Bahrain fiscal policy: Spending increases and lower oil provides putting pressure on government finances

Despite the gradual economic recovery seen in the US and parts of Europe, the GCC has witnessed strong growth in recent years, and Bahrain is no exception. With its main stock market index reaching a three-year high in mid-2014, and spending on infrastructure anticipated in the second half of the year, there has been a renewed sense of confidence and cautious optimism about the kingdom’s economy.

On May 21, 2014, the IMF concluded its Article IV consultation with Bahrain. The report stated that the kingdom’s GDP grew 5.3% in 2013, driven primarily by expansion in the hydrocarbons sector, while non-oil growth was reported at 3%. Looking forward, the organisation forecast real GDP growth of 3.9% in 2014 and 2.9% in 2015. As 2014 progressed, however, this renewed confidence was tempered somewhat by the sharp fall in oil prices, with Brent crude down by around 51% from its June 2014 high to about $56 per barrel as of the end of 2014. Sustained lower oil prices and rising debt levels could crimp the economy’s growth into 2015, particularly given Bahrain’s high fiscal break-even price – estimated at nearly $120 per barrel by the IMF.

Key Pillars

Hydrocarbons and financial services have long been among the key pillars of the Bahrain economy. Although oil, along with its by-products, is the biggest single source of government revenue, the kingdom has never enjoyed the same degree of hydrocarbons wealth as some of its GCC neighbours. While the per capita GDP in Bahrain was $27,926 in 2013, according to IMF estimates, the figure for Qatar, just 40 km away across the Gulf, was $98,986.

Like all GCC states, the kingdom relies on expatriate labour; however, Bahraini nationals work in an increasingly wide variety of occupations. Large numbers of skilled Bahrainis are employed in the financial sector, which has been the economy’s second-most-important driver since the 1970s, when bankers from Beirut settled in Manama, creating what became the region’s leading international finance centre. The sector showed resilience in weathering the 2008-09 global financial crisis, and the economy achieved 2.5% growth in 2009, according to the Central Informatics Organisation (CIO). Other key non-oil sectors include manufacturing, construction and tourism.

New Challenges

However, both the finance and oil sectors have faced new challenges in recent years. The banking and financial sector was adversely affected when political unrest in the kingdom eroded confidence among investors in 2011. Some wholesale banks and financial institutions moved staff to Dubai or other financial centres in the region. This, combined with poor performance in the hospitality, construction, real estate and business services sectors, resulted in 2.1% GDP growth for 2011. A year later a technical problem at the Abu Safa oil field resulted in a drop in oil production for most of 2012. However, strong growth in the non-oil sector helped buoy the economy, with the non-hydrocarbons sector expanding by 6.9% in 2012, resulting in real GDP growth of 3.4%.

As oil production resumed at more normal levels in 2013, hydrocarbons once again became one of the core contributors to growth. Confidence in the country has now gradually returned, driving the Bahrain All Shares Index to a three-year high in mid-2014.

Credit Ratings

This sense of stability has been reflected in the views of two of the three main international ratings agencies. In January 2013 Standard & Poor’s (S&P) revised its outlook for Bahrain from negative to stable, with local and foreign currency ratings of “BBB”. S&P affirmed its ratings in June 2014, stating, “Our ratings on Bahrain are supported by the country’s relatively stable growth prospects, our view that it will likely receive GCC development funds and our expectation that oil prices in 2014-17 will average out at about $103 per barrel, which will support public finances.” However, in December 2014, the agency revised its outlook to negative due to the rapidly falling oil prices but came short downgrading its rating.

In June 2014 Fitch changed its outlook to stable and reaffirmed its foreign and local currency ratings as “BBB” and “BBB+”, pointing to supporting factors such as the rebound in oil production, the continuation of GCC-backed projects and the expectation that the non-oil economy will drive growth in the medium term. Its statement did, however, highlight “a prolonged period of significantly lower oil prices” as a factor that could lead to a future downgrade. Like S&P, however, Fitch changed its outlook to negative in December 2014 due to dropping oil prices, but also fell short of downgrading either of the country’s ratings.

