Bahrain balances uncertainty with prosperity

Economics dictate that 2003 should be a good year. But given the regional uncertainties the current focus is politics. Bahrain has so far successfully balanced separate and at times competing political issues.

Saudi Arabia is Bahrain's closest economic and political ally. Saudi tourists pump millions of tourist receipts into the economy each year and economic ties go much deeper. Such is the close relationship between the two that Moodys, the international rating agency, has established a direct link between their sovereign ratings.

Bahrain is also the base for the US' Navy's Fifth fleet and Bahrain has had to walk a diplomatic tightrope in recent months both at home and abroad. In many ways the visible signs of Bahrain's regional and domestic concerns are strengths rather than weaknesses.

The presence of US troops will continue to guarantee external security. Alongside Egypt, Bahrain has been designated a Major non NATO ally. While recent public protests, which culminated in an anti American riot in December, can be disruptive they also represent a semi-official outlet for domestic tensions.

Rather than suppressing public concerns the current ruler, King Hamad al-Khalifa, has sought to channel and accommodate them. Since coming to power he has embarked on a process of political liberalisation, which culminated in the legal establishment of Bahrain as a constitutional monarchy with an elected parliamentary body.

Recent changes have not been welcomed by all and October's parliamentary election was boycotted by more than 40% of the population. This is a far cry from the 98% that supported the constitutional roadmap, set out in the National Action Charter in 2001.

The key issue has been King Hamad's decision to establish an appointed Consultative Council with equal legislative and veto rights to the parliament. Reconciliation with those that boycotted the elections will be critical if the reform process is to maintain momentum.

Political reform always carries risks not least of disillusionment. Political idealism must be balanced with economic reality. But political reform has had economic benefits. Investor perceptions have improved.

Bahrain is the highest recipient of net FDI in the region. The most visible sign however has been in international credit ratings. Fitch has upgraded Bahrain three times in the past 18 months to its current A- rating. This has translated into cheaper financing.

Bahrain's first sovereign Eurobond was issued in January at a better price than the better credit rated Qatar. Politics aside 2003 should see a strong pick up from last year's soft patch. While concerns about any fallout from Iraq may have a dampening effect on sentiment and private spending, there are several strong mitigants.

Tourist numbers have been robust. A buoyant Saudi economy has seen a higher number of visitors with a bigger average spend. Exports are benefiting from two years of high oil prices. The nascent recovery in Aluminium prices is another boost.

The biggest driver of growth in 2003 will be government spending. Last year's cuts are expected to completely reversed in 2003 with a forecasted doubling in project spending and a 16% increase in recurrent spending. The increases will drive the budget deficit to above 10% over the next two years, but are affordable.

While the outlook for 2003 is positive, 2004 will be challenging. In particular global interest rates will have begun to rise forcing local market rates up.

Despite strong growth unemployment is still high, at 14%. Creating jobs for the unemployed and Bahrain's large proportion of school leavers is the key policy challenge facing Bahrain. The government has tried to tackle the issue through 'Bahrainisation' of the workforce - setting quotas on employing nationals for local companies, but encouraging private sector involvement is needed.

Here recent steps have been hopeful. The government is starting to make headway with its proposed privatisation program. More far reaching will be the impact of the GCC Customs Union. As of January 2003 all goods and services traded within the 6 member Council will face no restrictions.

Given Bahrain's sophisticated service companies and its close ties with Saudi Arabia this offers huge potential. In light of increased regional competition, in particular from Dubai, seizing these opportunities will be crucial for the Kingdom's development.