High growth forecast for Bahrain

For 2003 estimates suggest that the real GDP in Bahrain grew by 5.5% as the construction, tourism and financial services recorded good performance. Real GDP growth rate for Bahrain is forecast at 4% for 2004 as the country is expected to enjoy slightly higher oil production this year.

Future GDP growth will be supported by strong government spending in both the oil and the non-oil sector. According to Moody's, GDP growth is expected to remain in the range of 5% to 6% in the medium term. The government has also targeted a GDP growth of around 5-6% for the next four years.

However, to sustain this growth rate much depends on the future of the oil prices and the governments own efforts to mobilize resources for funding various existing and future projects.

Although oil and oil products contribute around 24.3% of Bahrain's GDP, high oil prices have an indirect and multiplier effect through the spending by other Gulf states on Bahrain's services. Expected lower oil prices in 2004 and 2005 therefore will have a negative impact, but should be offset by the continued public investment.

Ongoing public and state-backed industrial and infrastructure projects coupled with high oil prices have boosted GDP growth. As per the latest statistics available from the Ministry of Finance & National Economy, the real gross domestic product of Bahrain increased by 5.1% in 2002, which was the highest growth recorded by any country in the GCC region. In nominal terms, Bahrain's GDP increased by 6.2% in 2002 to BD3.164bn.

The sectoral contribution to the GDP in 2002 showed some dramatic changes reflecting higher oil prices in the second half of 2002. The non-financial corporations contributed 73.5% to the GDP followed by financial corporations (17.5%), government services (10.6%), educational sector (4.5%), health sector (2.2%) etc.

Share of crude petroleum and natural gas in GDP rose to BD769.4mn in 2002 as compared to BD731.8mn in 2001, thereby registering a jump of 5.1%. In percentage terms, the contribution of oil and gas to the GDP has been gradually declining since the past few years.

Despite higher oil prices in the latter half of 2002, the contribution of oil and gas to the GDP declined in 2002 and it stood at 24.3% as compared to 24.5% in 2001. This indicates that the government's diversification efforts away from oil is working well but not fast enough the way the government would like it to be.

The non-oil sector recorded a handsome growth of 6.5% in 2002 to reach BD2.395bn. In the non-oil sector, financial corporations continued to dominate the GDP, however, its contribution has been declining since the past few years and stood at 17.5% as compared to 18.7% in the previous year.

In the financial corporations sector, financial institutions recorded increase in their contribution to the GDP from 5.5% in 2001 to 5.7% in 2002, while the Offshore financial institutions and Insurance sector experienced a fall in their contribution to the GDP to 9.1% (9.9% in 2001) and 2.6% (3.2% in 2001) respectively.

Manufacturing didn't show any improvement in its contribution to the GDP as its contribution remained at 11.9%. Going forward, we believe that there is tremendous scope for improvement in the contribution of manufacturing sector with the governments efforts to expand the capacities of many basic industries like Alba, Bapco, Balexco etc.

The government services sector registered a growth of 4.6% in 2002, compared with 2% in 2001. The government services sector's contribution to GDP fell from 10.8% in 2001 to 10.6% in 2002.

The trade sector and transport and communication sector showed dramatic improvements in its contribution to the GDP as their share increased to 9.1% and 7.9% respectively in 2002. The education sector also contributed well with its contribution rising from 4.1% in 2001 to 4.5% in 2002.

Booming real estate and business activities contributed 9.8% to the GDP in 2002 while the construction sector contributed a further 4.2%. We believe that the contribution of real estate and construction sector is set to increase further in the next two years with the number of projects in the pipeline increasing tremendously.

The domestic demand remained strong in 2002 as it grew by an impressive 7.2% compared to 0.9% in the previous year. During 2002, government consumption increased by 2.8% while the private consumption, which forms a large part of the domestic demand remained almost flat. The gross capital formation, which is mainly the capital spending by the government and the private sector has remained in the range of 12-14% of GDP since the past few years.

However, in 2002 the gross capital formation showed robust growth and it stood at 17.3% of GDP in 2002 as compared to 13.3% in 2001. The strong growth in gross capital formation was mainly owed to the fact that the government investments increased by a whopping 68.5% to BD291.2mn as compared to the previous year.

Private investment, which had declined in 2001, also witnessed a healthy growth of 13.8% to BD255.9mn in 2002. In view of the government's plan of greater allocation for infrastructure and development projects, we expect further recovery in government spending. In addition, the healthy macroeconomic profile, rising corporate earnings are expected to boost private investments in the years to come.