In April 2014 Moody’s revised its outlook for Bahrain’s banks upwards from negative to stable, citing Tier-1 capital ratios of around 14.5% in December 2013, enabling the kingdom’s lenders to absorb losses, and the Central Bank of Bahrain’s (CBB) moves to encourage consolidation among smaller banks affected by the “local real estate crash”. However, Moody’s downgraded its government issuer rating for Bahrain by one notch in September 2013, from “Baa1” to “Baa2”, also assigning a negative outlook. Moody’s downbeat assessment was based on “Bahrain’s susceptibility to domestic and regional geopolitical instability” as well as on an IMF assessment of the economy’s vulnerability to a drop in the global price of oil. In November 2014, Moody’s affirmed its “Baa2” rating with a negative outlook.

Break-Even

In its “Economic Prospects and Policy Challenges for GCC Countries” report published in October 2013, the IMF noted that Bahrain was the only GCC country where the fiscal break-even price of a barrel of oil was higher than the average price for Brent crude in 2013. “The IMF estimates Bahrain’s fiscal break-even oil price to be $118.70 per barrel, which exceeds Moody’s forecast of $109.50 per barrel for the average price of oil in 2013,” Moody’s stated in September 2013. Other estimates for Bahrain’s break-even price are higher still, with Emirates NBD putting it at $125 per barrel in an October 2014 report, based on the country’s 2014 expenditure and oil production estimates.

Moody’s said, “Given the budget’s significant dependence on oil revenues, Bahrain’s government finances are less flexible and its shock-absorption capacity is lower than that of its regional and global rated peers.” The firm predicted that this reliance on oil and continued concern over political and social issues “are likely to lead to a significant rise in government debt as a share of GDP over the medium term”.

In its own report, the IMF acknowledged that while oil prices are subject to considerable volatility, futures prices suggested a reduction in the medium term. By comparison, the break-even oil prices in Saudi Arabia, Oman and the UAE are between $80 and $100, while in Kuwait and Qatar it is less than $60, or half the price for Bahrain. The IMF report adds that Bahrain is the only country in the GCC that has not accumulated large official external assets as a result of fiscal surpluses fed by oil revenues in the past.

Given that the price of Brent crude dropped by more than 50% between June 2014 and the end of the year, down to $56 per barrel, the implications on Bahrain’s fiscal position may prove significant. While greater borrowing and GCC support may bolster the kingdom’s financial position in the short term, prolonged low oil prices may force the government to take measures to reduce expenditures and improve fiscal sustainability. So far, forecasts suggest such a scenario may occur, with Bank of America Merrill Lynch predicting that Brent oil prices could continue dropping throughout the first quarter of 2015 to reach $31 per barrel.

Banking

The IMF also points out that one of Bahrain’s economic mainstays – its role as a financial centre – has a potential downside. The report says the kingdom “has a high exposure to foreign banks” with foreign bank claims on Bahrain’s financial sector at 162% of GDP and foreign bank liabilities amounting to 107% of GDP.

According to the CBB, the total of aggregate banking sector assets was 6.3 times GDP at the end of 2013 compared to its peak of 13.4 times GDP in 2007, with the wholesale banking component shrinking from 10.7 times GDP in 2007, when it was worth $196.3bn, to 3.8 times GDP at the end of 2013, or $116.7bn. Retail banking has remained much more stable, declining from 2.69 times GDP in 2007, when it was at $49.5bn, to 2.48 times GDP by the end of 2013, or $75.3bn.

While the scale of Bahrain’s banking system, when compared to GDP, puts any future bailout of significant institutions well beyond the means of the government, the country’s banking regulator issued a positive signal on the state of the sector in February 2014. The CBB’s “Financial Stability Report” noted, “There are no major or minor effects of the drop of the overall size of the banking sector in the economy of Bahrain.”

In its August 2014 “Financial Stability Report”, the CBB said, “Despite the various types of crises, the banking sector in Bahrain remains resilient and stable, and Bahrain emerged during the past recent years to become a hub of [the] finance and insurance industry, especially the Islamic finance and takaful sector.”

By The Numbers

Figures from the CIO, released in April 2014, showed GDP growth of 5.3% based on constant prices in 2013. GDP reached BD10.75bn ($28.5bn) in 2013, up from BD10.2bn ($27bn) in 2012, BD9.9bn ($26.2bn) in 2011 and BD9.7bn ($25.7bn) in 2010.

The leading sectors in 2013 were oil and gas, worth BD2.2bn ($5.8bn) or 20.8% of the total; finance at BD1.8bn ($4.8bn) or 16.7%; manufacturing with BD1.56bn ($4.1bn), or 14.5%; transport and communications with BD735m ($1.9bn), or 6.8%; and real estate with BD593m ($1.6bn), or 5.5%.

