Bahrain's strong economic outlook

Bahrain's economy remained stable during 2003 despite unfavourable global economic conditions especially in the first half of the year.

The Kingdom recorded highest GDP (at current prices) growth rate of 6.2% in the region in 2002. The year 2003 may not be different and we expect that the country will have recorded around 6% GDP growth rate in 2003.

The high oil prices in most part of 2003 despite a resolution of Iraq war played a much bigger role in pushing the economy to a high growth trajectory.

Bahrain's economy is supported by prudent fiscal discipline characterized by restraint on current expenditure and improved budget balances along with an effective system of resource allocation for health, education and infrastructure projects.

However, despite relatively strong economic base, government's revenue remain highly dependent on oil. But, the financial system is doing well with the Banking system in Bahrain being a source of macroeconomic stability with very little contingent liability to the government.

The outlook of the economy in 2004 remains strong as stable oil prices and continuing tight budgetary controls would exert favourable influence on the national economy. The continuation of the policy of diversification away from dependence on the hydro-carbon sector and the implementation of the privatization programme will further strengthen the economy in the years ahead.

Bahrain's economy in 2002 continued to remain constrained by international oil prices that, on an average, were little changed year-on-year basis at around US$24 per barrel. The growth in Bahrain is being driven by public spending.

Alongwith housing, power and transport infrastructure, there are some very large projects under way such as the expansion of Aluminium Bahrain and US$1.3bn worth of infrastructure spending for Bahrain Financial Harbour and the ambitious Formula One car race.

In terms of economic growth, GDP at current prices increased by 6.2% and by 5.1% at constant prices in 2002. The overall balance of payments (increase in reserve assets) maintained a small surplus, while the budget deficit was 0.1% of GDP.

On the back of a consistent track record in macroeconomic stabilization and structural reforms, the Kingdom has been regularly upgraded by international rating agencies. In 2003, Bahrain's long-term foreign currency ratings were raised well above investment grade. Regular rating upgrades have boded well for a privileged access to the international capital markets.

Crude oil production rose marginally from 66.44mn barrels in 2001to 67.88mn barrels in 2002. Till the third quarter of 2003, crude oil production had already reached 65.69mn barrels. The offshore Abu-Sa'afa oil fields production level reached 55.37mn barrels, accounting for around 84 per cent of total crude oil production.

Bahrain's total gas production registered an increase of 1.1 per cent in 2002 to reach 429.2 billion cubic feet. The production of natural gas rose by 1.6 per cent. Aluminium Bahrain remained the largest consumer of natural gas using 26.9 per cent of total gas utilisation.

The second and third largest consumer of gas were power stations with 26.2 per cent of total utilisation, and oil field re-injection which accounted for 22.2 per cent of total utilization.

The total government revenue increased from BD980.9mn in 2001 to BD1026.9mn in 2002, an increase of 4.7 per cent. Oil and gas revenues registered a growth of 2.9 per cent, from BD672.1mn to BD691.4mn in 2002.

But the diversification efforts by the government has led to the contribution by the oil and gas sector reduce marginally from 68.5 per cent in 2001 to 67.3 per cent in 2002. At the same time, non-oil revenues rose from BD308.8mn in 2001 to BD335.5mn in 2002, or by 8.6 per cent.

Heavy public spending is producing budget deficits, which are normally funded by treasury bills issued to international banks. In recent years, the government has also issued bonds conforming to Islamic principles, which have helped to reinforce Bahrain's pre-eminent position in Islamic banking.

Inflation remained firmly under control with the Consumer Price Index (CPI) continuing to fall. Consumer price index (CPI) fell by 0.5% on a year-on-year basis in 2002, the sixth annual decline to 100.4.

The two main groups affected were transportation and services sector, which fell by 5.9 per cent but the and education sector rose by 8.3 per cent. The virtual price stability evident throughout the economy reflects in part the government's policy to provide price subsidies in key food and energy sectors. Inflation is expected to remain low in 2004 as well.

Keeping in line with the declining low interest rate environment in the US the interbank deposit rate in Bahrain declined to 1.12% (3-6 month offered rate) in Oct 2003 from a high of 1.5% recorded at the beginning of the year.

However, the deposit rates for 3-12 month period and less than three months period have risen marginally by the Oct 2003, but still remain low. The broad money supply as measured by M2 showed consistent positive trend during the first three quarters of 2003 as it grew by 7.2% over Q4 2002 to BD2.69bn.

In recent years, the government has started depending on Islamic bonds instead of conventional instruments to fund its requirements. The total borrowing from the Islamic instruments stood at BD302.6 while the total borrowing from the conventional instruments stood at BD286mn in the third quarter of 2003.

The banking system in Bahrain continued to show robust growth during 2003, with 30 new licenses issued by the Bahrain Monetary Agency. This brought the total number of financial institutions licensed by the BMA to 357 by the end of 2003.

The total asset size of the consolidated balance sheet of the banking system in Bahrain surged by 28.1% to US$94.8bn at the end of Sep 2003 from its 2002 level. In 2003, Bahrain stock market lagged behind its regional peers and was unable to emulate the impressive performance as it was up only 28.2%.

However, insurance and banking sector recorded robust growth during the period as their respective index rose by 58.3% and 49.7%. Going forward, we expect the BSE to show strong performance in 2003 as its valuation looks cheap as compared to its regional counterparts such as Kuwait and Saudi Arabia.

Of all the country's fundamental weaknesses, unemployment is the biggest worry. The government has also recognized the gravity of the situation and hence plans to introduce number of measures to increase the skills of the local workforce.

In order to increase the standard of living of the population, the government plans to introduce a minimum wages to the private sector. Looking forward, the government's main challenge includes pushing ahead with diversification into more labour intensive activities, and easing the oil dependency.

Facing this challenge will require increasing tax revenue and implementing an efficient fiscal collection mechanism. On the external accounts side, Bahrain will have to widen its export base and improve its price competitiveness.

Going forward, several challenges remain to be faced but the Kingdom seems to be in a good position to overcome them, provided that economic and political reforms remain on course.

Hence, we believe that the Bahrain's economy will continue to show robust performance in 2004, provided the government pushes ahead with its various economic and social reforms. At the same time, higher oil prices would certainly help in the medium term.