By Ed Attwood
The man charged with making Bahrain’s economy tick tells us why the Gulf is a more attractive investment than China or India.
For Sheikh Mohammed Bin Essa Al Khalifa, the man in charge of boosting Bahrain’s healthy economy, comparisons between the island state and the nearby glitzy emirate of Dubai are not entirely apt. The two entities may have started from a similar position - a comparative lack of natural resources, but a big ambition to cut it on the global stage - but the CEO of Bahrain’s Economic Development seems pleased with the more measured approach his country has taken.
“What Sheikh Mohammed Bin Rashid did in Dubai, the whole world admires - he made Dubai essentially an international city,” Sheikh Mohammed points out. “But we want Bahrain to be Bahrain. We congratulate them, and encourage them, and we want to be part of that success. Their success is our success and our success is their success. We do have a GCC view, but what we have to do is serve the people of Bahrain.”
As Bahrain moves out of the recession, the signs look encouraging. The International Monetary Fund (IMF) lauded the country’s regulatory regime for its key financial sector, and the overall sovereign debt outlook is stable. In many respects, Bahrain has been forced to blaze a trail for its neighboring Gulf economies through necessity. Diversification was a phrase adopted in Bahraini boardrooms long before it became a vital element elsewhere. It’s all part of a key question, the answer to which concerns nothing less than the survival of the Gulf nations as economic entities. Can these nations thrive in an inhospitable environment without oil and gas?
“A few years ago, I used to tell people what we were doing, and explain our attempts to diversify away from the post-oil economy,” Sheikh Mohammed says. “Their answer - invariably - was that this has all been said before and how do you know it will work this time. My answer was - I will tell you when the downturn comes, because words are easy when times are good.”
The downturn has now come, and Sheikh Mohammed says that the country’s policies have been vindicated. In one sense it does bear strong comparison to Dubai; its determination to attract international investor interest in the country. Visitors passing through the international airport are rewarded with a sizeable stamp in their passport welcoming them to ‘business-friendly Bahrain’ and that message is repeated on posters and electronic displays all over the arrivals area.
The worst-hit sectors have undoubtedly been finance and real estate, as elsewhere in the Gulf. But Sheikh Mohammed believes that the other sectors have performed sufficiently well to take the carry the full weight of the national economy. A recent policy note issued by the EDB revealed a slight tweak in the agency’s plans for Bahrain’s 2030 Vision, and while finance is clearly earmarked to play a less prominent role, it is still regarded as vital.
“Financial services is, and remains, an important growth sector for us,” the EDB CEO muses. “Some of the sub-sectors and niches - like insurance, for example - actually grew in 2009.”
Sheikh Mohammed also says that the liquidity of Bahraini banks is also strong by comparison with those of its regional neighbours.
“Just today, I had the CEO of one of the top three retail banks in bank and the regional and Bahraini partner of the top three accounting firms,” he says. “The banker was saying he is bordering on excess liquidity and is looking for more opportunity to give loans. The auditor was actually confirming this and saying that banks are starting to give out more loans. So it’s starting to happen, but banking is going through a global shake-up.”
One of the keys to the regeneration of the financial sector will be consolidation, however. Like Central Bank of Bahrain executive director Khalid Hamad, who told Arabian Business that more mergers are required, Sheikh Mohammed is a clear advocate of industry evolution.
“Any institution should aim to be a regional player, never in just your own neck of the woods,” he says. “I am one of these people who would favour consolidation. Let people grow and compete globally, absolutely.”
Elsewhere, Sheikh Mohammed says that quantity of manufacturing exports has doubled over the last five years. Another sector he is keen to highlight is tourism, where Bahrain sees four million visitors a year from Saudi Arabia venturing into its shopping malls. One major Middle East retailer recently said that as much of 60 percent of Bahraini luxury shopping sales were to visitors from its well-heeled neighbor. Small wonder that retail magnates such as the UAE-based LuLu chain are spending hundreds of millions of dollars increasing their services in the country.
“I’m picking these three, but sectors change over time. We have our Vision 2030 and people have always asked me why I haven’t specified the sectors that we wanted to concentrate on,” the CEO says. “To me, the sectors are the means. The whole goal of the vision is to improve the quality of life of the people. A sector may grow for five years, and then another sector may take up the slack. So sectors evolve over time, and you would hope the economy would grow with it.”
But Sheikh Mohammed is keen not to portray Bahrain as a single small economy, instead choosing to highlight its role as a cog in the wider GCC. He believes that the best way to attract international investment is by having all six nations pulling together, rather than apart.