In the CIO’s “National Accounts 2013” publication, the 2013 rate of growth in the oil sector was reported at 15.3% at constant prices, while the non-oil sector expanded by 3.1%. Gross national income grew from BD10.1bn ($26.8bn) in 2012 to BD10.8bn ($28.6bn) in 2013, up by 6.9%, while gross national disposable income rose by 6.5% from BD9.3bn ($24.6bn) to BD9.9bn ($26.2bn) over the same period.

State Revenue

Government revenues were BD2.94bn ($7.79bn) in 2013, down 3.3% from BD3.03bn ($8.03bn) in 2012, according to official data. Total revenue from oil and gas shank slightly, by 1.9% from BD2.65bn ($7.02bn) in 2012 to BD2.6bn ($6.89bn) in 2013. Hydrocarbons accounted for 88% of government revenues in 2013. Between 2012 and 2013 non-oil revenue dipped by 11.7% from BD388.9m ($1.03bn) to BD343.5m ($910.28m). For its part though, tax revenue continued its upward trend, rising 2.7% from BD217.8m ($577.17m) in 2012 to reach BD223.77m ($592.99m) in 2013. Meanwhile, following a surge in 2012, when income from fines and penalties increased 281% over the previous year, this segment saw a slight decrease in 2013, dropping from BD53.9m ($142.84m) to BD49.3m ($130.65m).

According to the state budget for fiscal years 2013 and 2014, government revenues were forecast to be around BD2.79bn ($7.39bn) in both 2013 and 2014, with the latter breaking down into BD2.4bn ($6.36bn) in net oil and gas revenue, BD351.51m ($931.5m) in non-oil revenue and BD37.6m ($99.64m) in grants.

Government Spending

Recurring expenditures accounted for BD2.88bn ($7.63bn) of government spending in 2013, with projects costing BD476.7m ($1.26bn), down 54.6% from BD737m ($1.95bn) the previous year. Total expenditure in 2013 was BD3.35bn ($8.88bn), which was lower than the BD3.9bn ($10.34bn) in the budget, but 2.8% higher than the BD3.26bn ($8.64bn) in expenditure in 2012.

Total state expenditure was projected at BD3.62bn ($9.59bn) for 2013, with this rising to BD3.71bn ($9.83bn) for 2014. The budget for the latter year is broken down into BD2.5bn ($6.63bn) in recurrent expenditure, BD660.78m ($1.75bn) in government subsidies and BD551m ($1.46bn) in project expenditure.

The departments with the highest recurring expenditure in 2013 were the Ministry of Defence, with BD465.1m ($1.23bn), and the Electricity and Water Authority, with BD350m ($927.5m). The Ministry of Interior spent BD324.73m ($860.5m), while expenditure by the Ministries of Education and Health totalled BD318.88m ($845.03m) and BD249.78m ($661.92m), respectively. The biggest project expenditures during 2013 were by the Ministry of Housing, with BD125.12m ($331.57m), and the Ministry of Works, with BD124.38m ($329.61m). However, spending on projects was slashed by BD371.39m ($984.18bn) compared to the budget.

Deficit

Despite these cuts, the government recorded a deficit of BD410.09m ($1.09bn) in 2013, below the budgeted deficit of BD1.11bn ($2.94bn) but above the actual BD226.64m ($600.6m) deficit in 2012. The deficit in 2013 was equal to 3.3% of GDP before being rolled over, higher than the 2% in 2012 but still much lower than the 5.6% of GDP in 2010. According to CBB figures, the deficit after rollover was 5.5% in 2012, or BD680.6m ($1.8bn), compared to 4.4% and BD503.3m ($1.33bn) in 2012, 3% and BD331.1m ($877.42m) in 2011, and 8% or BD773.2m ($2.05bn) in 2009.

The last year in which there was budget surplus was 2008, when it was 6.6% of GDP before rollover and 4.5% after. Total public debt as a percentage of GDP was 43.4% by the third quarter of 2014, according to CBB figures, up from 41.4% at the end of 2013.

