How Bahrain remained resilient among global economic crises

After weathering a series of global and regional challenges in recent years, Bahrain is emerging from the Covid-19 pandemic with a return to growth, rising government revenue and a new plan for the kingdom’s future economy. It was able to weather the 2020-22 period that was characterised by low energy prices on international markets, which resulted in slowed GDP growth both in the GCC and at home. These positive developments build on the country’s robust financial services and manufacturing sectors, which have helped make it among the most diverse economies in the Gulf.

A revival in transport and tourism after two years of a pandemic-related slowdowns caused by closed borders and social-distancing measures is helping to boost the economy further, with the kingdom’s hotels, restaurants and resorts once again open for regional and international visitors.

At the same time, a wave of labour and regulatory reform is under way, and an ambitious programme aims to attract $30bn in investment in the tourism, transport, health, education, construction and real estate sectors. Meanwhile, the Fiscal Balance Programme (FBP) has been updated – taking into account the pandemic’s impact – with a new target of balancing the budget by 2024 and continued efforts to cut unnecessary public expenditure (see analysis). The original FBP was introduced in late 2018 with an aim to reduce subsidies and economic inefficiencies, as well as balance the budget. While achieving these goals will not be easy, Bahrain has shown resilience – an attribute that puts it in an advantageous position for the coming years.

Government Structure

The government of Bahrain, an island nation which had some 1.7m inhabitants as of 2020, is appointed by King Hamad bin Isa Al Khalifa, who has ruled since 2002. The government consists of the Council of Ministers, led by the prime minister, a post occupied by Crown Prince Sheikh Salman bin Hamad bin Isa Al Khalifa since 2020. The Council of Ministers includes the heads of all ministries, such as the Ministry of Finance and National Economy (MFNE); the Ministry of Industry and Commerce; the Ministry of Tourism; the Ministry Social Development; the Ministry of Labour; the Ministry of Transportation and Telecommunications; the Ministry of Oil and Environment; and the Ministry of Works; and the Ministry of Housing Urban Planning.

There is also a bicameral legislature, known as the National Assembly. The assembly has a 40-seat lower chamber, the Council of Representatives, and a 40-seat upper chamber – the Shura Council – the members of which are appointed by the king.

Oversight

The government has established a number of key agencies with responsibilities for economic affairs. These include the Bahrain Economic Development Board, which works with the public and private sectors to promote investment; the Urban Planning and Development Authority, a body that was restructured in September 2021 in accordance with royal decree, and develops and executes studies, plans and projects in its field; the Labour Market Regulatory Authority; the Real Estate Regulatory Authority; the Supreme Council for the Environment; Tamkeen, a semi-autonomous agency that supports private sector development; the National Bureau for Revenue, the tax authority; and the Telecommunications Regulatory Authority.

The Central Bank of Bahrain (CBB) is responsible for maintaining monetary and fiscal stability and is headed by Rasheed Mohammed Al Maraj, the governor. The CBB sets and implements monetary policy, including interest rates, although its currency, the Bahrain dinar, is pegged to the US dollar. The CBB also has regulatory authority over the stock exchange, which is known as the Bahrain Bourse.

There are a number of government-owned entities that play a central role in the economy. These include the Ministry of Oil, which is responsible for energy matters. Tatweer Petroleum and a Saudi pipeline supply crude oil to the Bahrain Petroleum Company (Bapco), which has been exporting oil since 1934 and operates a refinery with a throughput of 267,000 barrels per day (bpd). Bapco is undergoing a $6.9bn corporate transformation, which was over 80% complete at the end of the third quarter of 2021 and is scheduled to finish in 2023. The Bapco Modernisation Programme is set to increase the company’s capacity to 380,000 bpd, boost efficiency and align activities with environmental criteria.

Another important entity is Mumtalakat, the country’s sovereign wealth fund which was established in 2006 with founding capital of BD5bn ($13.3bn) and 29 commercial assets. As of mid-2022 Mumtalakat managed more than 50 corporate investments in Bahrain and abroad. Its portfolio includes strategic national investments such as Aluminium Bahrain (Alba), local impact investments such as tourism and sport firm Bahrain International Circuit Company, government holdings such as the Gulf Investment Corporation, and global asset management in holdings including equities and hedge funds. Alba manages the world’s largest aluminium smelter outside of China, with a 1.6m-tonne-per-annum capacity. Mumtalakat also has a stake in Bahrain Telecommunications Company, real estate investment arm Bahrain Real Estate Investment Company, national carrier Gulf Air and the National Bank of Bahrain.

