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Oil sector helps Bahrain maintain a robust economy

By Nitin Nambiar



Bahrain’s real gross domestic product (GDP) growth remained stable at 6.5 per cent in 2007, primarily on the back of high oil prices and improved performance in financial, real estate and construction sectors, according to the Bahrain-based investment bank Global Investment House (GIH).


The oil sector remains the biggest driver of the country’s GDP, enabling budget surpluses that are being used for diversification, according to GIH. “The Bahraini Government has been posting budget surpluses for quite some time now, primarily due to higher oil prices prevailing in the market when compared to the conservative price estimates taken for budget,” GIH said in a report.


Going forward, the bank said, the financial, insurance and hotel sectors 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.”


Money supply in Bahrain has grown at an exceptionally high rate in the past few years and last year was no different, according to GIH. “This has primarily been attributed to the increase in private sector time and savings deposits [quasi money] as well as demand deposits,” the bank said in its report.


On the interest rate front, domestic interest rates are stabilising and moving in a narrow range with a southward bias, according to GIH. “Interest on interbank deposits (less than three months) increased to 5.3 per cent in the first half of 2007 and jumped further to 5.4 per cent in quarter three of 2007.


Following the same trend, the deposit rates for the period also increased sharply from 4.4 per cent in the last quarter of 2006 to reach 5.2 per cent by the end of quarter one of 2007, but then it decreased marginally to 5.1 per cent by quarter two of 2007. And again in quarter three of 2007, it further declined drastically to 4.2 per cent that is in line with the declining interest rate scenario in US,” the investment bank said.


The interest rates for construction and real estate sectors’ lending decreased from 8.82 per cent in quarter four of 2006 to 7.63 per cent at the end of quarter three of 2007.


Inflation in the island state (expected to be around three per cent last year) was among the lowest in the GCC. This has been possible mainly due to sustained efforts of the government to control prices through subsidies, according to GIH. “The government continues with its efforts to control inflation and at the beginning of 2008, allocated a total of BHD40million (Dh391m) to control rising prices and inflation,” the report said.



Large Number of Banks


According GIH data, Bahrain hosts the largest concentration of banks and other financial institutions in the Middle East with a total of 404 banking and financial institutions at the start of quarter four last year.


This comprises 153 banking institutions with total assets of $238.3billion (Dh875bn)   (as of November last year), 165 insurance firms with gross premiums of $308million (as of 2006), 34 investment business firms, 13 capital market brokers with total market capitalisation of $25.6bn (as of November last year) and 39 specialised licensee firms. “After  oil and gas sector, financial institution sector, which is banking and insurance firms, remains the highest contributor to the country’s GDP in nominal terms,” said GIH.


“Total banking assets have grown by 33.5 per cent in 2006 alone, making the sector one of the most active sectors in the world. This growth momentum has continued in 2007 with a total of $222.4bn assets at the end of quarter three of 2007, a growth of 18.7 per cent over the 2006 figure with foreign assets comprising $187.7bn or 84.4 per cent of the total assets,” the report said.


After a poor performance in 2006, Bahraini markets rebounded last year with the representative Global Bahrain Index gaining 26.5 per cent, which stood at 213.99 points at the end of last year compared to 169.16 points at the end of 2006.


The report has attributed this to the remarkable corporate performance, high liquidity due to soaring oil prices, positive business and consumer sentiments and increased stability in the region. “However, there was not much action in the primary market with only one new listing. Seef Properties got listed at Bahrain Stock Exchange with a paid-up capital of BHD46m during the year. Consequently the number of firms traded on the exchange increased to 51,” the report said.



Market Capitalisation


The market capitalisation at the end of last year was BHD10.19bn compared to BHD7.96bn reported at the end of 2006, reporting an increase of 27.9 per cent.

GIH predicts the financial sector’s contribution (currently 22.2 per cent of GDP) will increase following completion of the $1.5bn Bahrain Financial Harbour (BFH).


“Additionally, BFH will also be both directly and indirectly responsible for positively contributing to the national GDP through enhanced foreign direct investment and a ripple economic effect created through higher job creation and economic value addition,” the report said.


Other significant projects currently under way in the country include the Bahrain-Qatar Causeway, Sheikh Khalifa bin Salman Port and the World Trade Centre, which are expected to strengthen Bahrain’s diversification plan in attracting foreign investors to the kingdom.



Trading Up


Exports of Bahrain in 2006 were BHD4.59billion (Dh45bn) with oil contributing BHD3.47bn or 75.6 per cent of the total during the period. The total exports in 2006 were up by 19.1 per cent, on account of higher oil prices in 2006.


Oil’s contribution to the total exports has been rising gradually since 2002, increasing from 70.6 per cent in 2002 to 75.6 per cent in 2006. It touched a high of 80.5 per cent in quarter one of 2007 and was 78.6 per cent in quarter two last year, as the oil prices touched record highs in quarter four.


The total non-oil exports was BHD1.12bn or 24.4 per cent of that in 2006. However, on-oil exports contribution improved only marginally, according to GIH report.



Diversifying Away From Oil


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 per cent to the GDP.


“Due to its dwindling reserves, Bahrain’s oil production has come down and its current rate of production of about 35,000bd is much lower than its peak rate of 75,000bd. The nation is aggressively expanding its exploration and production activities,” the report said.


Bahrain’s sole refinery company, Bahrain Petroleum Company (Bapco), plans to sink some 700 more wells between 2007 and 2015 and increase the use of advanced technology.


The oil revenue of BHD1.42bn in 2006 was 58.2 per cent higher than the budget estimates. The contribution of oil and gas to the government’s revenue in 2006 increased to 77.0 per cent from a high of 75.7 per cent in 2004 due to high oil prices in 2006.


Despite the government’s best efforts to diversify its revenue streams, oil still remains the major contributor. Oil revenue for 2007 will again remain substantially high due to high oil prices throughout the last year.