An environment for growth: Maintaining high rankings and a positive outlook in spite of global financial troubles

Despite a number of notable uncertainties in the global economy, Bahrain’s economic outlook remains largely positive. It appears that the international economy will continue to be challenged by problems such as the sovereign debt crisis in the eurozone and fiscal disputes in the US throughout 2013.

Bahrain has remained largely insulated from these external risks and has weathered the global economic shocks of the recent past relatively well. At the height of the international financial downturn, for example, the kingdom avoided falling into recession and even achieved real GDP growth of more than 6% in 2008 and over 3% in 2009, according to figures from the country’s statistics agency, the Central Informatics Organisation (CIO) IN THE RATINGS: The kingdom’s economy has also weathered local challenges well. Political unrest across parts of the Arab world, including in Bahrain beginning in February 2011, has prompted some concern for the health of the economy. However, as efforts continue to improve the political environment, both Standard & Poor’s (S&P) and Fitch Ratings have indicated confidence in the country’s economic outlook. Most recently, S&P revised the kingdom’s outlook from “negative” to “stable” in January 2013, while maintaining both its local currency and foreign currency ratings of “BBB”. Meanwhile, Fitch affirmed its local currency rating of “BBB+” and its foreign currency rating of “BBB” in July 2012.

According to the CIO, Bahrain also recorded strong economic growth in 2012, with real GDP growth at 3.4%, representing a sharp increase compared to the 1.9% recorded in 2011. The non-hydrocarbons sectors played a key role in boosting GDP growth in 2012, making up for a slower year for the hydrocarbons sector and recording growth of 6.7%. The retail banking segment supported this growth through an increase in lending over the year.

Even more notable than 2012’s overall economic performance, the Economic Development Board (EDB) expects GDP growth in the kingdom to reach more than 5% in 2013. Much of this will be due to the oil and gas sector’s expected rebound as the technical disruptions seen in 2012 are overcome. Indeed, the EDB estimates the hydrocarbons sector will grow by more than 10% in 2013. Growth in non-hydrocarbons is expected to decelerate somewhat from the rebound rates seen in 2011, but this segment should continue to expand at a comfortable pace of around 4.4%, supported in part by robust credit growth.

FEELING THE PRESSURE: As Bahrain works to stabilise its political situation, a number of potential global and regional events in 2013 could impact the economy, despite its relative insulation from external factors. A continued pattern of volatility in the international economy, for instance, could spill over into GCC markets. The practice of loose monetary policy throughout parts of the world could also lead to higher inflation in 2013, though commodity prices in the near term look relatively stable.

Regional developments such as strong economic growth in Saudi Arabia should lead to greater numbers of Saudi tourists spending time in Bahrain, and investments in real estate are expected in the Gulf region due to rising disposable incomes. The GCC economy is likely to continue growing strongly in 2013, and this should provide Bahrain with new regional export and investment opportunities.

Because it has smaller oil and gas reserves than some of its neighbours, Bahrain has worked for years to diversify its economy. These efforts have helped the kingdom develop strong financial services and industrial manufacturing sectors, in addition to a business-friendly environment for investors.

OUTLINING DEVELOPMENT: Economic Vision 2030, Bahrain’s long-term development strategy, outlines plans to build upon the kingdom’s successes through further diversification of the economy. The main objectives of the strategy include establishing a more competitive and sustainable economy that supplies Bahraini nationals with improved employment options. The plan also takes into account the need to integrate environmental considerations into development and infrastructure projects in line with the 2006 National Environmental Strategy. “Sustainable development is a key component of Bahrain’s 2030 vision,” Adel Khalifa Al Zayani, the director-general of the Supreme Council for the Environment, told OBG. “Public and private sector compliance with practical environmental regulations will only add value to Bahrain’s investment climate.”

Economic Vision 2030 is guided by the EDB, which is responsible for helping the various stakeholders in the country understand the economic plan and make any changes needed to adopt it. Chaired by the crown prince, Salman bin Hamad Al Khalifa, the EDB’s board of directors includes a number of executives from private sector organisations, as well as key government ministers. The EDB has been closely involved in several major economic achievements in the recent past, including the liberalisation of the telecoms sector and the signing of a free trade agreement with the US in the mid-2000s.