A key body representing the private sector is the Bahrain Chamber of Commerce and Industry (BCCI), established in 1939 – making it the Gulf’s oldest chamber of commerce. In addition to advocacy, it issues and approves certificates of origin, participates in local and international exhibitions, meets with foreign trade delegations and advises members.

Global Agreements

Bahrain is a member of the GCC, which sets common tariff and other trade policies, along with international bodies such as the World Trade Organisation, the IMF and the World Bank. The Organisation of the Petroleum Exporting Countries (OPEC) has an extension called OPEC+, of which Bahrain is a member. The group’s OPEC members and 10 oil-exporting countries work to regulate the supply of oil and influence global prices.

Bahrain’s oil output is subject to OPEC+ agreements. The country has two major fields – the offshore Abu Safa Field, with a capacity of around 150,000 bpd, and the onshore Bahrain Field, which produced 42,300 bpd in the third quarter of 2021. A new shale oilfield, Khaleej Al Bahrain Basin (KABB), was discovered in 2018 and has an estimated yield of 80bn barrels of light shale oil. The government hopes to begin production in late 2022 if it is able to reach an agreement with an international strategic partner to develop the reserves.

Plans & Programmes

Bahrain Economic Vision 2030 was launched in 2008. It aims to develop a thriving private sector and create an environment conducive for growth. Economic diversification is another major aspect of the plan, which aims to shift the economy away from hydrocarbons and towards high-potential sectors such as tourism, business services, manufacturing, transport and logistics.

With oil and gas prices beginning a sustained decline in 2014, Bahrain faced a significant economic challenge; the MFNE produced its FBP 2019-22 in response. Backed by a $10bn in non-interest financing loans from Saudi Arabia, the UAE and Kuwait, 2022 was originally set as a goal to bring the country’s fiscal accounts into balance. However, with the onset of the pandemic in 2020, public spending ramped up to cushion its economic impact, necessitating a revised FBP that was launched in October 2021. The updated timeline in the FBP targets a balanced budget in 2024 (see analysis).

The Economic Recovery Plan contains five pillars: labour market reform, regulatory reform, a new land bank, online portals and further digitisation of government services. It includes a strategic projects plan, with some $30bn in new projects and the creation of new industrial investment areas around the country prioritising six strategic sectors: tourism, logistics, financial services, telecommunications, IT and the digital economy, and manufacturing. It sets a target of 5% non-oil sector growth for 2022.

Fiscal reform remains a priority, and the plan outlines measures aimed at cutting government spending on non-essential projects, while raising revenue and streamlining the distribution of cash benefits to citizens where they are most needed.

Pre-pandemic Performance

In 2019 Bahrain had a nominal GDP of $38.7bn, according to the World Bank. Oil and gas was the largest contributor to GDP that year, accounting for 17.8% of economic output, followed by financial services, with 16.5%. Other major sectors included manufacturing (14.5%), government services (11.8%), transport and communications (7.7%), and construction (7.3%). Smaller sectors included social and personal services (6.3%), real estate and business activities (5.4%), trade (4.5%), and hotels and restaurants (2.5%).

The year 2019 saw real and nominal GDP growth of 1.8% and 2.4%, respectively, with the non-oil sector showing the most significant expansion, of 1.7% and 3.6% annual growth in real and nominal terms, respectively. The fiscal deficit, for its part, dropped from 14.2% of GDP in 2017 to 11.9% in 2018, and then to 9% in 2019. The primary balance also improved, from -7.3% in 2018 to -4.5% in 2019.

Covid-19 Response

Sectors such as tourism and transport were particularly affected by the pandemic, while the overall global slowdown in economic activity negatively impacted international trade, as well as oil and gas prices. As with other countries around the world, this necessitated government intervention to not only bolster public health provision, but also provide support for individuals and businesses affected by shutdowns and other pandemic-related disruptions.