Financing Public Debt

Bahrain uses a number of different Islamic financing instruments, as well as development bonds and Treasury bills to finance its public debt. Treasury bills can be bought for three-, six- or 12-month periods through a variable-rate auction process. According to the CBB, which issues government debt securities with the Ministry of Finance, Treasury bills accounted for BD1.23bn ($3.26bn) by the third quarter of 2014. Development bonds are a longer-term security with a maturity period of three to 10 years and are issued on an ad-hoc basis in either US dollars or Bahraini dinars. They represented BD3.15bn ($8.35bn) of government debt instruments by the third quarter of 2014. The government issues three types of sukuks (sharia-compliant bonds): long- and short-term ijara sukuks and al salam sukuks. According to the CBB, sharia-compliant securities totalled BD969.9bn ($2.57bn) by the third quarter of 2014.

Monetary Polcy

The Bahraini dinar has been pegged to the US dollar since the 1980s, as have other GCC currencies with the exception of Kuwait, which is pegged to a currency basket. The pegged rate is BD0.376:$1. For a relatively small and open trading nation such as Bahrain, monetary policy is key to facilitating trade with global partners, and the CBB is tasked with setting and implementing this policy. The stable exchange rate helps provide consistency and predictability to the economy, which is heavily reliant on trade, while also making it particularly easy to interact with neighbouring countries, as they are also pegged against the dollar. The CBB provides a foreign exchange facility that is used to sell and buy Bahraini dinars against the US dollar at the official exchange rate and it aims to steer short-term interest rates in the money market by providing deposit and standing facilities to banks.

In mid-November 2014 the CBB one-week deposit rate, or the CBB key policy rate, was 0.5%. The bank also uses a reserve requirement where all commercial banks in the kingdom are required to maintain reserves deposited at the CBB amounting to 5% of the value of non-bank deposits denominated in Bahraini dinars. The Monetary Policy Committee of the CBB determines both the amount and form of the reserves. The reserve requirement of each commercial bank is calculated on a monthly basis from data provided by the banks at the end of the previous month. There are no interest rate caps or floors, and the CBB does not exercise control over market interest rates or work directly to affect the distribution or cost of credit in the economy.

Money Supply

All measures of money supply have more than tripled in the last decade. The narrowest measure, defined as currency outside of banks and demand deposits, or M1, increased more than threefold from BD861m ($2.3bn) in 2004 to BD2.80bn ($7.4bn) in 2013 and rose each year in between with the exception of 2012. The broadest measure, which includes all types of deposits and also general government money supply, or M3, tripled from BD3.54bn ($9.38bn) in 2004 to BD11.22bn ($29.7bn) in 2013 and has seen consistent year-on-year (y-o-y) growth, according to CBB statistics from April 2014. According to the Bahrain Economic Development Board (EDB), the primary driver of money supply from 2001 to 2013 was a 215% increase in private sector time and savings deposits and a 240% rise in demand deposits.

Interest Rates

Although there have been some quarterly oscillations, the cost of borrowing has followed a downward trend over the past five years. In 2009 the interest rate on an average personal loan was 7.67%, but by the final quarter of 2013 this had fallen to 5.9%. In contrast, rates for business loans excluding overdrafts have gone from 4.94% in the final quarter of 2012 to 5.08% in the last quarter of 2013. However, the money market rates fell gradually from the fourth quarter of 2012 to the same period in 2013. The average three-month money market rate fell from 0.32% in the fourth quarter of 2012 to 0.24% in the fourth quarter of 2013 and the average six-month money market rate also declined from 0.56% in the last quarter of 2012 to 0.35% in the same period at the end of 2013.

Consumer Inflation

Consumers in Bahrain have seen only moderate increases in the price of goods in recent years. The average consumer price index (CPI) rose from 114.7 points for 2012 to 118.5 points for 2013, equivalent to an inflation rate of 3.3% y-o-y, according to figures released by the CIO.

By category, the biggest increases in CPI from December 2012 to December 2013 were housing, electricity, water, gas and other fuels (up 7%); furnishings, household equipment and routine household maintenance (up 6.7%); food and non-alcoholic beverages (up 5.5%); miscellaneous goods and services (up 5.1%); and education (up 4.1%). The only categories to see a fall over the year were transport, which was down 1.3%, and clothing and footwear, which fell 0.1%.

Current Account

According to provisional data released by the CBB in April 2014, Bahrain had a current account surplus of BD962.6m ($2.6bn) in 2013, up 15% from BD835m ($2.2bn) in 2012, and representing 8.4% of GDP in 2013 compared to 7.3% of GDP in 2012. The balance of payments was BD65.2m ($172.8m) in 2013, down from the BD253.2m ($671m) achieved in 2012, but a considerable improvement on the deficit of BD220.8m ($585.2m) recorded in 2011.

