At the end of 2016 the government reaffirmed its commitment to Bahrain’s $32bn infrastructure pipeline as a key driver of economic growth.
These projects – to be implemented in the medium term – include a major upgrade of its international airport, road-building schemes, a new railway link with Saudi Arabia, utilities developments and logistics support, along with investments in housing, industry and services.
As more projects move from the drawing board into the development stage, Bahrain’s construction sector will be critical to economic growth over the next couple of years, according to a recent report by the National Bank of Kuwait.
The overview of the Bahraini economy, issued in early February, forecast non-oil growth would outstrip that of the broader economy, both this year and next. While it projects real GDP will expand by 3.4% in 2017 and 4.2% in 2018, non-oil growth is on track to reach 4.2% and 4.5%, respectively, as a result of higher investment levels, especially in construction.
Local authorities agree. In its most recent assessment of the Bahraini economy, the Bahrain Economic Development Board (EDB) reported that the construction industry is not only boosting non-oil GDP, but also having a multiplier effect on other areas of the economy.
“Growth in the third quarter was led by the construction sector, which expanded by an annual 7.2%,” it said. “The forward momentum of the projects is beginning to push up growth in several other non-oil sectors as well.”
The rising rate of expansion of the construction industry underscores the critical role infrastructure investment can play as a countercyclical growth driver in the kingdom. The sector’s growth rate rose in each of the first three quarters of 2016, to 5.4%, 5.9% and 7.2%, respectively.
Added to the ongoing infrastructure and development programme is an increasing number of residential, retail and commercial property projects. Real estate trading volumes in 2016 rose 14.2% to BD1.04bn ($774.4m), according to an overview of Bahrain’s property sector issued in February by property consultancy CBRE.
While the report noted the possibility that private sector development could be weighed down this year by concerns over excess supply coming to market, bright projections for economic growth and strong expected performance by the tourism sector should help soak up excess supply in the retail and hospitality segments, and generate extra demand elsewhere, CBRE said.
Among the direct beneficiaries of growth in the construction sector will be materials and logistics services suppliers, whose order books should increasingly fill up as more infrastructure projects get under way. Suppliers of equipment and technology, as well as the relevant support services, will likewise gain from a greater need for construction machinery and maintenance.
An added benefit should be a carry-through effect to the financial sector, with increased building activity heightening demand for credit, and bringing new business to banks and insurers alike.
In addition to spurring more robust GDP growth, a construction boom could help to generate additional government revenue, aided by the introduction of a new value-added tax (VAT), due to come into effect by mid-2018.
The GCC-wide tax on goods and services, endorsed by the Bahraini government and all other member countries on February 1, will be set at 5%, though the agreement includes the right to exempt some sectors, such as real estate.
If the government does decide to waive VAT for property transactions, this would lower prices for buyers, though the impact would likely still be felt at other stages of the construction and development chain.
Despite adding to the cost of materials and services, the new tax could lift state revenues for Bahrain and other GCC member states by as much as 2% of GDP, according to the IMF. This would allow the government to channel more funds into services and development, stimulating growth through targeted public investments.
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