“What I tell people is that this is not a Bahrain versus Qatar or a Bahrain versus Dubai story,” he says. “Everyone always talks about China and India, but I want people to be talking about China, India and the Gulf. That’s where we should be aiming to compete.”
It may sound ambitious, but it’s hard to argue with Sheikh Mohammed’s point. Right now, the Gulf nations collectively are approaching GDP of $1 trillion, which is slightly smaller than India. The IMF says that figure is expected to double in the next decade, and that’s from a six-country economic entity with just 40m people. Compare that with the 1.2bn population of India, and the attractions of the Gulf start to look ever more enticing. As a long-term bet, India might have more potential, but Sheikh Mohammed believes that the Gulf should be aiming to compete alongside China and India in its ability to attract outside investment.
“For companies like GE - and I’ve confirmed this in the past three or four years - in dollar terms, in revenue terms and in profit terms, the Gulf is bigger for GE than China,” he smiles. “They employ less people, make more money and have more revenue. It’s the same thing for Cisco.”
But it’s not just the size of the GCC economy that Sheikh Mohammed is plugging. He is keen to stress the other benefits of doing business in his country – what he refers to has ‘the Bahrain value proposition’. That includes a low cost of doing business, a trained workforce and access to the markets. His view has been echoed by no less august a body than the Heritage Foundation, which this year ranked Bahrain tenth on its Index of Economic Freedom. To put that into perspective, the Gulf country outperformed the UK and Japan, and was streets ahead of the second-highest MENA country, Qatar, which came 27th. Even the UAE only just managed to scrape into the top 50.
It’s hard to target exactly what has produced this success, but there is a statistic of which Sheikh Mohammed is justifiably proud. Today, more Bahrainis work in the private than the public sector, a record that is the envy of its neighbours.
“The government is a civil service, and in a country the size of Bahrain it can only grow so far,” he remarks. “So you cannot literally provide jobs for your people, and this all stems from our labour and education reforms.”
But Bahrain is not planning to rest on its laurels. Sheikh Mohammed reflects widespread thinking when he says that capital markets in the country are “not as they should be”. Changes are afoot, however, with the Central Bank of Bahrain (CBB) removing itself from its role as administrator of the Bahrain bourse. The CBB’s relationship with the index will now be purely as its regulator, as is the case in other international markets. Whether that will boost what has been a lacklustre bourse performance in the last couple of years remains to be seen, but Sheikh Mohammed is keen to see the Bahraini people take a larger stake in the country’s biggest firms.
That desire was reflected in the successful listing of Aluminium Bahrain (Alba) last year, in which local citizens were offered a 10 percent discount on prospective shares. Does he see other companies listing in the near future?
“Well, we don’t have that many other companies left, because all the major companies are public companies anyway,” he says. “Alba was one of the few exceptions, the other being Gulf Air, but that’s another story. We’re pleased with the way it [the IPO] has gone, and it will hopefully give people that access in the future.”
Turning to Gulf Air, and one of the country’s biggest assets has caused more headaches than smiles over the last few years. The carrier has suffered legacy issues from its previous ownership by four different countries, and only now does it look as if those issues are starting to be ironed out. The EDB CEO admits that “politics, ego and pride” had undermined the operator, but under the stewardship of CEO Samer Majali, Gulf Air’s fortunes look more favourable, albeit backed by another $1bn of investment from the government.
“It will serve Bahrain, yes, but in a more sustainable manner. So Gulf Air will not compete with Emirates, Etihad and Qatar Airways, with huge flights linking continents,” Sheikh Mohammed says.
“The plan is several months old, but they have already reduced losses by a third, and reduced employment by over 20 percent. Loads are higher, and the fleet renewal plan is working. There are still some legacy costs, and we have to give it a bit more time for the plan to completely work, but again, I’m optimistic.”
For 2011, Sheikh Mohammed expects that there will be more bond issuances, and the EDB CEO sees tapping the markets as an important part of being connected to the global financial system.
“Technically, you don’t have to issue international bonds to meet your needs, but it’s a reflection of your sophistication, where you stand, and how you are rated,” he smiles. “I think we were one the first countries to be officially rated as well in the early part of the century. Bahrain is historically conservative by nature, and we will maintain that, but we will also continue to use international markets when necessary.”
If in 2011 Bahrain receives the kind of international investor interest its 2010 bond garnered, then it will again be considered a good year. Longer term, the goal is clear; steady and consolidated growth based on sound fundamentals.
“I tell people I’d like to grow at 5-6 percent for 20 years, then 10-12 percent for three,” Sheikh Mohammed says. “It will be a wonderful three or four years. This has been and remains our overall policy.”