In 2013 oil exports accounted for BD5.75bn ($15.2bn) compared to BD5.71bn ($15.1bn) in 2012, but imports rose from BD2.95 ($7.8bn) to BD3.19bn ($8.5bn) over the same period. According to the UN Conference on Trade and Development, Bahrain attracted $989m in foreign direct investment (FDI) in 2013, an 11% increase on 2012, while outgoing FDI reached $1.05bn for 2013, an increase of 14% over 2012.

Subsidy Debates

The IMF has been targeting the use of state subsidies in its discussions with countries in recent years and Bahrain was no exception when the fund visited in March 2014. It suggested retargeting subsidies to those on low incomes as one way to control spending without harming the needy. The IMF argues that universal state subsidies tend to favour those with more spending power in society, diverting funds away from specific measures that might aid those most in need of a helping hand from the state.

In December 2013, deputy prime minister Shaikh Khalid bin Abdullah Al Khalifa revealed the government had spent BD1.13bn ($2.99bn) on subsidies in 2012, when Bahrain’s GDP was BD11.6bn ($30.74bn), the equivalent of 9.7% of GDP. Also in December 2013 an attempt to reduce the subsidy on diesel led to threats of a walk-out by some members of parliament, and the price hike was revoked by the prime minister on December 31, 2013. However, writing in a local newspaper in April 2014, Bahraini MP Jasim Ali called for the issue of subsidies to be revisited. Ali’s article suggested that in 2013 subsidies totalled BD1.28bn ($3.4bn), with gas subsidies accounting for 47%; electricity and water, 27%; petrol products, including diesel, 21%; and 5% on a small range of essential food products such as wheat flour, red meat and poultry.

Housing Projects

In December 2013 King Hamad bin Isa Al Khalifa used a speech to mark the country’s national day to order his ministers to build 40,000 new housing units “in the shortest period possible”. One of the biggest complaints among Bahraini nationals is that many spend decades on waiting lists for social housing, with more than 40,000 people waiting at any one time and as many as 3000 new names joining the list each year. A five-year plan running from 2012 to 2016 has earmarked BD2.6bn ($6.9bn) for social housing, but the king’s speech and subsequent remarks by the prime minister in February 2014 suggest there may be a renewed urgency in implementing the plan.

In April 2014 Basim bin Yacob Al Hamer, the housing minister, used a visit to China to meet several construction firms in Beijing to outline the kingdom’s plans. Meanwhile, in Bahrain, the prime minister announced the first contracts had been signed with Chinese firms for the building of 4000 units, in cooperation with local contractors, in Muharraq, Umm Al Hassam and Isa Town. Bahrain is also planning to use almost half of the BD3.77bn ($10bn) it is set to receive in aid approved by its GCC partners three years ago for social housing. According to local press reports, BD820m ($2.2bn) will be spent on 2548 houses in 2015, 1443 units in 2016 and 5241 homes in 2017. The remaining BD840m ($2.2bn) will go towards water and power projects.

In the past two years the state has initiated public-private partnerships for social housing construction. In December 2013 a BD170m ($451m) funding package agreed with Ithmaar Bank saw construction start on 2800 social and affordable housing units at Al Madina Al Shamaliya and Al Luzwi. In late 2013 a new housing finance scheme was launched in association with a number of banks to help people on the housing list to secure loans to buy their own properties.

The Ministry of Housing announced a second phase of the scheme in March 2014 targeting Bahrainis under the age of 35 and with a monthly income of BD700 ($1855) or more. The housing minister said the original pilot scheme had benefitted 1200 people. The total budget for all state-funded capital projects in the kingdom in 2014 is BD551m ($1.5bn).

Oil & Gas

Although the non-oil sector is expected to show greater growth in 2014 after a more subdued 2013, the oil and gas sector will remain the key source of government revenues. Bahrain was the first country in the Gulf region to successfully produce oil after its discovery in 1932 and the onshore Bahrain field is the region’s oldest source of crude oil. The kingdom’s second and most significant source of oil is the offshore Abu Safa field, and Bahrain currently has rights to half of the oil produced from the field by Saudi Aramco, Saudi Arabia’s state oil company.

