Global Investment House – Bahrain Economic & Strategic Outlook – Current Account- The total exports of Bahrain in 2006 stood at BD4.35bn and oil exports contributed BD3.46bn of the total exports during the period. The total exports in 2006 were up by 15.3%, on account of higher oil prices in the year 2006. The oil’s contribution to the total exports has been increasing gradually since 2002, as it increased from 68.3% in 2002 to 79.7% in 2006, and it is further expected to cross the 80% mark provided the oil prices remain at the same levels. Despite the rigorous diversification efforts by the Bahraini government, the gradual growth indicates Bahrain’s continued dependence on oil, although lower compared to the regional peers. On the other hand, the total non-oil exports stood at BD0.88bn or around 20.3% of the total exports in 2006. The non-oil exports reported an increase of 4.7% in 2006 and hence the contribution to the total exports has been the lowest since 2002. In absolute terms, the non-oil exports have increased but due to the higher oil prices through out the year has brought down the contribution of non-oil exports.
The total imports increased by 12.6% in 2006 to reach BD3.36bn. The total oil imports during 2006 stood at BD1.84bn, witnessing an increase of 17.6%, which is again attributed to the high oil prices and increased demand in the year 2006. Oil imports contribution increased from 33.4% in 2002 to 54.8% in 2006, which is the highest witnessed since 2000. On the other hand, non-oil imports witnessed an increase of 7.0% and stood at BD1.52bn as compared to BD1.42bn recorded in 2005. As a result, the non-oil imports contribution to the total imports declined from 66.6% in 2002 to 45.2% in 2006. The resultant trade balance in 2006 stood at BD984.80mn, registering an increase of 26.0%. Thus on an external front, higher oil prices allowed maintaining a healthy balance of trade. In our opinion, 2007 is likely to have a higher trade surplus as oil prices have remained at the same level, although not at the same levels seen in 2006.
In the non-oil sector, base metals and articles thereof constitute the largest items of exports, followed by textile & textile articles and products of chemical and allied industries. The top three non-oil import items constitute machinery and appliances, transport equipment and base metals and articles. On the external accounts side, Bahrain will have to widen its non-oil export base. We believe that with its thrust on manufacturing industries, Bahrain will be able to develop its non-oil exports in the years ahead; however, it will take some time before its non-oil exports contribute substantially to the total revenue.
Bahrain’s trade with other GCC member countries was about 36.4% of non-oil exports and 20.7% of non-oil imports in the year 2006. Saudi Arabia has been the major export destination for Bahrain with exports worth BD184.5mn in 2006, representing 60.2% of total non-oil exports with the GCC member countries. The other important export destinations were UAE and Qatar representing 17.3% and 11.3% respectively of the total non-oil exports with the GCC countries. Similarly, Saudi Arabia has also been the major import destination for Bahrain with imports worth BD176.9mn taking place in 2006, representing 60.2% of the total non-oil imports with GCC countries in 2006, followed by UAE (28.1%) and Qatar (5.0%) in 2006. Saudi Arabia has been among the major import and export destination even when compared to all the countries that deal with Bahrain. Other major international destinations are Germany, Taiwan, India, Japan, China and USA. In 2006, Japan took the leading position from Saudi Arabia as the top exporter to Bahrain with imports worth BD181.0mn. The other major exporters to Bahrain included Germany, China, Australia and USA worth BD96.8mn, BD123.9mn, BD125.4mn and 108.5mn respectively.
The higher trade surplus in 2005 contributed to a sharp improvement in the current account, which increased the surplus from BD156.1mn in 2004 to BD592.2mn in 2005. Bahrain would have had a higher current account surplus in 2006 too due to higher trade balance as oil prices continued to remain on the higher side during the year 2006. However, the transfers abroad from the large expatriate community are also expected to grow with the increasing number of expatriates in the country.
The capital account surplus remained at the same level as compared to 2003 and 2004, but financial account could not hold its upbeat gain witnessed in 2003. The decrease in net outflow was largely on account of the substantial increase in portfolio investments, which saw net outflow of BD1.32bn in 2004 to BD1.74bn in the year 2005. As a result, the capital and financial account continued to extend its deficit from BD187.5mn in 2004 to BD610.1mn in 2005.
