Bahrain: financial report.
The new Emir of Bahrain, Sheikh Hamad bin Isa Al Khalifa, who assumed power on the death of his father Sheikh Isa, in March, takes over the reins at a particularly uncertain juncture.
Bahrain had until recently experienced one of the most robust growth rates in the GCC region. Real GDP growth averaged 4.5 per cent annually between 1990-97 according to IMF figures. But recessionary conditions which have gripped the Gulf since 1998 have also spilled into Bahrain.
Growth last year dipped to a low of 0.51.0 per cent at best, as tumbling oil prices and depressed economic activities across the GCC, particularly in neighbouring Saudi Arabia, undermined consumer and business confidence. Bahrain could see zero growth or slip into a technical recession as private consumption and investment growth are set to slow during the year.
Fiscal policy remains largely expansionary, reflecting higher spending, mainly on salaries and job training and creation programmes. But some capital projects are being delayed or cancelled, perhaps affecting development of the Hidd industrial area. The 1999-2000 budget deficit is projected at Bahrain dinar (BD) 320 million (US$849 million) - the highest in a decade, compared to BD 150 million in 1997-98. But the risk of over-shooting budget targets this year and next is high in view of an uncertain outlook for oil (which comprises 45 per cent of the government's revenue). Deficit financing will be mostly via domestic bank borrowing and soft loans from the Islamic Development Bank and Arab Development Funds. The government has approved issuance of additional Treasury bills and development bonds worth BD600 million per annum.
Inflationary pressures are low due to cheap imports of Asian manufacturers, depressed non-fuel commodity prices and recently subdued domestic demand. Consumer price inflation (CPI) was estimated at 0.2 per cent in 1998. CPI has averaged barely one per cent per year between 199097 according to IMF figures.
The government's strategy is geared towards promoting private investment-led growth and making the export sector more diversified. However amid falling oil revenues, industrial expansion will need considerable private sector funding and any resurgence in the civil unrest which took place in late 1995 to early 1996 will deter business confidence and lead to a decline in new private investment and tourism.
Progress on privatisation remains lack-lustre. State-owned enterprises such as Aluminium Bahrain (ALBA) or the Bahrain Petroleum Company (BAPCO) are profitable, so the government has little incentive to privatise. There are plans to privatise new industrial areas on a leasing basis for up to 50 years. Ibrahim Abdul-Karim, minister for finance and national economy recently said that public utilities and the transport sectors would be sold off in the near future. Various options for the privatisation of power and water sectors are management/services contracts, transferring Ministry of Electricity and Water assets to a shareholding company, but retaining majority control and full sell-offs including responsibilities for operations and maintenance. The latter may be politically sensitive given the system of subsidies.
Socio-political stability, however, depends on increasing economic prosperity and combating high unemployment, especially among the Shia majority.
MOST DIVERSIFIED OF THE GCC ECONOMIES
Though smallest of the GCC members, with a Gross Domestic Product (GDP) of $6 billion in 1997, Bahrain's economy is structurally more diversified and better integrated into the global market place than its larger neighbours. The island has capitalised on its centuries-long experience of commercial trading activities.
The first emirate to discover oil in 1932, it will also be the first Gulf state to exhaust its modest oil reserves by early in the 21st century. Compared to its neighbours, oil output - 37,674 barrels a day (b/d) - is negligible, but Bahrain receives 140,000 b/d since 1996 from the Abu Safah field in Saudi Arabia. Bahrain is a pioneer of economic diversification in the Gulf and is well-placed to function in the post-oil era. The non-oil sector is highly developed and diversified including a wide range of service and manufacturing industries. Besides its sophisticated financial and banking sector, the island boasts petrochemicals, ship repairing, aluminium, refining and small-to-medium manufacturing industries. ALBA is the largest aluminium smelter in the Middle East with an annual capacity of 500,000 tonnes, mostly for export markets. ALBA's presence has led to the development of downstream industries including Bahrain Aluminium Extrusion Company (Balexco) and Gulf Aluminium Rolling Mill Company. BAPCO has a daily capacity of 260,000 barrels, and the refinery imports 210,000 b/d from Saudi Arabia. The Arab Shipbuilding & Repair Yard Company remains the largest shipyard between Europe and Asia. This diversity can help to cushion Bahrain from a severe oil market recession. The oil sector accounts for 15 per cent of GDP, the lowest in the GCC, with finance and real estate services constituting a healthy 28 per cent, and trade and manufacturing 16 per cent and 12.4 per cent of GDP respectively in 1997. In essence, an extensive diversification drive since the 1980s has succeeded in fostering viable industrial and service sectors.