In addition to its domestic focus, the EDB is also mandated with marketing Bahrain internationally to attract investors from abroad. The EDB works to fulfil this responsibility by operating four foreign offices, which are separate from Bahraini embassies and consulates. These are located in the UK, Japan, India and Germany. Along with its marketing efforts, the EDB helps new investors enter the market by providing information on setting up a business in Bahrain and helping build a network of contacts.

BY THE NUMBERS: According to the most recent data released by the CIO, GDP at constant prices in Bahrain was about BD9.7bn ($25.52bn) in 2010. This rose to more than BD9.8bn ($25.81bn) the following year and to BD10.2bn ($26.84bn) in 2012, a 4% increase over the previous year.

In terms of headline year-on-year (y-o-y) growth, Bahrain’s GDP during the first half of 2012 grew by more than 5%. A large part of this expansion can be attributed to a rebound following the political disruptions in early 2011; however, this growth was sustained throughout the year. The CIO reports that GDP for the fourth quarter of 2012 was about BD2.58bn ($6.79bn) at constant prices, which is higher than GDP in any quarter of 2011.

Goods-producing sectors in Bahrain – which include oil and gas production, manufacturing, construction, and electricity and water industries – accounted for around 43.5% of GDP at constant prices in 2012. The services sectors, such as financial services and trade, represented about 55.4% of GDP in 2012, according to the CIO.

The largest sectors, in terms of GDP contribution, were oil and gas production (19.0%), financial services (17.1%), manufacturing (15.5%), construction (6.8%), and transport and communications (7.0%). The manufacturing and transport and communications sectors’ share of GDP rose slightly in 2012 compared to the end of 2011. The oil and gas industry’s share of production, meanwhile, decreased slightly between the two periods. The other major sectors remained largely stable over the same period.

According to the CIO’s most recently published report of economic indicators, gross national income growth mirrored that of GDP between 2010 and 2011, increasing from about BD8.8bn ($23.18bn) in 2010 to nearly BD9.5bn ($25bn) the following year. Similarly, gross national disposable income grew by close to 7%, from around BD8.2bn ($21.6bn) in 2010 to more than BD8.7bn ($22.92bn) in 2011.

REVENUE & SPENDING: Bahraini government revenues reached more than BD2.8bn ($7.38bn) in 2011, a nearly 30% increase when compared to 2010, according to the most recent Ministry of Finance (MoF) data. Oil and gas made up the majority of government income during the year, totalling close to BD2.5bn ($6.59bn). This represented an increase of nearly 34% when compared to 2010. Non-oil revenue reached some BD343m ($903.5m) in 2011, expanding by almost 6% since the end of the previous year.

Recurring expenditures accounted for around BD2.4bn ($6.32bn) of government costs in 2011, with projects constituting roughly BD441m ($1.16bn). The MoF reported that the Ministries of Defence, Interior, Education and Health, as well as the Electricity and Water Authority (EWA), accounted for the greatest shares of government expenditure in 2011. Projects carried out by the EWA and the Ministry of Works (MoW) represented the largest percentages of government-funded projects under way during the year. However, project spending for both the EWA and the MoW was below budget.

While the government recorded a slight deficit in 2011, it constituted only 0.3% of GDP before being rolled over — a notable improvement compared to 2010, when the deficit reached more than 5.5% of GDP before being rolled over. Total outstanding public debt at the end of 2011 was close to 30% of GDP, according to the Central Bank of Bahrain (CBB).

While this had increased to about 36% of GDP by the end of 2012, the kingdom’s public debt-to-GDP is still relatively low by global standards. According to data from the IMF, the UK’s public debt, for example, was more than 80% of GDP at the end of 2011 and the US recorded a public debt-to-GDP ratio of nearly 103% during the same year.

