BAHRAIN’S ECONOMY IN REVIEW

BAHRAIN’S ECONOMY IN REVIEW

PIONEER IN ECONOMIC DIVERSIFICATION

 

Recognized as a key regional services hub, Bahrain’s progressive regulatory framework, educated workforce and significantly lower-cost environment has continued to attract international and regional companies seeking a regional base to engage with the wider GCC and beyond. Bahrain is now in the process of overhauling its subsidy framework while seeking new income streams in a long-standing diversification strategy to overcome the reliance on hydrocarbon resources for revenues – challenging prospects in an economy renowned for generous social support and low taxation.

A major focus for the government in the past years has been moving the role of the public sector from investor and operator, to regulator and facilitator. Many of the reforms that Bahrain has carried out have been focussed on creating an environment to allow the private sector to become the engine for growth, and for the public sector to be a smart and focussed enabler of development and diversification. The non-oil sector expansion has remained the major driver of economic expansion and job creation. More than 80 percent of GDP already comes from non-oil sectors currently, with overall non-oil sector growth reaching 4.4% in the first quarter of 2017, up from 3.7% during 2016, according to the Bahrain Economic Quarterly published by the Bahrain Economic Development Board (EDB).

This growth was driven by strong performance across the non-oil private sector, with momentum continuing to be supported by large-scale infrastructure projects. Overall, during the first three months of 2017 the Bahraini economy expanded by 2.9%, in line with the 3% pace seen in 2016 as a whole.

The first three months of 2017 saw particularly strong growth in the hotels and restaurants, financial services and transportation and communications industries. Hotels and restaurants emerged as the fastest growing single sector during Q1, posting a 12.3% year-on-year real rate of expansion and financial services continued along its strong growth trajectory reported last year, posting an annual expansion of 8.3% at the end of Q1 compared to 5.2% Q on Q in 2016. The transportation and communications sector also performed strongly, with an annual real growth rate of 8.2% in Q1.

Underpinning the near term momentum in Bahrain’s non-oil economy is the large amount of investment in infrastructure that the Kingdom is experiencing. This includes the USD3bn Alba Line 6 project – which is set to create the world’s largest single-site aluminium smelter. USD1.1bn is being invested in the airport modernization programme and a further USD335m earmarked for a new Banagas gas plant. Expressions of interest have been solicited for the construction of the King Hamad Causeway which will add to the existing King Fahd Causeway, connecting Bahrain to Saudi Arabia and serving as a platform for the GCC railway.

Active projects that are part of the GCC Development Fund also saw a further increase in their aggregate value. The cumulative total worth of GCC Development Fund projects that had broken ground by Q2 of 2017 reached around USD3.2bn. This marks a 111.3% increase on the active pipeline from Q1 of 2016.

Read Also: Bahrain’s non-oil sector growth accelerates to 4.4% in first quarter of 2017

From the Bahrain Economic Development Board’s perspective, the core mandate has been to attract investment to Bahrain in order to create sustainable economic growth and high quality jobs. The EDB has narrowed down the focus to five key sectors where Bahrain offers particular competitive advantages and where there is strong potential for growth: financial services; information and communications technology (ICT); tourism; transportation and logistics; and manufacturing.

What links all of them is that they are areas where Bahrain has something to offer businesses – areas with a real demand and factors underpinning the growth in that demand in the coming years. Looking to the future, Bahrain is focussed on a few key areas to make sure it builds on the opportunities and maintains a positive economic trajectory. There is a strong emphasis on regulatory reform to ensure that the business environment in the kingdom is truly conducive to the formation and growth of companies.

Despite increasing regional competition, Bahrain maintains its position as regional leader for conventional and Islamic finance, and the fast growing FinTech industry.

After weathering the tumultuous economic environment and changing regulatory landscape of the previous year, Bahrain’s sharia-compliant financial institutions continue to expand in the domestic market and beyond, while activity in the newly reinforced sharia-compliant insurance sector is well positioned to continue along a trajectory of premium growth, outstripping that of its conventional counterparts.

The CBB and the Bahrain Bourse (BHB) have recently leveraged the kingdom’s reliable pipeline of sharia-compliant debt offerings to broaden the range of activity on Manama’s exchange. In January 2015 the BHB launched a new mechanism, the first of its kind in the Middle East, which allows both individual retail investors and institutions – domestic and foreign – to directly subscribe to government issuances of sukuk and bonds through registered brokers, and thereafter trade them on the secondary market at the BHB.

FinTech businesses got a significant boost, when the Central Bank of Bahrain (CBB) initiated two new license types in 2014– payment services and card processing services – marking the entry of non-banking companies into banking services. To date Bahrain has issued 14 licenses for these two activities. Earlier this year, CBB announced new regulations to create a regulatory sandbox that will allow startups and FinTech firms to test and experiment their banking ideas and solutions. The creation of the regulatory sandbox provides an opportunity for FinTech businesses around the world to expand and thrive in the Gulf, strengthening Bahrain’s position as a hub. The framework provides a virtual space for companies to test their technology-based innovative solutions, and is open to existing CBB licensees and other local and foreign firms for a testing duration of nine months, with a maximum extension of three months.

The launch of Bahrain FinTech Bay (BFB), the largest dedicated FinTech hub in the Middle East and Africa further substantiated the efforts. The new hub launched by Bahrain Economic Development Board (EDB) in partnership with FinTech Consortium (FTC), aims to further the development and acceleration of FinTech firms as well as the interaction between investors, entrepreneurs, government bodies and financial institutions. It will provide a physical hub to incubate insightful, scalable and impactful FinTech initiatives through innovation labs, acceleration programmes, curated activities, educational opportunities and collaborative platforms.