EXTERNAL PAYMENTS SITUATION
Bahraini principal exports, refined oil products (comprising 62 per cent of total) and aluminium (16 per cent) are both victims of weak global off take - especially in Asia-Pacific - and plunging prices. based on the Bahrain Monetary Agency (BMA) central bank's trade figures for the first nine months of 1998, the emirate may have recorded a small trade deficit. Exports are estimated at $3,346 million - a fall of 24 per cent oil 1997. Imports also fell to around $3,369 million, compared to $4,025 million in 1997. This reflects weak private consumption and lower oil and non-fuel commodity prices. Oil imports from Saudi Arabia constitute a third of total imports. Inward official transfer grants and aid from core GCC members - Saudi Arabia, the UAE and Kuwait and invisible inflows from tourism, banking, insurance and air/sea transport have had a positive impact on the current account balances in recent years. The balance of payments was in surplus to the tune of $178 million a year between 1994-97. The London-based Economist Intelligence Unit estimates the surplus at $99 million in 1998. This year, exports may dip to below the $3 billion mark as prices of oil products and aluminium are still weak. Import demand is also undermined by subdued consumption and fixed investment. Inward official/private capital will not increase much this year, given current liquidity problems in the GCC. Therefore the current account surplus may shrink to $50 million or even zero this year.
According to the Bank for International Settlements (BIS) and OECD Figures, Bahrain's external debt stocks in June 1998 were $2047 million - equivalent to 34 per cent of GDP - and debt-servicing (though rising) remains manageable.
Moody's Investors Services of the US rates Bahraini sovereign rating at Bal-one notch below investment-grade.
The dinar has been pegged to the US dollar since the late 1980s at a rate of $1:BD 0.377. The BMA maintains close cooperation with other GCC central banks, especially the Saudi Arabian Monetary Agency and uses wide interest rate differentials between Bahraini and US money rate as a means of supporting its currency. However, amid pressures on exports, the dinar's future depends on the continued stability of the Saudi riyal's peg to the US dollar at its current rate of 3.75:$1. Should Saudi Arabia devalue the riyal, however unlikely, Bahrain and other GCC countries will follow suit. But FX reserves of $1 .2 billion last November were modest and inadequate to support the dinar in the event of speculative currency attacks.
The prospects for economic growth and exports rest on an upturn in regional business activities, recovery in Asian energy consumption and continued socio-political stability in the Persian Gulf. Modest growth is anticipated by the year 2000 and thereafter as new capacity in petrochemicals and aluminium comes on stream and oil prices possibly recover. ALBA is continuing with its $400 million expansion plan and the government is committed to investing $2.8 billion over the medium-term on upgrading and expanding infrastructure, oil refinery, public utilities and housing. Growth in the private sector will depend on increasing trade and investment links with companies in the GCC.
FINANCIAL HUB OF THE MIDDLE EAST
Bahrain has effectively served as a regional financial hub for a quarter century. The island houses more international and regional banks than any other Arab country and boasts a sizeable and varied financial sector. As of mid-1998, there were about 182 financial institutions registered. They include 19 commercial banks, 12 of which are foreign, two specialised banks, 33 investment banks, 44 representative offices and 50 offshore banking units (OBUs). The BMA is successfully promoting the island as a favoured centre for Islamic banking. The first Islamic bank was opened in 1997 and since then, over 12 have been licensed to serve an expanding Gulf Islamic market. There are also forex and money brokers and local and foreign insurance companies.