According to the EDB’s quarterly report for April 2014, the hydrocarbons sector was responsible for 2.9% of GDP growth in 2013, and grew by 15.3% y-o-y itself, thanks to the resumption of full production at the Abu Safa field. In 2012 oil production had dipped to 128,000 barrels per day (bpd), below its 150, 000-bpd capacity, but in 2013 it was back up to 149,700 bpd. In addition, average production from the Bahrain field was around 48,000 bpd in 2013, up from 45,000 bpd in 2012, giving a total daily average of crude oil extraction of 198,000 bpd (see Energy chapter).

The growth trajectory of the oil and gas sector continued in the first half of 2014, with expansion of 4.1% and 9.3% y-o-y in the first and second quarters, respectively, according to the EDB. However, the price of Brent crude fell by around 51% from June ($115 per barrel) to year-end ($56 per barrel). Such a change in oil prices could impact government revenues and have an effect on government spending and future economic growth.

Financial Services

The financial sector is the second-biggest contributor to GDP after hydrocarbons. In 2013 it was responsible for 16.7% of GDP, and retail banking is a key source of employment for Bahrain’s workers. The finance sector has weathered successive shocks to the global and regional banking system, but in terms of employment its impact has been felt at different times by Bahrainis and expatriate financial workers.

The financial services sector grew rapidly until the second quarter of 2008, just before the Lehman Brothers collapse, and at that time it employed 16,291 people, of which 9599, or 58.9%, were Bahraini nationals. However, by the fourth quarter of 2013 the number of people employed in the sector had fallen to 14,400, down 11.6% since its peak in 2008.

Real Estate & Construction

The EDB’s quarterly report published in December 2013 stated that there had been strengthening of real estate sales for the first three quarters of 2013 despite a lull in construction activity in the third quarter.

“Real estate trading in the first half of [2013] was some 58% ahead of a year earlier, with a total of some BD500m ($1.3bn) worth of transactions reported,” said the EDB report, which also noted that there was higher demand for small office space in the commercial sector (see Construction & Real Estate chapter).

Construction activity recovered in the fourth quarter of 2013, with growth increasing from 0.7% to 1.6% quarter-on-quarter, and this trend continued into the first (1.4%) and second (3.6%) quarters of 2014. According to the EDB’s September 2014 report, a further acceleration of construction activity “looks extremely likely in view of the projected increases in infrastructure spending”. The EDB forecasts sector growth of around 8% in 2014, with this likely to have positive knock-on effects for the broader economy.

Workforce & unemployment

The number of Bahrainis employed across all sectors increased by 2.45% from the third quarter of 2013 to the third quarter of 2014. In the same quarter, the total workforce was 582,141, of whom 141,100 were Bahraini nationals and 441,041 were foreigners, according to figures from the Social Insurance Organisation. Average monthly wages for Bahraini workers were BD809 ($2144) in the public sector and BD666 ($1765) in the private sector, up 2.8% and 0.9% year-on-year, respectively.

The unemployment rate was 4.2% at the end of February 2014, according to the IMF. Bahrain’s well-educated, flexible and Arabic-English bilingual employees remain one of its most significant assets. In 2013 the sector experiencing the second-highest growth, of 9.5%, was the hotel and restaurant sector, a sign that the numbers of weekend visitors from Saudi Arabia have picked up significantly after falling by 17.2% in 2011. Saudi Arabia also changed its weekend in 2013 and, according to the EDB, this may have led to more visitors staying for two nights rather than one.

Outlook

With a renewed sense of stability and growing business confidence reflected in the performance of the Bahrain All Share Index, there are signs that the kingdom is moving forward with cautious optimism. Its economy is diversified, but its two key pillars are both susceptible to downside risks.

However, a drop in the price of oil has put an additional strain on the country’s balance sheet as its fiscal break-even point is based on an oil price of almost $120 per barrel and Brent crude was trading at around $56 as of year-end 2014.

While oil prices are notoriously difficult to predict, if they remain at a sustained lower level this may affect growth forecasts in 2015 and beyond. Bahrain’s dominance in investment banking has also been challenged by the emergence of new financial centres in the region, especially in the UAE and Qatar. More broadly, the kingdom’s fortunes are tied to those of its GCC neighbours, and the smallest economy in the region stands to benefit from the growth and diversification of those around it. The kingdom’s skilled workforce help provide it with the flexibility to adapt to changing circumstances.