By Ed Attwood
Bahrain’s politics may have stolen all the headlines, but the Gulf island state’s economy has proved relatively resilient
These days, mid-week Manama is quiet, the traffic is as strong as ever and local officials are keen to proclaim an air of quiet confidence about the prospects of the Bahraini economy. And if the headline news has tended to focus on domestic unrest, there are some indicators that the island's economy is getting back on its feet.
But it is something of a slow process. The country’s economy has had to cope with a comparative paucity of natural resource receipts in comparison to the rest of the GCC, has had a thriving financial sector hit via exposure to the global economic crisis, and is trying to recover amidst a fragile political outlook.
With all that to bear in mind, it’s somewhat surprising that the economy is performing as well as it is currently. In the second quarter, GDP grew by 4.3 percent, after growing by 5.9 percent in the first quarter. However, those sets of figures are tempered slightly by the fact that the same quarters a year ago were subject to a slump due to pro-democracy protests. Quarter-on-quarter, however, GDP growth declined for the first time since the beginning of 2011, by 1.3 percent.
For Kamal Bin Ahmed, the acting chief executive of the country’s Economic Development Board, the second-quarter figures appear to be of little concern.
“Our budget is expanding, and it will expand further, especially with the money that we are getting from the GCC countries,” he points out. “It will be used to build more infrastructure, more housing units — all of these will be used to expand the economy and create a bit more of a buzz.
“This year we are expecting GDP growth of between four-five percent — maybe there was a dip in the second quarter, but we know that it will be between four-five percent by the end of the year.”
The Economic Development Board (EDB) has itself gone through a period of change since last year’s protests. Both it and Mumtalakat, the country’s sovereign wealth fund, have seen their chief executives move away from the public sector in recent months.
Sheikh Mohammed Bin Isa Al Khalifa, the affable former CEO of the EDB, has left to chair Tamkeen, an agency that helps locals find jobs and fosters private enterprise. In his place is Ahmed, who shares what is viewed as one of Bahrain’s top jobs with his brief as transport minister. Given the EDB’s role — which is both to oversee the country’s economic development and marshal foreign direct investment (FDI) into Bahrain — there’s an argument to be made that Ahmed’s ministerial brief might mean that he has too much on his plate.
So far, however, his stewardship of the agency appears to be going according to plan. In terms of FDI, Ahmed says this figure topped $300m during 2011, which, taken as a percentage of GDP, puts it amongst the region’s best performers. Given that the World Bank estimated Bahrain’s GDP at $22.95bn during 2011, FDI equates to around 1.3 percent of GDP, a marked increase against the 0.7 percent recorded during 2010.
One of the benefactors has been the financial industry, which makes up a quarter of Bahrain’s economy. Foreign investment into the sector rose by three percent in 2011, year-on-year, as the Gulf state’s well-established and strongly regulated banking industry recovers from the global financial fallout.
Financiers in the country frequently refer to the fact that even during the height of the 2011 protests, the banking system didn’t miss a payment. But Khalid Hamad, executive director of banking supervision at the Central Bank of Bahrain (CBB) does admit that the country’s 412 financial institutions were “really challenged” by domestic problems. Still, however, high capital adequacy ratios — which are mandated by the CBB at twelve percent, well above Basel Committee recommendations of eight percent — have helped the majority of Bahraini banks to turn healthy profits in the third quarter.
In the year to July, balance sheets at retail banks grew by 4.5 percent, while deposits at retail banks rose by 8.2 percent. Growth in loans in the same segment rose by 6.2 percent. Between the third quarter of this year and the same period last year, the retail banking sector’s total outstanding loans to residents rose by 10.3 percent.
“The growth is coming mostly from the retail sector,” says Hamad. “Lending to individuals — in terms of personal loans, car loans, mortgages and so on — is growing at a good rate. For the corporates, there is growth, but the growth is not as before.”
It’s clear that the wholesale banks aren’t performing as well as the retail sector, a fact that was highlighted by the International Monetary Fund (IMF) during its visit to the country in March this year. But Hamad is hoping that the government’s expanded budget will eventually result in increased interest from the corporates.
“If you walk around here, you will see a lot of government spending, a lot of projects started,” the CBB official says. “And when you see a lot of government spending, there is a need by the private sector to get some lines from the banks to be able to service these projects. They need financing because the government will not just give them money. So hopefully by the end of this year and early next year we will see more growth in corporate credit.”