The kingdom finances its public debt through a combination of treasury bills, development bonds and a number of different Islamic financing instruments. Treasury bills are sold through a variable-rate auction process and can be bought for three months, six months or 12 months. According to figures from the CBB, which issues government debt securities in coordination with the MoF, treasury bills accounted for BD930m ($2.45bn) of public debt instruments by the end of 2012. Development bonds are a longer-term security, with a maturity period of three to 10 years. They are issued in either Bahraini dinars or US dollars and represented about BD1.7bn ($4.48bn) of government debt instruments at the end of 2012.

The Bahraini government issues three types of sharia-compliant securities: Al salam sukuks and short-term and long-term ijara sukuks. According to the CBB, BD18m ($47.4m) worth of Al salam sukuks are issued on a monthly basis, with the securities having a maturity of three months. Short-term ijara sukuks are also issued each month, but have a longer maturity of six months. A total of BD20m ($52.7m) worth of short-term ijara sukuks are sold at auction every month. Long-term ijara sukuks have a maturity of three to 10 years and are not issued on a regular basis. Sharia-compliant securities accounted for a total of around BD1.3bn ($3.43bn) by the end of 2012 (see Islamic Financial Services chapter).

MONETARY POLICY: In addition to selling government bonds and sukuks, the CBB is also mandated with setting and implement monetary policy in Bahrain. Central to this policy is an objective to keep inflation low and the dinar stable. Bahrain has largely been able to achieve these aims by pegging the dinar to the US dollar since the 1980s, at a rate of BD0.376:$1. The central bank has noted that the exchange rate plays a dominant role in Bahrain’s monetary policy because the kingdom is a small, open economy that trades actively. A monetary position that closely matches that of key trading partners facilitates global trade.

The CBB also employs three types of instruments to manage the implementation of monetary policy. The bank provides a foreign exchange facility that is used to sell and buy Bahraini dinars against the US dollar at the official exchange rate. The CBB works to steer the short-term interest rates in the kingdom’s money market by providing a set of deposit and standing facilities to retail banks. These are offered in Bahraini dinars, with the CBB setting the interest rates. As of late March 2013, the CBB’s one-week deposit rate was 0.5%, according to figures provided by the bank. The central bank’s third monetary instrument involves placing a requirement on retail banks in the kingdom to hold unremunerated reserves with the central bank. This tool helps manage the liquidity situation in the banking industry. However, it is not meant to be used as an active policy instrument for controlling liquidity on a daily basis.

There are a number of restrictions on what the CBB can do. For example, the bank does not exercise control over market interest rates and does not work to directly affect the distribution or cost of credit in the economy. In addition, there are no interest rate caps or floors in the kingdom.

MARKET RATES: The liquidity situation in the economy has been slowly improving. According to the EDB, currency not held by banks or in demand deposits, known as the M1 measure of money supply, increased by a yearly rate of 4.1% in December 2012. The entire money supply – known as the M3 measure – grew by 4.3% y-o-y, reaching about BD10.6bn ($27.92bn). The annual rate of M3 growth during 2012 topped out at 10.1% in May. Since that time, M3 growth has typically tended to oscillate between 6.1% and 9.1%.

The EDB reported in early 2013 that market interest rates had moved down over the past several months. During the fourth quarter of 2011, the average lending rate for a personal loan was 6.28%; however, this decreased slightly to 5.96% a year later. In contrast, business loans averaged 4.86% in the fourth quarter of 2011, increasing marginally to 4.94% for the following year. Money market rates, however, have been moving slowly up. According to the CBB, the average three-month money market rate rose from 0.25% in the fourth quarter of 2011 to 0.32% at the end of the fourth quarter of 2012, and the average six-month rate increased from 0.50% to 0.56% over the same period.

Inflationary pressures in Bahrain have remained subdued in recent years. The overall rate in 2012 was 2.8%. The headline consumer price inflation in April 2013 reached an annual pace of 2.8% in a deceleration from the 3.0% pace recorded the previous month. The downward trend was above all driven by the effects of the global commodity price correction on food prices. By contrast, housing costs have rebounded somewhat after a period of price declines in 2011. Housing costs advanced by an annual 9.6% in April 2013, up on a total of 8.6% in March. Nonetheless, significant new price pressures are unlikely because of new capacity in most market segments.

