. Higher exports will help improve the trade balance. Profit repatriation by foreign companies as well as lower remittances by foreign workers will, however, fuel the deficit in the balance of services and income. The widening current account deficit in 2016 led to a decline in international reserves, which were equivalent to 1.3 months of imports. Nevertheless, bond issuance of USD 2 billion in October 2016 should ease the pressure on the foreign exchange reserves. The expected rise in the US interest rate is, moreover, likely to increase speculative pressure against the peg to the dollar at a time when the kingdom has the lowest reserves among oil exporters.

The government continues to respond to protests by arresting Shiite militants and stripping them of Bahraini nationality. The tensions between the majority Shiite population and the Sunni ruling elite were further heightened in 2016 following the dissolution of Al wefaq, the main Shiite opposition movement, and confiscation of its assets.  Weak public resources and the squeeze on subsidies raise fears of a social protest movement coming on top of the political protests. This situation is adversely affecting the business climate, which up to this point had been reasonably favorable, thanks to efforts to improve local skill levels, stimulate the private sector and attract more foreign investment.