Baharain econ

Higher oil prices and a successful vaccination programme have eased pressure on Bahrain's economy. However, as Kit Gillet reports, questions remain about whether the country can meet its deficit reduction targets.

The Bahraini economy had a challenging year in 2020, hit by the effects of the global coronavirus pandemic as well as lower oil prices. Real gross domestic product (GDP) contracted by 5.8%, with government debt rising from 101% in 2019 to 129% in 2020. Sectors like tourism and real estate were especially hard hit.

However, 2021 saw a strong turnaround, aided by a high vaccination rate across the country, the return of tourists and rising global oil prices. In November, Bahrain launched an ambitious $30bn Economic Recovery Plan aimed at enhancing the kingdom’s long-term competitiveness post-pandemic, with almost two dozen signature projects spread across areas like education, health, housing and infrastructure.

The plan, which prioritises six sectors – oil and gas, tourism, logistics, financial services, telecommunications and the digital economy, and manufacturing – aims to create more than 20,000 jobs a year until 2024, with the government seeking to attract $2.5bn in foreign direct investment by 2023.

“This comprehensive economic and fiscal plan is an investment in our nation’s people, our businesses, and the future of Bahrain,” Shaikh Salman bin Khalifa Al Khalifa, Bahrain’s minister of finance and national economy, said at the time.

Growth returns

According to Bahrain’s Information and eGovernment Authority, the country’s domestic economy grew by 1.5% in the first three quarters of 2021, compared to the same period of 2020, with the non-oil sector seeing real year-on-year growth of 3.8% in the third quarter. Transportation and communications grew by an impressive 25.8% year-on-year, with real estate up by 4.7%. In contrast, manufacturing was almost flat and financial services contracted by 2.7%, according to official figures.

“Bahrain economic growth is expected to record a real GDP growth of 3.2% in 2022 driven by improving consumer confidence and increasing retail sales, as high vaccination rates allow restrictions on movement to be minimised,” says Adel El-Labban, chief executive and managing director of Ahli United Bank (AUB). “The ongoing government support will also aid private consumption growth,” he adds.

In December, Bahrain once again extended its pandemic-related loan deferment policy, this time until the end of June 2022, with the aim of further supporting individuals and small and medium-sized enterprises (SMEs). The country had put in place a massive economic stimulus package in March 2020, worth the equivalent of 6.7% of 2020 GDP, according to the International Monetary Fund, the highest percentage in the region.

There is now growing confidence in the economy. S&P Global Ratings revised its outlook for Bahrain from negative to stable in November, highlighting the fiscal reforms being pushed through by the Gulf nation with the aim of strengthening its economy, as well as the likely impact of higher oil prices and support from other Gulf Co-operation Council (GCC) members.

“The stable outlook indicates we expect the government to implement measures to reduce the budget deficit and benefit from support from other GCC sovereigns if needed, in addition to the direct fiscal support already pledged,” the rating agency said at the time.

Balancing the budget

In late 2018, Bahrain launched its Fiscal Balance Programme, with the goal of reaching a balanced budget by 2022. “Until Covid happened we were ahead of that plan,” says Khalid Humaidan, chief executive of the Bahrain Economic Development Board (EDB). “All Covid did was delay the balance point. It was expected at the end of 2022; because of Covid, we delayed it for another two years. We believe in fiscal discipline, and believe it’s the right time to be able to do that.”

Among other measures, Bahrain has adopted significant cost rationalisation measures, including increasing its value added tax (VAT) rate from 5% to 10%, effective from January 1, 2022. The VAT increase, plus higher oil revenue, will help Bahrain narrow its budget deficit to less than 4% of GDP this year, according to a recent assessment by Emirates NBD, down from 6.6% in 2021 and 12.9% in 2020.

Bahrain also continues to receive support from its neighbours, as part of the $10bn long-term interest-free support programme agreed with Saudi Arabia, the United Arab Emirates (UAE) and Kuwait back in 2018. The money is being released in tranches, with the last amount due in 2023.

Even so, some are cautious about the country’s chances of hitting its 2024 goal. “There are elements of the plan that still remain a little bit undefined,” says Toby Iles, head of Middle East and Africa sovereigns at Fitch Ratings. “They want to phase out subsidies for electricity, water. There’s additional revenue from the pricing of government services, but these things are a bit hard to assume will happen. And then otherwise it relies a lot on efficiency and cutting costs.”