Monetary Policy
Interest on interbank deposits in Bahrain has increased from 2.8% (3-6 month offered rate) in 2004 to 4.7% in 2006, which was in-line with the increasing interest rate environment in the US (because of the currency peg). Following the same trend the deposit rates for the 3-12 months period also inched up sharply from 2.62% in the first quarter of 2005 to 3.70% by the end of fourth quarter of 2005, which was further increased up to 4.40% by the end of forth quarter of 2006.
Although the interest rates for construction and real estate sector lending jumped from 5.47% in the fourth quarter 2004 to 8.82% at the end of fourth quarter of 2006. The highest rate was seen in the second quarter of 2006, where it reached 9.14%, the highest rate seen in the last couple of years. The interest rate for the manufacturing sector also increased from 4.60% at the end of fourth quarter of 2004 to 6.89% at the end of fourth quarter of 2006. These trends suggests that gradually domestic interest rates are moving northwards, however, the rise in rates will be a measured one rather than any drastic surge, which shows the competition in the banking sector. In our opinion, we believe that the interest rates will start stabilizing at the banks as they witness increasing demand on the credit side, which will further shrink the margins for the banks.
The broad money supply as measured by M2 has exhibited consistent positive trend during the past few years. M2 has grown at an exceptionally high rate in terms of both YTD growth, which is primarily attributed to the increase in private sector time and savings (Quasi Money) as well as demand deposits. At the same time, the currency in circulation also increased by the end of forth quarter of 2006 as compared to 2005 level, registering an increase of 20.2%.
Keeping in line with the rising demand deposits, the money (M1) increased by 21.4% at the end of 2006 to reach BD1.29bn. At the end of 2006, quasi money witnessed an increase of 12.2% to reach BD2.75bn, whereas it increased by 21.4% in 2005 as compared to 2004. The broad money supply (M2) had increased from BD3.51bn at the end of 2005 to BD4.04bn at the end of 2006, an increase of 14.9%. Most of this increase actually happened in the first two quarters of 2006, especially in the time and savings deposits (Quasi Money). There has also been a consistent rise in the money supply as measured by M3, which was primarily due to a substantial rise witnessed in deposits from the government in the year 2006. At the end of 2006, M3 witnessed an increase of 17.4% to reach BD4.89bn as compared with BD4.17bn in 2005. The growth in money supply as measured by M3 in the year 2006 has been in line with the growth of 17.6% witnessed at the of 2005.
The conventional borrowings by the government continued to drop since 2000. However, in the year 2006, we have seen an increase in the form of treasury bills. At the end of 2004, the government’s development bonds matured and decided not to issue any new bonds there after. Instead, the government decided on issuing new short term treasury bills. By the end of 2006, the government’s conventional borrowings stood at BD162mn. In the three quarters of 2006, the government’s conventional borrowings witnessed an increase and stood at BD180mn, which further dropped to BD162mn at the end of forth quarter of 2006. The new issues during the year 2006 amounted to BD642mn, whereas the only KD610mn matured during the year.
Since 2000, it can be witnessed that the government borrowing has been hovering between the BD500mn and BD600mn, but the bulk of borrowing has shifted from the conventional financial instrument to the Islamic instruments. Due to the growing demand of Islamic financing, the government started depending on Islamic instruments to fund its requirements, instead of the conventional financial instruments. Islamic leasing securities which are long-term instruments with maturity of three to five years witnessed an increase from BD442.0mn in 2005 to BD472.0 in 2006, an increase of BD30.0mn or 6.79%.
Al Salam Islamic securities, which are short-term instruments with a maturity of 91 days remained at the same level as 2005, at BD45.1mn at the end of 2006. Thus, the total borrowings from Islamic instruments far exceeded that from the conventional borrowings. At the end of 2006, Islamic borrowings accounted for almost 76.1% of the total government borrowings, which is also in line with the efforts to make Bahrain an Islamic financial hub of the region.