Overall, the kingdom’s retail sector has performed well. “The premium consumer and corporate segments remain very steady across the island. A previously conducted AMEX survey focusing on luxury markets showed that Bahrain is second to Qatar for luxury item sales throughout the Middle East region,” Mazin Khoury, CEO, AMEX (Middle East), told OBG.

BUDGETING FOR STABILITY: The Bahraini government prepares two-year budgets, with the current budget cycle covering 2013 and 2014. Presented in November 2012 by the MoF, the 2013-14 draft budget outlines a number of the government’s priorities, including housing, infrastructure and social development. Commenting on the current budget, the EDB noted that the country’s fiscal position should be characterised by stability and continuity.

According to the MoF, the draft 2013-14 budget anticipates total revenues to reach close to BD2.79bn ($7.34bn) in 2013 and BD2.79bn ($7.35bn) in 2014. Oil and gas production will account for the vast majority of revenues in both years. Total oil and gas earnings are expected to reach BD3.31bn ($8.71bn) in 2013, for example, with net oil and gas revenues totalling around BD2.41bn ($6.34bn) after about BD878m ($2.31bn) in subsidies to the local market and a planned BD21m ($55.31m) donation to the kingdom’s Future Generation Fund (FGF) are taken into account. The FGF was established in 2007 to ensure that future generations of Bahrainis would benefit from the kingdom’s hydrocarbons reserves. The budget anticipates net oil and gas revenues falling slightly in 2014. Non-oil revenues, meanwhile, are expected to total BD344m ($906.13m) in 2013 and BD349m ($919.3m) in 2014, while grants of BD37.6m ($99m) each year are also accounted for in the kingdom’s total revenues.

Expenditures of BD3.45bn ($9.09bn) are budgeted for 2013. At BD2.9bn ($7.63bn), recurrent spending, which includes government subsidies, will make up the largest portion of 2013 expenditures, while spending on projects is expected to account for the remaining BD555m ($1.46bn). Total expenditures of BD3.54bn ($9.32bn) are budgeted for 2014, meaning that public spending will increase by about 2.7% over 2013. While the government expects to run a deficit of roughly BD662m ($1.74bn) in 2013 and nearly BD753m ($1.98bn) the following year, these figures are lower than the expected deficits in the 2011-12 budget of BD925m ($2.44bn) in 2011 and about BD1.03bn ($2.71bn) in 2012.

GOVERNMENT SUPPORT: Excluding oil and gas subsidies, government subsidies of some BD623m ($1.64bn) are budgeted for both 2013 and 2014. The EWA, which provides water and power throughout the country, will account for the largest portion of government contributions (56%), followed by food (more than 10%). Three public universities are also set to receive grants: the University of Bahrain (UoB), which will see some 7% of total subsidies; Bahrain Polytechnic (2%); and the Bahrain Teachers College (1%), which is part of the UoB. The government also plans to spend approximately BD38m ($100m) each year – about 6% of the total annual subsidies – on its Housing Programme Support scheme, which includes rent assistance and reduced housing loans.

PROJECT SPENDING: While public spending on projects decreases to some degree between the 2011-12 and 2013-14 budgets, project expenditure still remains a key feature of the current budget. A total of BD555m ($1.46bn) has been set aside for development in 2013, and projects in the infrastructure sector, which includes the MoW, the Ministry of Housing (MoHO) and the Ministry of Transportation, account for the largest share, at 40%, or BD223m ($587.4m). MoHO projects alone are budgeted to cost BD120m ($316.1m), while MoW enterprises are estimated to cost BD95m ($250.2m). Project expenditure is budgeted to decrease by about 4.5% to BD530m ($1.4bn) in 2014, according to budget figures. As with the previous year, however, the infrastructure sector, led by the MoHO and the MoW, will account for the largest portion of project spending in 2014 (see Construction and Transport chapters).