In response to the health crisis, the government introduced an $11.3bn crisis package in March 2020, followed by a $1.3bn package in June 2021. The kingdom was therefore able to keep liquidity in its economy, while also financing pandemic health measures such as the widespread rollout of vaccinations and containment programmes.

“Bahrain was less affected by the pandemic than other countries,” Mohammed Jaffar, chairman of Asia Jewellers, told OBG. “The government has been proactive and made effective decisions based on best practices from other countries. Overall, it was well handled and the country was able to function, despite the disruptions, better than most.”

While Bahrain was affected by the Omicron variant that emerged in late 2021 and early 2022, by midMay 2022 around 75% of the population had been fully vaccinated, and new cases, hospitalisations and deaths were falling. The King Fahd Causeway, which links Bahrain to Saudi Arabia and was closed in March 2020, was reopened in May 2021, with the requirement to present a negative PCR test dropped in February 2022. The BCCI estimated at the time that this reopening would boost spending in the kingdom by some $2.9bn, given the previous popularity of this route into Bahrain for Saudi tourists and other Gulf nationals.

Impact

Despite measures aimed at alleviating the economic impact of the pandemic, Bahrain registered a 4.9% GDP contraction in 2020. The oil and gas sector shrank by 2% that year, while the non-hydrocarbons sector declined by 8%. This, combined with higher levels of public spending, helped to deepen the fiscal deficit to 17.6% and the primary balance to -12.6% by the close of the year. The public debtto-GDP ratio was also affected, rising from 109% in 2019 to 133% in 2020, according to the IMF. The drop in international energy prices impacted the current account, with the 2019 deficit of 2.2% widening to 9.6% in 2020, according to figures from the World Bank. Meanwhile, a decline in consumer demand resulted in deflation of 2.6% in 2020, after moderate inflation of 1% was seen in 2019.

Recovery

As 2021 unfolded, however, headline figures began to improve. This mirrored a global recovery as economies reopened, disruptions in supply chains eased, and oil and gas prices rose. By June of that year oil prices climbed to above $75 per barrel – a first since 2018. This trend continued in the second half of the year, surpassing $80 per barrel in November, before a temporary decline saw the price of oil end the year at around $74. The February 2022 invasion of Ukraine by Russia pushed oil prices back up, surpassing $100 per barrel that month.

The impact on Bahrain was significant. GDP expanded by 2.2% that year, from BD12.4bn ($32.9bn) in 2020 to BD12.6bn ($33.4bn) in 2021, with deflation easing to 0.6%. According to the “Bahrain Economic Quarterly: Third Quarter 2021” report issued in June 2022 by the MFNE, the non-hydrocarbons sector was estimated to have grown by 2.8% in 2021, compared to a contraction of 0.3% in the hydrocarbons sector. The ministry expects both to grow in 2022, by 5% and 0.3%, respectively. The report found that during the first quarter of 2022 hotels and restaurants was the fastest-growing segment that quarter, expanding by 26.6% year-on-year (y-o-y) in real terms – followed by transport and communications at 15.8%. Manufacturing ranked third, with 5.3% y-o-y growth, followed by real estate and business activities (4.7%), financial services (3.1%) and construction (3%). That quarter financial services was the largest contributor to GDP, at 17.4%. The MFNE estimated inflation at -0.6% in 2021, and expects this figure to reach 3.2% and 2.5% in 2022 and 2023, respectively, and as inflationary pressures intensified globally. At the same time, the new FBP included a provision for increasing value-added tax (VAT) from 5% to 10%, starting on January 1, 2022. This will likely add to upward price pressure, although some food products – one of the main constituents of the consumer price index basket – are exempt from VAT. The other main constituent – real estate – is likely to remain flat, given the amount of oversupply, further easing inflationary pressure.

The trend towards recovery was expected to continue into 2022, with the ministry forecasting real GDP growth of 4.1%, non-hydrocarbons GDP expansion of 5% and hydrocarbons GDP to remain steady. The report estimated that the current account balance would also improve as Bahrain would see a surplus of 16.5% of GDP by the close of 2022.

Monetary Moves

As part of its pandemic response package, the CBB cut interest rates to stimulate lending and business activity. In March 2020 the central bank reduced key policy interest rates on one-week deposits from 1.75% to 1%. At the same time, overnight deposit rates were cut from 1.5% to 0.75%, one-month deposit rates from 2.2% to 1.45%, and the CBB lending rate from 2.45% to 1.7%.

