Walk through customs in Manama, Bahrain, and your passport will say you’ve entered a Kingdom. While it may lack the splendor of traditional spires and knights on horses, Bahrain - the Gulf’s smallest country, by land mass - has accomplished a royal task.
It’s not just staying afloat but managing to grow in the dismal economic climate that’s consumed the GCC for much of the past three years.
Once the financial king of the Gulf (particularly in the 1980s, when foreign banks used the country as GCC headquarters) the tiny island was usurped by much flashier, credit-rich Dubai. But it has quietly maintained one of the most liberal, increasingly-diverse economies in the Middle East and could one day reclaim its position.
In 2010, the country expanded into new and unlikely markets (even a smaller Manama-based food chain grew its assets throughout the Indian subcontinent), opened new ocean-front residential properties, and saw talk of a Bahrain-Qatar causeway - put on hold after budget issues - resume, with talk of a 2015 completion date, after neighbouring Qatar won the rights to host the 2022 World Cup in December.
In January, the Wall Street Journal and Heritage Foundation also designated Bahrain’s economy the world’s tenth “freest” economy in the world, topping all other countries in the Middle East and North Africa. It was up slightly from the previous year, bolstered by investment and labour freedom.
“Commitment to structural reforms and openness to global commerce have enabled Bahrain to become a financial hub and the regional leader in economic freedom,” the institute said.
“As one of the region’s least oil-dependent economies, it benefits from a competitive tax regime and a sophisticated financial sector that facilitates the free flow of capital and foreign investment. The government has modernised its regulatory framework and continues to focus on diversifying the productive base.”
A blueprint called Economic Vision 2030, overseen by the Bahrain Economic Development Board (EDB), paves the way for growth. It aims to double Bahraini household income by that year and sustain the diversified growth of the last half decade.
“Bahrain has prospered over the past decades and GDP has grown more than 6 percent per annum in the past five years,” it said in its introduction.
“We need to embrace competition, make Bahrain fitter to compete regionally and globally and increase our own productivity. Bahrain must shift from an economy built on oil to a more diverse economy that raises a broad middle class of Bahrainis who can earn more and enjoy better living standards,” it continues.
“The country’s future economic prosperity relies on our ability to respond to the challenges and opportunities presented by the world around us. Vision 2030 identifies three key challenges and opportunities and describes how Bahrain will respond to each.”
The three main challenges facing those trying to further grow the momentum surrounding Bahrain’s economy are: development of the quantity and quality of jobs available and improving the skills of local job seekers; innovating and expanding into new sectors so as to compete in the rapidly expanding global marketplace; and targeting as-yet-unexploited opportunities in the GCC as it continues to rebound from several years of economic freefall.
Job creation is particularly important - in 2009, the unemployment rate stood at 15 percent, the 28th highest in the world.
“Unemployment, especially among the young, is a long-term economic problem Bahrain struggles to address. In 2009, to help reduce unemployment among Bahraini nationals, Bahrain reduced sponsorship for expatriate workers, increasing the costs of employing foreign labor,” the EDB said.
The EDB - which oversees the plan - said it is currently two years into implementation. “Sustainable economic expansion is an important part of Economic Vision 2030, the blueprint for the development of Bahrain’s economy, government and wider society over the coming decades,” they said.
It is being led under the guidance of His Royal Highness Prince Salman Bin Hamad Al Khalifa, the Crown Prince of Bahrain and Chairman of the EDB. The report also highlights that Bahrain remains on track to achieve the key aim of Economic Vision 2030, of doubling Bahraini real household income by 2030.
That’s a significant achievement when other countries in the Middle East are struggling to get back on target following the credit crunch that rocked Dubai and sent ripple effects throughout the Gulf region.
Bahrain’s push to diversify its economy - though oil remains an integral part of any GCC country’s GDP - has resulted in an overall GDP growth of 4.3 percent in 2010, handily beating its 4 percent growth expectation for the year. It was largely off the bat of sectors not in oil - namely tourism, manufacturing and financial services.
The Bahrain Economic Quarterly said hotel and restaurant business swelled 15 percent, manufacturing by 8 and financial services by 6. These figures stood as proof of the tourism industry’s continued diversification, catering now not just to business travelers (whose numbers also expand as the country brings in new companies), but to tourists looking for the beach and to wealthier families from elsewhere in the Gulf who opt to purchase additional getaway properties in the country.
More and more people are also moving to Manama, the capital, which currently stands at population of about 130,000. A release from the EDB said that both Standard & Poor’s and IMF had confirmed the growth, with the IMF predicting a 5 percent expansion in GDP for 2011.
“The near-term outlook is favourable. Buoyed by the rebound in oil prices, the continuing recovery in the global economy and fiscal stimulus,” the IMF said, “growth is expected to accelerate from the 3 percent recorded in 2009 to 4 percent in 2010 and further to 5 percent in 2011.”
