Bahrain - Sound economic reforms and increased investment in productive capacity and social infrastructure.

Published January 31st, 2008 - 02:33 GMT

Global Investment House –Kuwait – Bahrain Economic and Strategic Outlook –Macroeconomic - January 2008 – Bahrain’s economy continued with it growth momentum in 2006 and is expected to show strong growth for 2007 as well on the back of high oil prices and strong regional liquidity, coupled with the sound economic reforms and increased investment in productive capacity and social infrastructure.

Exceptionally strong oil revenue and the rise in economic confidence as a result thereof have encouraged the government to plan for the future by continuing with the pace of reforms and also carry out high level of infrastructure and construction development activity in the country. The thrust on infrastructure development and the current reforms carried by the government will play an important role in taking the economy to a higher growth trajectory in the near term.

Bahrain enjoys one of the most diversified sources of income in 2006 when compared to other GCC countries. Bahraini economy grew at a healthy pace with the nominal Gross Domestic Product (GDP) estimated to have grown by 17.6% in 2006 to reach BD5.95bn (US$15.83bn) while real GDP grew by 6.5% to reach BD4.11bn (US$10.92bn) in 2006. The oil sector GDP is estimated to have grown by 22.3% in nominal terms. 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 contribution of the manufacturing sector to the GDP has grown at a healthy rate in the last couple of years. In addition, trade is also an important contributor to the economy.

The Kingdom has long been an open economy that has attracted foreign investment. Whether it is the financial sector, telecom sector or the real estate, Bahrain has been witnessing strong private/foreign participation over the past few years. The strong growth in demand and increased profitability has spurred the corporate to invest in new ventures or expand their existing facilities.

The main reason that the foreign companies have looked Bahrain as the place to enter the region is primarily for its geographical environment, well-regulated authorities and low cost factor in setting up operations. The recent diversification and privatization initiatives of the Government have helped things further. As a result, Heritage Foundation has ranked Bahrain as the 19th freest economy in the world and 1st out of the 17 countries of the MENA region in its economic freedom index for 2008.

The financial sector, the back-bone of the Bahraini economy continues to grow substantially and has shown excellent growth in 2007 as well, after an impressive performance in 2006. 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 Kingdom is continuously reforming its banking sector so as to keep abreast with latest world developments and also developing world class infrastructure such as Bahrain Financial Harbour (BFH). As a result the country continued to attract a good mix of locally incorporated, regional and international institutions to set base in the Kingdom. All this would help in developing the banking sector further in the country and will ensure it remains a major revenue earner for the country. Going forward, the financial sector would continue to play a significant role in Bahrain’s economy growth.

Real estate sector in Bahrain has flourished over the years, which is backed by political stability, a sound legal system, freehold property rights and residency entitlement. This is further enhanced by the Kingdom's diversifying and buoyant economy and a growing population.

Manufacturing sector, which has been one of main contributors to the GDP is growing rapidly too over the last few years. The government’s move towards privatization and diversify the economy are coming to light with the growth seen in the manufacturing sector. This growth augurs well for the economy as it increases the investment as well as creates employment opportunities.

The Bahraini stock market continued to grow at a healthy pace as the “Global” Bahraini Index recorded a growth of 26.5% during 2007. This is attributed to the remarkable corporate performance, high liquidity due to soaring 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, good corporate earnings and strong business & consumer confidence. Apart from liquidity, there have been fundamental and structural changes in the economy and stock market that will continue to drive the markets further.

Although, Bahrain has started rigorous diversification efforts to reduce the dependence on oil, Bahrain's economy is still strongly linked with the oil sector with revenues from the sector contributing 26% to the GDP. Due to its dwindling reserves, Bahrain’s oil production has come down greatly and its current rate of production of approx 33,000b/d is much lower than its peak rate of 75,000b/d. The Kingdom is making significant efforts and is aggressively expanding its exploration and production activities. Bahrain’s sole refinery company, Bahrain Petroleum Company (Bapco), plans to sink some 700 more wells between 2007 and 2015, as well as increase the use of advanced technology like enhanced oil recovery (EOR) to squeeze more oil from the existing fields. All these are done with an aim to increase the production capacity by up to 12,000b/d and would ensure that oil continues to play a significant role in the growth of the economy.

The government is also trying to reform itself by restructuring official bodies and privatizing a variety of state services, including power provision and port management. Private as well as government investment is likely to go up due to increased confidence which will drive future growth.



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