Bahrain’s economy continued its forward momentum in 2004 and is on course for another year of stupendous growth on the back of high oil price coupled with the economic developments. The growth in Bahrain is being driven by public spending. Robust government spending, prompted by exceptionally strong oil revenue, will stimulate private consumption and will help to bolster business confidence. The continued government support to the economic reforms has resulted in the improvement in various sectors of the economy. However, the high oil prices in 2005 has played a much bigger role in pushing the economy to a high growth trajectory.
Bahrain’s economy is supported by prudent fiscal discipline characterized by restraint on current expenditure and improved budget balances along with an effective system of resource allocation for health, education and infrastructure projects. However, still we find the economy to be mainly hinged at oil price and production level which makes it susceptible to external shocks. It is worth mentioning that Bahrain is comparatively less dependent on oil compared to other GCC countries. So, in other words, Bahrain will be the least vulnerable economy in the GCC if the oil prices start dropping in near future.
Bahraini economy grew at a healthy pace with the nominal Gross Domestic Product (GDP) estimated to have grown by 13.6% in 2004 to reach BD4.14bn (US$10.99bn) while real GDP grew by 5.4% to BD3.24bn (US$8.59bn). The oil sector GDP is estimated to have grown by 7.07% in nominal terms. This performance should be lauded keeping in mind the small size of the economy and the production capacity compared to the other GCC countries. The government focus to reduce reliance on oil is showing its results as the private sector GDP is estimated to have grown by 15.65% in nominal terms in the year 2004. The financial, insurance and hotel sector are poised to grow at a rapid pace as it witnesses increased private as well as foreign participation in the respective sectors.
The government of Bahrain announced the establishment of two new companies to manage its shareholding in commercial enterprises. The main objective of this move is to offer the government’s shares in these enterprises to Middle Eastern investors. In addition to this, earlier in mid 2005 the government announced to liberalize the telecommunication sector. Bahrain's government wants to sell all the 80% shares it holds in Batelco as well as the 77% stake in Alba, the largest aluminum manufacturing plant in the Middle East. Liberalization of few sectors mentioned will allow Bahrain to attract more foreign investors in 2006 as Bahrain is also known for having the least limitations on FDI as compared to other GCC countries.
Bahrain has been encouraging both the private and the foreign players to invest and become party to the country’s growth. Whether it is the financial sectors, Telecom Sectors or the real estate, we are witnessing strong private/foreign participation in Bahrain over the last two years. The strong growth in demand and increased profitability has spurred the corporate to invest in new ventures or expand their existing facilities. We have seen a genuine interest from international firms to set up base in Bahrain especially in the financial service sector.
In line with foreign investment, Bahrain is the only country in the GCC that allows 100% foreign ownership. In addition, Bahrain is also ranked number one in foreign direct investment (FDI) among the Middle Eastern countries. However, Bahrain apart from the foreign ownership is lagging behind the other GCC countries especially the oil and gas revenues which has been bringing positive economic conditions in the GCC.
Bahrain Monetary Agency, BMA has been replaced by a Central bank which will entirely focus on banking and investment companies. This step by the BMA has certainly eased the increasing pressure of licensing new companies in the Kingdom. The new central bank will also focus on listing approvals for companies on the Bahrain Stock Exchange (BSE) and controlling the procedures and listing requirement regulations. We believe that this is also one of the critical development as BMA will now focus entirely on the transformation of Bahrain into a financial hub of the Middle East in the near future with several large scale projects in pipeline.
Bahrain has for long remained at the forefront of regional banking and recently it has also played a critical role in the development of Islamic financial markets in the region. The construction of Bahrain Financial Harbour (BFH) has been among the major developments in the financial sector which will transform Bahrain into the region's premier financial hub, and thus creating a pool of intellectual expertise and fuelling expansion of the financial sector. The completion of the Dual towers of the BFH, the Kingdom's tallest building in the heart of Manama is further harmonizing the growth and development of the financial and banking sector in the region. BFH is set to have a significant impact across the widest spectrum of the regional and global financial communities. It will also reinforce Bahrain's supreme position as the international financial centre of the Middle East by offering various commercial opportunities.
The Bahraini stock market continued to grow at a healthy pace as the Global Bahraini Index ended the year 2005 at 172.44 points and recorded a growth of 23.70% in 2005. This is attributed to the remarkable corporate performance, high liquidity due to high oil prices, positive business and consumer sentiments and increased stability in the region. The stock market is likely to remain firm in the short to medium term helped by the intention of the government to diversify its economy, strong corporate earnings and strong business & consumer confidence. Apart from liquidity, there have been fundamental and structural changes in the economies and stock markets that will continue to drive the markets further. The primary market is abuzz with new issues slated to come in 2006 and this will complement the secondary markets in terms of the increased market depth and rise in the trading volumes.
Looking forward, the government’s main challenge includes pushing ahead with diversification into more labor intensive activities, and further easing the dependence on oil. Facing this challenge will require increasing tax revenue and implementing an efficient fiscal collection mechanism. On the external accounts side, Bahrain will have to widen its export base and improve its price competitiveness. The current Free Trade Agreement (FTA) with US will allow Bahrain to foster the trade balance accounts in the near future. Going forward, several challenges remain to be faced but the Kingdom seems to be in a good position to overcome them, provided that economic and political reforms remain on course. Hence, we believe that the Bahrain’s economy will continue to show healthy performance in 2005 and 2006, provided that the government pushes ahead with its various economic and social reforms. At the same time, higher oil prices would certainly help the economy and business sentiments in the medium term.