It even beats analysts’ expectations. “We’re forecasting GDP growth at 3.6-3.8 percent, near the GCC average, slightly below the boom-year period, but on aggregate relatively strong,” Rachel Ziemba, a senior research analyst for Roubini Global Economics (RGE), said earlier in 2010.
“Government spending will be a major component, as will a temporary rise in the hydrocarbon sector.”
The reports affirm “the benefits of our tried and tested single regulator and the strength of our prudent, business-friendly economic policies that have meant Bahrain is well placed to achieve long-term, sustainable growth,” Shaikh Mohammed bin Essa Al Khalifa, chief executive of the EDB, said in a statement.
“The fact that our strategy and vision continue to be supported by key international organisations such as the IMF and Standard & Poor’s is also important,” he added.
S&P also reaffirmed the country’s ‘A’ rating for sovereign debt, with a stable outlook. “The ratings on the Kingdom of Bahrain reflect the government’s net financial asset position, renewed development of its hydrocarbon resources, and strong international alliances,” said the ratings agency.
At the end of 2009, Bahrain’s gross domestic product stood at $28bn, up from $27bn in 2008 and $25bn the year before - an indicator of continued slow and steady growth. Unlike other countries, there are no peaks and sudden dips in Bahrain’s recent economic activity - it maintains and even keel. It ranked at number 108 in the world.
A diverse economy will be key to distinguishing Bahrain from larger neighbours like Kuwait and Saudi Arabia and making it a player on par - on a to-scale level, of course - with flashier, global players like the UAE and even Oman, which is establishing itself as a wealthy tourist hub.
The CIA World Factbook lists Bahrain’s economies as petroleum processing and refining, aluminum smelting, iron pelletization, fertilisers, Islamic and offshore banking, insurance, ship repairing and tourism.
More importantly for its growth, it’s now becoming a centre of Islamic banking, much the same as Malaysia became the worldwide hub for foreign banking investment into South and Southeast Asia by providing a liberal environment and less expensive setup. “Bahrain competes with Malaysia as a worldwide center for Islamic banking,” the EDB said.
“Future economic growth hinges on Bahrain’s ability to acquire new natural gas supplies as feedstock to support its expanding petrochemical and aluminum industries,” it added.
Despite the continuing growth in diversity, deficit levels slipped as a result of global economic meltdown. “The global financial crisis caused funding for many non-oil projects to dry up and resulted in slower economic growth for Bahrain,” the EDB said.
“Lower oil prices also caused Bahrain’s budget to slip back into deficit for the first time since 2002, prompting Bahrain to issue an emergency budget supplement and finance its deficits with bonds.”
Meanwhile, it takes the bulk of its imports from Saudi Arabia (23 percent), France, the US, China, South Korea, Japan, Germany and the United Kingdom.
A diverse group of trading partners - it established the first free trade agreement between the US and a Persian Gulf state in 2006, cementing its status as a liberal leader in the GCC - lend to a newly expanded economy.
“Under a constitution promulgated by Sheikh Hamad bin Isa Al Khalifa, the country became a constitutional monarchy in 2002, and the government has sought to reduce dependence on declining oil reserves and encourage foreign investment by diversifying the economy,” Heritage said.
“Home to many multinational firms that do business in the region, Bahrain has a modern communications and transportation infrastructure, a reliable regulatory structure and a cosmopolitan outlook.
“It has developed one of the Persian Gulf’s most advanced economies and most progressive political systems since gaining independence from Great Britain in 1971.”
Now that is has established its own name, set a steady economic pace and made it know that its liberal, forward-thinking environment is good for foreign business and investment in any number of sectors, Bahrain is able to focus within.
The impetus to build a number of new developments and further develop its infrastructure and connectivity with the other Gulf states was further accelerated by neighbouring Qatar’s winning bid to host the 2022 World Cup, an event from which Bahrain could prosper more than any other GCC country - starting with accessibility and its close proximity to the Gulf state.
A proposed causeway linking it to Qatar - shelved in recent years over concerns about a skyrocketing budget - are solidly back on the table.
The island nation has also seen a boom in the number of flights to and from its capital, Manama, from around the GCC - it now serves as a portal to Baghdad’s international airport, one of a few cities from which passengers can fly into the war-torn state.
It all feed high-end tourism - where Bahrain has become a major player. 2011 will see the seventh incarnation of its annual Grand Prix, dwarfed in buzz but not in size by a new Prix in Abu Dhabi.
The government is backing one of the high-end projects underway, the billion-dollar Durrat Al Bahrain and Reef Island, a man-made island located near the Bahrain Financial Harbour development.
It’s a symbol of the government’s faith in expanding economic sectors that go beyond oil and its offshoots, and differs from similar efforts in the flasher UAE in one major way - it, like other huge construction undertakings in Bahrain, is largely not being done on speculation.
The perception among international banks in particular is that Bahrain’s internal economic infrastructure is in good shape and that any hits it has taken are as a result of other countries’ inflections - not its own merit. “The global financial crisis and lower oil prices slowed Bahrain’s economy in 2009,” Heritage said.
