Complex Made Simple

Reforms, tourism, Islamic finance, oil exploration, boosting Bahrain’s economic recovery

S&P Global Ratings has revised Bahrain's outlook to 'stable' from 'negative' on the back of new fiscal reforms aimed at improving non-oil revenues and cutting state spending

In September, Bahrain postponed plans to balance its budget by two years Tourism can provide vital support to Bahrain’s revenue doldrums, and luxury travel is already on the map Bahrain ranked fourth in the world and second in the MENA for Islamic finance development

S&P Global Ratings has revised Bahrain’s outlook to ‘stable’ from ‘negative’ on the back of new fiscal reforms aimed at improving non-oil revenues and cutting state spending, it said in a recent statement.

Bahrain was bailed out to avoid a credit crunch in 2018 with a $10 billion package from Saudi, Kuwait, and the UAE, money that was linked to promises of fiscal reforms. The COVID-19 came and threw a wrench in the works.

In September, Bahrain postponed plans to balance its budget by two years and announced plans to increase a value-added tax.

“The Bahraini government recently announced additional fiscal reforms to strengthen non-oil revenue and rationalize expenditure. These measures, along with the more supportive oil price environment, should improve the sovereign’s fiscal position,” S&P said.

Bahrain will double VAT to 10% next year, a move which S&P estimated could contribute receipts of about 3% of GDP in the next few years, up from about 1.7% this year.

The Gulf state is also planning to rationalize operational government expenditure and social subsidies in 2023 and 2024.

Prior austerity measures in Bahrain were met with opposition and proven hard to proceed with.

Cruising plans for Bahrain

Tourism can provide vital support to Bahrain’s revenue doldrums, and luxury travel is already on the map. AD Ports Group has inked an initial agreement with Diyar Al Muharraq and the Eagle Hills Diyar Company to investigate opportunities to develop and operate new cruise infrastructure in Bahrain.

Building on the country’s potential to become the fourth high-performing cruise destination in the Arabian Gulf, the initial stage of the collaboration will involve a series of feasibility studies aimed at identifying avenues of investment, as well as the development of new infrastructure and services, AD Ports Group stated.

Bahrain has witnessed a sharp increase in annual arrivals in recent years, observing a record high of 130,778 passengers in 2019.

An icon in Islamic Finance (IF)

While the traditional economy may be going through air bumps, Bahrain ranked fourth in the world and second in the MENA for Islamic finance development, according to the 2021 Islamic Finance Development Indicator (IFDI 2021) by Refinitiv.

The report places Bahrain first globally for Islamic finance (IF) regulation and news. Amongst MENA countries, Bahrain ranked first in awareness, governance, corporate social responsibility activities, and Islamic finance knowledge. Bahrain also tops the ranking in the region for Islamic banking and corporate governance.

Khalid Hamad, executive director of banking supervision at the Central Bank of Bahrain (CBB), said: “We have seen the total value of IF assets reach $102 billion in Bahrain in 2020, making Bahrain among the top 10 countries globally in IF and banking assets.

 

“This industry is the largest contributor to GDP after oil, at 17%, and such efforts are in line with the recently announced Economic Recovery Plan which includes a number of growth and development initiatives with the aim of increasing the contribution of non-oil sectors to GDP.”

According to the report, the net asset value of Islamic Funds in Bahrain during 2020 increased by 142% to $27 million, and the value of sukuk issued increased by 40% to $5.3 bn when compared to 2019.

The world’s IF industry saw double-digit growth of 14% in 2020 to a total $3.37 trillion in assets.

IFDI projects the size of the IF industry to rise to $4.94 trn in 2025.

Major oil exploration

Shrinking oil reserves in Bahrain are about to get a major boost. The country is in talks with international oil companies to help develop the Khalij al-Bahrain oil find starting in 2025, according to S&P Global Platts.  

In 2018, Bahrain revealed the Khalij al-Bahrain reservoir off its west coast could contain some 80 billion barrels of tight oil, its largest oil discovery since the 1930s.

Bahrain gets the majority of its oil, or about 150,000 bpd, from the offshore Abu Safah field it jointly owns with Saudi. Bahrain also produces more than 40,000 bpd from its onshore Bahrain field.

 Nogaholding, the hydrocarbon and energy investment and development arm of Bahrain, is also considering selling “non-strategic” oil and gas assets, such as pipelines, to investors, following in the footsteps of Abu Dhabi National Oil Co. and Saudi Aramco in monetizing its facilities.