The EDB has reported that Bahrain’s economy should benefit from a number of specific industrial projects in 2013, including a $2.2bn plan to build a new production line and power station at Aluminium Bahrain (Alba), which is one of the largest aluminium smelters in the world. Another project involves upgrading the kingdom’s oil refinery – a facility owned and operated by the Bahrain Petroleum Company (BAPCO) – which the EDB estimates will cost $4.8bn. BAPCO is also working to complete a renewable energy project in 2013 that will supply 5 MW of power through photovoltaic solar panels, and the locally based Gulf Petrochemical Industries Company plans to invest $1.2bn in upgrades.

In late 2012 the Bahrain Airport Company announced its intention to expand the Bahrain International Airport (BIA). The proposed project aims to build a service centre and extend the BIA’s passenger terminal, increasing capacity by 50% from 9m passengers currently to 13.5m passengers when the project is completed, according to figures provided by the EDB in February 2013.

Bahrain recorded a current account balance of about BD1.22bn ($3.22bn) in 2011, representing close to 13% of GDP for the year. This has increased notably in recent years from roughly BD211m ($555.8m) – or about 3% of GDP – just two years before. The CBB reported in late 2012 that total exports expanded by around 65% between 2009 and 2011, from BD4.47bn ($11.75bn) in 2009 to almost BD7.38bn ($19.5bn) in 2011. At 79%, oil accounted for the lion’s share of exports in 2011. However, the kingdom was able expand its non-oil exports by more than 40% between 2009 and 2011, according to provisional CBB data.

The most recent CBB figures reported that the balance of payments fell in 2011 to about BD221m ($582m). While this represents a downward trend from a provisional balance of payments in 2010 of BD481m ($1.27bn), foreign direct investment in Bahrain grew in 2012. According to the EDB, the kingdom attracted 40 new businesses that year, which may create as many as 900 local jobs over the coming three years. Covering industries such as logistics, renewable energy, and professional and financial services, these new investors came from Europe, the Middle East, North America and Asia.

As of February 2013, 48 companies were listed on the Bahrain Bourse, according to the EDB. The Bahrain benchmark index slipped by a little less than 7% over 2012, and capitalisation of the bourse fell from BD6.3bn ($16.6bn) in the fourth quarter of 2011 to BD5.9bn ($15.5bn) during the same period the following year. Nonetheless, the index recovered to some extent in early 2013 with a year-to-date increase of 6.45% at the middle of May 2013.

In addition, the EDB reported that the total value traded on the bourse rose to BD110.2m ($290.3m) in 2012, increasing by more than 5% when compared to 2011. The strongest performing segment in the market was the services sector, which recorded an index gain of 8% in 2012.

GROWTH DRIVERS: While the economy is becoming increasingly diversified, the oil and gas sector remains a major driver of growth and should encourage continued expansion in 2013. Oil was discovered in Bahrain in 1932, and the country became the first state in the GCC to successfully commercialise production. BAPCO reported in early March 2013 that current production from the country’s onshore Bahrain Field stands somewhere between 42,000 barrels per day (bpd) and 43,000 bpd. Work is under way, however, to significantly increase production to 100,000 bpd, according to the EDB.

In addition to the country’s onshore oilfield, Bahrain also maintains sovereign rights to half of the production of the Abu Saafa Field, which is shared with Saudi Arabia and operated by the Saudi Arabian Oil Company (Saudi Aramco). According to the EDB, lower production at the Abu Saafa Field due to a technical problem had a notable effect on overall economic growth in 2012. Yet production is understood to be reverting to normal levels and is expected to remain steady at about 300,000 bpd through most of 2013 (see Energy chapter).