Some of the factors that affected Bahrain in the last two years included deleveraging in developed markets, problems with localised groups owned by Saudi Arabia but featuring Bahrain subsidiaries and the grand implosion of Dubai World.
But Bahrain’s banks - though taking a small hit - managed to skirt the trauma, having little aggregate exposure to Dubai’s public enterprises.
Indeed, banking - particularly investment from Islamic banks - is one of the booming sectors of the country’s economy.
Accounting giant Deloitte last year opened its new Islamic Finance Knowledge Centre in Bahrain, partially due to its market’s continual growth of 15 to 20 percent per year. Its decision not to base in Dubai was seen by many as symbolic of the stability of the Bahraini banking scene.
“We decided to build the Islamic finance centre in Bahrain as we believe the country has substantial critical mass of Islamic finance institutions,” Dr Hitam Tahir, the new head of the centre, said at the time. “It has a solid and robust regulatory environment and a good resource of talented people and its central location in the region.”
Flight is another area in which Bahrain is viewed as having a solid, though not s story of the last five years spectacular, reputation.
Its national carrier, Gulf Air, was the GCC’s most significant airline throughout the 1990s and early 2000s. Since then, competitors have begun to box it in, notably Emirates, Etihad and Qatar, though it does solid business.
In a healthy dose of competition, locally-based low-cost carrier Bahrain Air has also been pushing at Gulf’s profits.
In recent years, Bahrain has been quietly building up a logistics infrastructure that will see it become by far the most important trading hub in the Upper Gulf market. Where Jebel Ali has positioned itself as the gateway to the GCC market, Bahrain’s landmark new facilities - including the Reef - are destined to see the island become the pinch-pin for feeder connections to Kuwait, Saudi Arabia’s eastern seaboard and - above all - Iraq.
International firms have seized the opportunity to involve themselves in this thriving location. Holland-based APM Terminals, one of DP World’s few competitors in the prots trade, masterminded the launch of the $340m Khalifa Bin Salman port - the ‘Bahrain gateway’ - in mid 2009.
“Bahrain obviously offers significant benefits for businesses, including a number of free trade agreements, a liberal tax regime and foreign ownership,” said Steen Davidsen, the managing director of APM Terminals Bahrain and the boss of the new port.
“Operating from the port also makes clear economic sense and being 40 percent closer to the upper Gulf ports than our neighbours saves money for shipping lines. For example, it equates into a cost saving of 25 percent, or just under $1m on annual fuel costs, for a two-vessel feeder service linking Bahrain, Dammam, Kuwait and Iraq, sailing at 15 knots and consuming 26 tonnes of fuel per day.”
Though it remains unclear whether or not the port will be able to sustain its momentum and take the title from Jebel Ali, it is positioning itself to serve markets that - Kuwait aside - have not been as impacted by the global recession as those like Dubai.
The Hidd area of development is also one which could see tremendous growth. The Bahrain Logistics Zone, located in the Salman Industrial City in Hidd, was valued last year at $280m.
Assistant director general of the General Organization of Sea Ports, Hamad Fakhro, announced in 2009 that the plans at the site could eventually attract more than $600m in direct investment, presumably much of it from foreign national companies.
Other cites in the industrial park include the Bahrain International Investment Park, the Bahrain Investment Wharf and the Hidd Industrial Zone. In addition, the Hidd district is both adjacent to the ever-expansing Bahrain International Airport, which makes it an easy destination for business travels and a further incentive for companies looking at convenient, cost efficient areas to set up their offices.
It is also in close proximity to the link between Qatar and Bahrain, the soon to be built Qatar Bahrain ‘Friendship Causeway,’ on which construction work has begun after debate.
Bahrain is one of the few countries investing in becoming a hub for other nations which have not fared as well as it has. Whether it will become ‘the next Dubai’ is not the point - it stands to serve an equally important role in merging the shipping trade and banking infrastructures of a handful of Gulf countries.
Tyres are a big part of the automotive business, and are in fact the key to Bahrain’s economic recovery. Unable to match the massive spending of Gulf neighbours Abu Dhabi and Qatar, the Bahraini government has adopted a globally innovative brand of Keynesian macroeconomic policy of kick starting the economy with massive spending on tires.
By stirring up sectarian violence on a grand scale protestors have rushed to their nearest garages to kit themselves out with tires. Tyre sales have rocketed, along with petrol and matches, as riots have moved into full swing. The customs authorities have benefited too from extra duties and there is talk of the investment fund looking at the plantations of Malaysia to buy into the future profits of this extraordinary boom.
The country also has one of the region’s booming telecommunications sectors. Its market is arguably the most open and competitive in the Gulf region.For all the latest business news from the UAE and Gulf countries, follow us on Twitter and Linkedin, like us on Facebook and subscribe to our YouTube page, which is updated daily.
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