Bahrain: Economy treading carefully

The Kingdom’s economy is making steady progress towards regaining lost momentum following the global financial crisis and civil unrest in 2011. However, the recovery will need to be managed carefully if past losses are to be fully recouped.

While growth in 2011 was just under half of that in 2010 – 2.2% compared to 4.5%, according to the International Monetary Fund (IMF) – analysts expect GDP growth to gain momentum in 2012. Forecasts by both local and foreign experts put the rate of expansion at around 3.5%, far better than most Western economies and in line with the IMF’s global outlook.

The economy was given a vote of confidence in late July by Fitch Ratings, which maintained its assessment of the country’s long-term foreign currency issuer default rating (IDR) at “BBB” and local currency IDR at “BBB+”. The report also upgraded the Kingdom’s outlook to stable, an improvement the firm said reflected a stronger economic performance.

While Fitch Ratings noted the stability of the financial sector, which it said had been little affected by the long-running unrest, it did say that if further damage is done to Bahrain’s image as a business-friendly destination, there would be the potential for negative spillovers to key industries, such as the banking sector.

This potential for renewed downward pressure will be somewhat offset by increased government spending, backed in part by the promise of $10bn in support from other GCC states, helping to drive economic growth and potentially deliver key developmental initiatives.

Standard & Poor’s (S&P) was less convinced, however. In its own assessment of Bahrain’s economy and creditworthiness, the ratings agency affirmed the Kingdom’s long-term foreign and local currency sovereign credit ratings at “BBB”, in line with Fitch’s assessment, though it did maintain its negative outlook position. S&P noted that if there were a renewal of political tensions, slower growth, lower oil prices, or increased government expenditures that could weaken Bahrain’s fiscal or external performances, the agency could lower the long-term ratings.

S&P voiced concerns regarding the levels of government debt, estimating that general government debt would reach 42% of GDP this year, far above the 24% recorded in 2009. This would reduce the government’s net asset position to 6.9% of GDP in 2012 from 25% three years ago, the report said.

The agency did report a number of positives, however, which should help underpin recovery. Foremost among these was the size and resilience of the financial industry, long one of the cornerstones of the economy.

“Despite a relatively large financial sector, we consider sovereign contingent liabilities to be limited. The financial system appears relatively well-regulated, with manageable asset quality risks from the real estate overhang,” the report said.

A key plank in the government’s platform to revive the economy is its sovereign wealth fund, Mumtalakat Holding Company, which has holdings in some 35 firms across a range of sectors. However, in early July Mumtalakat declared losses of $717m for 2011 and $621m the year prior. Much of these losses can be attributed to national flag carrier Gulf Air, which is implementing several restructuring initiatives to reduce operating losses and improve customer service.

Despite this, Mumtalakat said it was considering a change of broader strategy, with the CEO saying recently the fund would look to concentrate its efforts closer to home in order to better support the local economy.

“Maybe the way forward will be for us to reduce our shareholding in some portfolios we have,” Mahmood Al Kooheji told Reuters in early July. “But our focus would be to reinvest that money into the Bahraini economy. We are not shying away from international investment, but really our focus is Bahrain and maybe the GCC, as we are finding big demand and growth from the GCC market.”

To help back its activities, Mumtalakat announced at the end of July that it was planning to raise $1bn through an Islamic bond issue on the Malaysian stock market, a portion of which will be used to clear maturing loans. By tapping into the Asian debt market, Mumtalakat will be able to gain access to Eastern markets, potentially strengthening regional interest in Bahrain as an investment destination.