Back in September last year, the government boosted the budget by almost nineteen percent in a bid to kick-start the economy, and other GCC states also promised to provide $10bn in aid over a ten-year period. Much of that cash — when it arrives — will be spent on infrastructure and affordable housing. Whether the budget will stay high as Bahrain’s breakeven price (the oil price required to balance the budget) continues to rise is still to be seen. But there have been some encouraging signs that international investors still see sovereign and sovereign-linked bonds as a good bet.
Last year, Bahrain issued a $1.5bn sovereign bond, plus a $750m sukuk in November. The latter was 100 percent oversubscribed and the EDB acting CEO says that this is a statement of faith in the local economy.
“This proves that the economy is stable and that macro indicators are solid,” Ahmed says. “When Bahrain entered the crisis, we didn’t have big debts compared to other countries — at around fifteen percent. It has now increased to 30 percent, but it’s still a good number compared to other countries worldwide.”
The success of the sovereign issuances means that more Bahraini companies may be tempted to tap the markets. Ahmed thinks that the market is “available for them to respond”, although he does state that “only big companies can do it, and it’s not established for small and medium firms in the region.”
One of the firms that may well be tempted is Batelco, the former incumbent telecoms operator. Despite its relatively strong balance sheet, the government-linked firm is currently looking at overseas acquisitions as it attempts to diversify its revenue stream away from a competitive operating environment at home.
“Today, the market is very conducive for either sukuk or conventional bonds,” says Sheikh Mohammed Bin Isa Al Khalifa, the group CEO of Batelco. “So yes, we will come to the market when we need to raise debt financing; we feel we have significant potential to leverage over a billion dollars without hurting the rating of Batelco or the strength of our balance sheet.”
But, despite the liquidity in the banking system and the investor interest from abroad, there are still some kinks to be ironed out. The bankruptcy of Arcapita, an investment bank, has come amid a period of restructuring that has seen many lenders — both retail and wholesale — restructure their operations.
Six retail Islamic banks and eighteen conventional banks are all vying for business in a country with a population of only 1.2 million. As a result, the market is currently going through a phase of reconsolidation; three Islamic investment banks — Capivest, Elaf Bank and Capital Management House — are likely to receive final approval of their merger from the CBB within the next few weeks. The CBB’s Hamad says that more are likely next year.
“Some banks are still looking at how to go forward, talking to some other partners, like other banks, and at the same time looking at any possibility of increasing capital,” he says. “Others are restructuring debt. There are a lot of talks — not only investment but also retail banks. I’m 100 percent sure that if things work out with these individuals and organisations when they talk, we’ll definitely see more mergers next year.”
While the banking sector, at least on the retail side, looks solid, tourism looks a little weaker. Domestic disturbance last year, which resulted in the cancellation of the Grand Prix, hit hoteliers hard. But Ahmed says that the sector is rebounding, helped in no small part by the presence of its nearest neighbour. So far this year, more than five million Saudis have driven over the King Fahd Causeway into Bahrain, which has helped boost receipts considerably.
“This is a big, big amount,” Ahmed says. “And we are trying to create the right venue to encourage people to stay longer than two hours, or one day. I think it’s working — more hotels are being built, and in attractive locations.”
Elsewhere, as the government pushes to attract larger numbers of international firms to set up base in Bahrain, there are signs that the malaise in the office sector is softening. According to Cluttons Bahrain’s third-quarter report, “the market seems to have stabilised and the number of leases being signed has increased towards the end of the quarter”. But with supply still coming online in the Diplomatic Area, and long-term leases coming to an end in Bahrain Financial Harbour, many businesses are taking the opportunity to set up shop in cheaper areas.
In many respects — and from the economic perspective — the challenges that Bahrain faces are not unique to the country; competition in the banking sector and a soft real estate market are hallmarks in most of the other Gulf countries right now, for example.
But perhaps its biggest asset lies in its well-educated and well-skilled workforce. Bahrain does have one outstanding card in its favour in comparison to the rest of the GCC; more locals are employed in the private sector than the public sector. In Saudi Arabia, around 90 percent of locals work in the public sector, a challenge that the government is finding it tough to solve. For Ahmed, the key is to continue to bring in high-value-added industries.
“The most important thing is to build human resources and infrastructure, to make sure that you have a trusted regulatory and legal environment,” he says.
“If all of these are in place, then it’s easy to attract to the right companies and to build the private sector. Not just in terms of foreign investment, but also to empower Bahraini businessmen.”