“The GCC Development Fund will be exhausted by 2023-24,” he adds. “That has provided meaningful support to the economy over the last decade or so. Whether there’s a follow-on development fund 2.0 makes a difference.”

Oil still dominant

Bahrain’s reliance on oil and gas revenue also has significant budget implications. Despite efforts to diversify its economy, oil and gas accounts for 18.5% of Bahrain’s national economy, according to the Information and eGovernment Authority, the highest total among all industries. In the third quarter of 2021, Bahrain was producing an average of 193,375 barrels of oil a day, with crude extraction from the offshore Abu Sa’fah field averaging 151,038 barrels.

“The fascinating thing about Bahrain is that within the GCC it’s the most diversified economy in terms of real economy, yet in terms of budget about 70% of revenue comes from hydrocarbons,” says Mr Iles.

Getting the fiscal structure to better reflect the economic realities is a big policy question for Bahrain, he adds. “The VAT rise has definitely helped, doubling the rates. We might get another one and a half percentage points of GDP in terms of revenue. It’s helpful, and it also sends a pretty important signal.”

Still, Mr Iles points out that Bahrain’s fiscal breakeven oil price remains well above $60 per barrel on the global oil markets, which is what is assumed in the fiscal balance plan. “We still have Bahrain running budget deficits in 2024.”

Building for the future

One area that Bahrain is targeting for long-term growth is its tourism and hospitality sector, which remains a key industry for the country, especially when it comes to Saudi Arabian visitors.

“We welcomed 12 million tourists before Covid. We’re looking forward to regaining those numbers and building on them,” says EDB’s Mr Humaidan. “That’s the low hanging fruit for us in terms of growth. We are targeting the next five years around 14 million tourists a year,” he says. “We also want to increase the amount that tourists spend in the country, by staying longer and spending more money with us.”

Mr Humaidan also points to the importance of massive infrastructure projects like the Bapco Modernisation Programme (BMP), a major expansion and upgrade of the existing Bapco refinery which will increase its capacity from 267,000 to 380,000 barrels per day. The project, the largest ever undertaken in Bahrain, will have cost almost $7bn and is expected to be completed in 2023.

“We’re diversifying away from crude,” he says. “We’ve spent a lot of time and money developing the Bapco refinery. All of that is to diversify [the economy]; the more value add we have, the less reliant we are on commodity prices.”

Meanwhile, the total value of Bahraini exports grew by more than 75% year-on-year in the third quarter of 2021, benefiting from the sharp increase in global aluminium prices, with imports up just over 15%.

Long-term targets

In January 2022, Bahrain announced a new, four-year strategy aimed at pushing ahead with digitalising the country’s economy, with a key role played by the telecoms and information technology sectors.

The same month the country’s cabinet also approved a new visa granting long-term residency to foreigners who have resided in Bahrain for at least five years and who earn salaries of more than $5306 per month. This is part of efforts to both bring in and then retain a highly skilled workforce.

In future, the country may also see the establishment of new taxes – in addition to the VAT rise – following trends being seen elsewhere in the region. “A corporate tax in the UAE, beginning in 2023, has been announced. I don’t believe that is going to happen in only one country in the region. That’s something which will probably follow in other countries as well,” says Jean-Christophe Durand, chief executive of the National Bank of Bahrain.

This would have a positive impact on public revenue, but could be a negative for businesses deciding whether to set up in Bahrain or elsewhere, unless it is timed with similar initiatives across much of the region.

Closer ties

At the same time, the geopolitical situation for Bahrain is looking more favourable than it has in many years.

In January 2021, Bahrain, together with Saudi Arabia, the UAE and Egypt, ended its economic and political blockade of Qatar, which began in 2017, opening up diplomatic, trade and travel ties with one of its larger GCC neighbours. Relations with its traditional partners remain strong, while the country signed an agreement to establish normal relations with Israel in September 2020, which could also lead to trade benefits for the country.

With restrictions increasingly lifting, and the world returning to some semblance of normalcy, Bahrain is hoping to be among the regional winners.


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