Interest rate hikes by the US Federal Reserve – with three implemented in the first half of 2022 – are expected to continue as the US authorities work to ease price pressures. The Economist Intelligence Unit expects the US Federal Reserve to raise rates seven times to 2.3% by early 2023. The CBB rose rates three times in the first half of 2022, given the US dollar peg. However, past experience suggests this development may not have an overly detrimental impact on businesses at home. “During the last cycle, when rates went up to around 2.5% – the peak level that is expected during the current cycle – the impact on domestic credit was fairly minimal, as there was significant amounts of liquidity in the system,” Jarmo Kotilaine, chief strategy and data analytics officer for Tamkeen, told OBG.

Much of this resilience is associated with efforts taken after the 2007-08 global financial crisis by the CBB to future-proof the financial sector and the economy as a whole. Indeed, Bahrain’s banks remain well capitalised and have buffers against fallout from expected future rate increases.

Trade & Investment

According to the MFNE report, the kingdom’s balance of trade swung from a $432m deficit in November 2020 to a $5.3m surplus in the same month of 2021. This performance reflected an uptick in trade, with the volume of imports of goods and services improving from an contraction of 2.6% in 2020 to expansion of 0.3% in 2021, according to the IMF. The growth rate of the volume of exports of goods and services similarly improved, from 0.4% to 1.9% over the same period.

Top import source markets in the third quarter of 2021 were Brazil, accounting for 15.9% of the total, followed by China (12.4%), the UAE (7%), Saudi Arabia (6.5%) and Australia (6%). The top export markets were Saudi Arabia, comprising 20.1% of the total, followed by the US (18%), the UAE (9.2%), Egypt (6.2%) and the Netherlands (4.6%).

Increasing oil and gas prices have been a major contributor to Bahrain’s improving trade position. Oil looks set to see its contribution to GDP and government revenue increase in 2022, as prices continued to increase into the second half of the year. Further benefits are expected when new production from the KABB shale oil field comes on-stream, and as the Bapco Modernisation Programme edges towards its 2023 completion date. In addition to higher global oil prices, Bahrain has benefitted from increasing demand and prices for aluminium, the latter of which rose by 61.9% between the third quarter of 2020 and the second quarter of 2021. The increase helped Bahrain’s exports expand by 75.5% in value over the same period, to BD1.2bn ($3.2bn), while re-exports rose by 22.3% to BD174.7m ($463.4m).

Over the first three quarters of 2021 foreign direct investment (FDI) rose by 59.8% compared to the same period in 2020, to approximately BD606.6m ($1.6bn). Total inward FDI stock was up 5.1% y-o-y in the third quarter of 2021, reaching BD12.5bn ($33.2bn). Around two-thirds of this figure was associated with financial services, while manufacturing accounted for 14.8% of foreign investment. Other recipients included wholesale and retail trade (4.9%), and information and communications (3.5%). Saudi Arabia and Kuwait were the largest countries of origin for foreign investment, responsible for 29.9% and 29% of FDI, respectively.

Project Pipeline

A pick-up in the project pipeline is expected to support the post-pandemic economic recovery. This included projects funded by the GCC Development Fund totalling a cumulative $6bn in investment in Bahrain as of the first quarter of 2022. Other initiatives included Aleastur, a Mumtalakat portfolio company, which launched a $15m master alloy and aluminium grain refinery project; and the first phase of the 109-km metro project, which reached the pre-qualification tendering stage the same quarter. Set to be completed in 2030, the network will be the country’s first metro system.

Another major transport construction project in the pipeline is the $3.5bn King Hamad Causeway, which will serve as a second link between Bahrain and Saudi Arabia. It will connect to both the metro system and Bahrain International Airport, supporting multi-modal connectivity.

Outlook

With an array of infrastructure projects in the pipeline, global oil prices rising, and trade and economic activity returning to pre-pandemic levels, the coming years look likely to bring economic expansion. The pandemic proved to be an opportunity for the public and private sectors alike to reassess how they do business, and the renewed focus on innovation has furthered Bahrain’s efforts to create a diversified, knowledge-based society.