Bahrain’s financial sector also plays a substantial role in the local economy. Indeed, the EDB reported in early 2013 that 406 financial service companies were licensed in the kingdom, and total assets for the banking sector reached $191.1bn in February 2013. Furthermore, Islamic banking has grown tremendously, jumping from $1.9bn in total assets in 2000 to $25.4bn in February 2013. There are currently 26 Islamic banks in operation locally. Asset management is also strong, with more than 2800 registered funds as of March 2013, of which 108 of these are Bahrain-domiciled, and 51 are sharia-compliant.

There are currently 36 insurance firms operating in Bahrain, eight of which provide Islamic insurance products, according to the CBB. The insurance market recorded steady growth at a compound annual growth rate of about 15% between 2001 and 2010, reaching BD210.5m ($554.5m) in 2010. The Bahrain insurance sector posted strong growth during the third quarter of 2012, with gross premiums increasing by around 9% over the same period in the previous year, to register a total of BD184.1m ($484.4m) at the end of September 2012.

The manufacturing sector is another key pillar of the economy. According to figures provided by the EDB in January 2013, manufacturing output has grown by about 80% over the past five years due to a number of factors, including the well-developed logistics infrastructure. Assuming the sector continues to grow at current rates, manufacturing will make up more than one-fifth of Bahrain’s GDP within the coming 10 years. With total sales of $1.98bn in 2012, Alba plays a leading role in the manufacturing sector, and the company’s importance should continue as the global demand for aluminium is expected to grow by 7% during 2013, according to one recent forecast from the US-based aluminium producer Alcoa. The kingdom is also home to a burgeoning food manufacturing sector.

LEADING THE WAY: Despite experiencing difficulties in 2008 and 2011, Bahrain’s private sector is performing well and contributes significantly to GDP. An increase in bank lending to the private sector provides one indication of its current strength. According to the EDB, lending to the private sector grew by more than 8% y-o-y in November 2012 – a faster rate than overall bank lending, which rose by 7.5% y-o-y. Bank lending began to accelerate fairly consistently in the second half of 2011 and the y-o-y growth peaked at 18.3% in April 2012.

The y-o-y increment to lending hovered around BD1bn ($2.63bn) until June. Some of this positive momentum was naturally caused by a rebound from an unusually subdued situation in the first half of 2011. Since then, the pace of credit growth has decelerated fairly consistently, marking a larger trend in the region. The y-o-y growth of 6.0% seen in December accelerated to 6.7% in January before falling back to 5.9% in February 2013. These figures are around the GCC average. Growth has continued in all main segments of bank credit.

Set up in the late 1930s, the Bahrain Chamber of Commerce and Industry (BCCI) works to support and encourage economic growth in the kingdom’s private sector. Recent efforts by the chamber were focused on helping private companies remain competitive during the slower economy of 2011. For example, starting in August 2011 the BCCI distributed BD300,000 ($790,230) to qualifying small and medium-sized enterprises (SMEs). A total of 168 companies, all of which were members of the chamber, benefitted from this initiative, according to figures provided by BCCI in March 2013.

Private sector firms are performing particularly well in a number of segments and industries, such as information and communications technology (ICT), construction, food processing, steel, petrochemical, health and education sectors. A particularly notable development is the commissioning, in early 2012, of a privately backed water desalinisation and power plant – the largest power facility in the kingdom, in terms of electricity generation capacity. Known as the Al Dur Power and Water Plant, the facility provides 1234 MW of power, according to the Al Dur Power and Water Company, which owns the plant.

While Alba is majority government-owned, albeit with a portion publically listed on the Bahrain and London stock exchanges, a number of downstream, private sector aluminium companies are performing well. These include BALEXCO, which was set up in 1977 and produces aluminium extrusions, and GARMCO, which was established in the early 1980s and produces aluminium sheets, circles and coils.

PRIVATE EMPLOYMENT: Labour figures provide another indicator of the strength of Bahrain’s private sector. According to the latest data from the CBB, private sector companies accounted for over 92% of total employment during the third quarter of 2011. This has remained relatively constant for some time, with private sector employment at 91.5% of total employment in 2008.

Bahrainis made up 17.4% of private sector employment in the third quarter of 2011, and although the portion of nationals working in the private sector has decreased slightly in recent years, the total number of Bahraini private sector employees rose by close to 8% between 2008 and the third quarter of 2011.