GLOBAL REVIEW

In the World Bank’s 2017 “Doing Business” Report, Bahrain ranked 63rd in the world for ease of doing business and 4th for paying taxes. In the World Economic Forum’s 2016-17 Global Competitiveness Index, it again ranked 48th globally for its strong institutions, infrastructure, market efficiencies, and business sophistication.

EDB reports reveal that more than US$200million worth of investment was brought into Bahrain’s manufacturing and logistics sector in the first half of 2017. The investments are expected to create approximately 1,000 jobs over the next three years. The growth follows a substantial increase in the number of international businesses looking to use Bahrain as a hub to access and seize the regional opportunities offered in the GCC market and beyond.

HIGH PERFORMANCE SECTORS

Logistics sector is a key sector thanks to the country’s strategic location and connectivity to key markets. The Khalifa bin Salman Port is the most efficient in the region according to the EDB, with an efficient and speedy container clearance lag. The key logistics processing zones – Bahrain International Airport, Khalifa Bin Salman Port, Bahrain Investment Park and Bahrain Logistics Zone – are all within easy reach of the vital international link, which is the Eastern Province of Saudi Arabia through the King Fahd Causeway. The growing logistics and transport sector have also facilitated growing manufacturing activity. Trade and economic agreements with over 60 countries, a steady supply of specialist, skilled and semi skilled labour, and tax free and duty free incentives have increased the pull of Bahrain as a manufacturing option.

Mondelez International, one of the world’s largest snacks companies, is building one of its global manufacturing and distribution hubs in Bahrain – a state-of-the-art biscuit production plant that will produce the famous brands Oreo, Ritz and TUC  – in order to meet the growing demand in the Middle East and Africa. The plant will generate 200 jobs in its initial phase. This is the second investment by Mondelez in Bahrain in less than 10 years where in 2008 they have launched a 60,000-ton production facility for Kraft cheese and Tang products that exports to 47 countries including the United States. Both investments by Mondelez are located at Bahrain International Investment Park (BIIP), one of the most developed and modern industrial parks in the region.

The trend continued with leading GCC textile and fashion distribution company Armada Group starting construction of its regional distribution centre in the Bahrain Logistics Zone (BLZ), investing over $50 million and creating 400 direct jobs over the next three years for Bahrainis. The BLZ is strategically located close to the Khalifa bin Salman Port, allowing Bahrain to have the shortest travel time in the region between its export hubs and logistics zones. The Kingdom’s strong regional transport links and its strategic geographical position provides easy access to the $1.5 trillion GCC economy, proving an attractive location for international logistics companies.

Other important investments this year include ECU Worldwide, SMSA Express, Elsewedy Electric, Mennekes, Sonmez Metal, Tsinx Environment Technology, Almajdouie Holding, Lals Group, as well as expansion investments by several companies including Kuehne + Nagel, Sandvik, and Agility Logistics.

The recent investments are also supported by a significant programme of infrastructure investment and reforms across a number of sectors, which have served to enhance Bahrain’s reputation as a ‘Gateway to the Gulf’. In the World Bank’s Doing Business 2017 report, Bahrain was also named as one of ten countries improving the most in three or more areas, one of which was “trading across borders,” a critical factor for manufacturing companies exporting their goods to the regional market. This is in large part due to the consistent work to improve infrastructure and streamline procedures at the King Fahd Causeway.

Bahrain’s manufacturing, transportation and logistics sector is currently one of the largest contributors to the country’s GDP, and accounted for 20.3% of 2016 GDP, and the sector continues to grow at a significant rate. Further investments, such as the ongoing modernization and expansion of Bahrain International Airport, the building of a second causeway to Saudi Arabia and additional regulatory reforms are expected to further increase regional and global connectivity, while making the economy more efficient and productive, and more competitive at a global level.

NEW ARRIVALS

AWS, part of Amazon, providing cloud data storage to more than a million customers in 190 countries, announced plans to create cloud infrastructure in Bahrain to serve the Middle East that will be operational by early 2019. The new AWS Middle East (Bahrain) Region will incorporate three Availability Zones, a means to ensure greater speed and reliability than through a single data centre. Gulf businesses will now find it easier to take on the world. Via AWS’s cloud infrastructure, they will be able to run serious workloads (data processing, storage and sharing) in ways that weren’t previously possible.

His Royal Highness Prince Salman bin Hamad Al Khalifa, Crown Prince of Bahrain, First Deputy Prime Minister, and Chairman of the Bahrain Economic Development Board, commented on the occasion, “Today’s announcement is a significant moment for Bahrain and the region. For the Kingdom, the expansion of regional cloud capacity builds upon a business environment that is already driving innovation and entrepreneurship, using technology to accelerate economic diversification in Bahrain. Through improved efficiencies, access to new career opportunities, and helping to enhance the delivery of government services, this marks further realization of the principles of sustainability, fairness, and competitiveness that form the core of Bahrain’s 2030 Vision.”

Economic forums such as the Italian-Arab Business Forum to which Bahrain sent a delegation for the first time, have proved to be effective platforms to promote Bahrain’s proposition internationally and invite the international community to invest in Bahrain, while also discussing further policies the country can take in order to boost foreign investments.

“Bahrain was a pioneer in recognizing the importance of economic diversification in the region. The oil sector now comprises less than 20% of total GDP, evidence that Bahrain today enjoys a business-friendly environment to investors across a multitude of economic sectors,” said Khalid Al Rumaihi, CEO of Bahrain Economic Development Board.

In a world characterized by rapid and often disruptive change the creation of a strong, technology-led start-up ecosystem has helped prepare for the economy of the future, capitalizing on key competitive advantages, like the qualified human capital available in the kingdom.

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