Despite the positive indicators, the economy still faces a number of challenges such as ensuring that the local labour market grows sufficiently to provide jobs for the expanding population. The Ministry of Education has reported that the working-age population among Bahrainis is expected to grow by more than 40% over the next seven years. Another main economic challenge includes the structural task of creating a regulatory framework that encourages and fosters further SME creation and development, as well as training programmes.

“One of the primary tasks of the government is to match labour with the needs of the market,” Jarmo Kotilaine, chief economist at the EDB, told OBG. “This means helping Bahrainis to attain the skills needed in the current economy. Doing so will aid the recruitment process for local companies, help Bahrainis to obtain secure employment and strengthen the overall economy in the long term.”

A few sectors have performed relatively poorly in recent years. Although it has improved to some degree, investment in the real estate sector, for example, remains below 50% of its preceding peak, according to the EDB. The CIO has also reported that the added economic value at constant prices of the real estate sector fell from BD106.8m ($281.3m) in the first quarter of 2011 to BD105.8m ($278.7m) in the third quarter of 2012. The oil and gas production and construction industries have also had some trouble maintaining growth.

RANKINGS: Despite these challenges, the kingdom’s economy looks strong overall, and a number of indicators suggest that it will continue to expand going forward. The 2013 Index of Economic Freedom (IEF), for example, ranks Bahrain as having the 12th-freest economy out of 177 countries and gives the kingdom a score of 75.5 out of 100.

By comparison, the US received a score of 76; Bahrain was the only country in the Middle East to be ranked among the top 25 countries. Developed by the Wall Street Journal and the US think-tank the Heritage Foundation, the 2013 IEF awards Bahrain particularly high scores in fiscal freedom (99.9) and labour freedom (90.4).

The World Economic Forum’s (WEF) “2012-13 Global Competitiveness Report” ranks Bahrain as the 35th-most-competitive economy out of 144 economies. The kingdom received a score of 4.63 out of 7, and was ranked higher than a number of other countries in the Middle East, such as Turkey and Kuwait. The country also moved up two rankings since the WEF’s 2011-12 report, and the 2012-13 report ranked Bahrain’s goods market efficiency and financial market development as the 16th- and 18thbest, respectively, of the 144 economies surveyed. The only areas where Bahrain received a rank lower than 40 was for market size, which was ranked at 103rd, and for innovation (73rd).

The “Doing Business 2013” report for Bahrain, a publication produced by the International Finance Cooperation (IFC) and the World Bank, ranked Bahrain as having the 42nd-best business environment out of 188 economies listed. The kingdom was placed well above the MENA region average of 98 and received high scores in areas such as dealing with construction permits and paying taxes. Bahrain is ranked 7th in both of these categories, according to the IFC/World Bank’s 2013 calculations.

OUTLOOK: Given the favourable rankings from organisations such as the WEF, the IFC and the World Bank, Bahrain’s ability to quickly overcome a period of uncertainty and sluggish growth in 2011 is not surprising. Real GDP growth reached 3.4% in 2012, up from 1.9% the year before, and expansion of more than 5% is expected in 2013. A range of factors are supporting the economy’s positive trajectory. These include a robust private sector, forecasts for solid overall growth in the Gulf region, relative insulation from global economic uncertainties and strong domestic non-hydrocarbons sectors.

Looking forward, the kingdom will need to address several challenges such as government debt, youth unemployment and increased competition in the finance sector from nearby competitors. Inflation is likely to remain moderate, even in the face of sustained loose monetary policies in other parts of the world. A number of government initiatives promise to help boost the private sector by fostering SME growth and promoting innovation (see analysis). Furthermore, the tourism industry should be strengthened due to a growing economy in Saudi Arabia, which will likely lead to more Saudi tourists visiting Bahrain. The ICT and transport industries should also look to expand further. More significantly, however, Bahrain’s oil and gas sector is set to grow substantially as it recovers from lower production in 2012.