The emirate is best known in international markets for its offshore banking centre. Major foreign OBUs are Citigroup, Bankers Trust, Chemical Bank, Banque Paribas, ABN AMRO, HongKong Shanghai Banking Corp. ANZ Grindlays, Bank of Tokyo, Credit Suisse, Banque Nationale de Paris and Standard Chartered. The major Arab offshore players are Arab Banking Corp, (ABC) - with assets of $25.2 billion m and Gulf International Bank (GIB) - with assets of $10.2 billion. The total assets of OBUs rose to a peak of $78.3 billion in September 1998 according to the BMA. Geographical distribution of assets were GCC countries (29.6 per cent), Western Europe (29.8 per cent), Americas (16.6 per cent) and Asia 15.5 per cent.
Many foreign investment houses are represented, including Nomura, Nikko, Merrill Lynch, Daiwa, Mercury Asset Management, Lehman Brothers, Sumitomo Finance, Warburg Dillon Read and Alliance Capital Limited (US). Citigroup, ABN-Amro and HSBC are marketing their Islamic investment services in the Gulf from Bahrain. The best-known local incorporated investment bank is highly profitable Investcorp.
As scope for recycling Arab petro-dollars surpluses has diminished for the foreseeable future, banks' business strategies are focused on niche markets such as portfolio fund management, cross-border syndication lending, project/corporate finance, multi-billion dollar Islamic banking, and regional trade financing and advisory services linked to privatisation and issuance of initial public offerings (IPOs).
Major banks are attracted to Bahrain because of its stable legal and administrative framework, liberal business climate, sophisticated financial and physical infrastructure and above all, by the BMA's reputation as an effective bank regulator on a par with Group of 10 countries. The BMA is rigorous in its enforcement of the Basle regulations on banks, eight per cent capital adequacy and debt-provisioning. All banks must also comply with International Accounting Standards (IAS). As well as zero corporate taxation, OBUs are exempted from maintaining liquidity ratios or cash reserves with the BMA.
However, the Bahraini offshore centre could face competition from Dubai and Qatar in the coming years and from Lebanon in the long term. Both onshore and offshore banks were not affected too much by tumbling oil prices in 1998. However, a prolonged regional recession would undoubtedly hit all banks in the area, and offshore banks would be prime casualties because they lack domestic business. A recent Moody's report says that credit-quality would deteriorate and all major banks (domestic and offshore) would be "materially affected" by a regional downturn. As Moody's warn, heavy reliance on the GCC markets means that severe Gulf recession may cause significant deterioration in asset-quality of banks leading to "higher provisioning levels and reduced profitability". Others may be affected by the Asian recession. ABC has made increased bad debt provisions on its East Asian exposures.
REGIONAL CAPITAL MARKET AMBITIONS
The BMA sees the development of capital markets as a channel for facilitating private investment funded mostly by an injection of domestic savings and foreign portfolio investment. But at present the ceiling on total foreign share holding is 49 per cent of quoted companies and non-GCC foreign investors may invest directly in only seven stocks: Arab Insurance Group, ABC, Investcorp, Faysal Islamic Bank, Bahrain Middle East Bank, Bahrain International Bank and TAIB Bank.
The capitalisation of the Bahrain Stock Exchange (BSE) was almost $7 billion last February and 41 stocks are currently listed. The major seven stocks by capitalisation are Investcorp (22 per cent), Bahrain Telecommunications Co (20 per cent), ABC (nine per cent), National Bank of Bahrain (six per cent), Arab Insurance Group (4.6 per cent), Bank of Bahrain & Kuwait (4.5 per cent) and BIB (four per cent). An internationally approved settlement and clearing mechanism is in place and an electronic trading system is expected to be operational soon. The BSE surged almost 50 per cent in 1997, but last year capital gains were eroded by profit-taking as the all-share index fell by five per cent on the year. The BSE's correction was modest compared to a 52 per cent plunge in Oman or 40 per cent drop in Kuwait. The BSE has cross-listing agreements with bourses in Oman, Jordan, Kuwait, Egypt and Lebanon. The cross-share listings can be the first step towards integration of Arab stock markets, but these agreements have so far had little impact on trading because of different market regulations. Bahrain possesses the necessary infrastructure to develop into a regional capital market and an outlet for inward portfolio investments. But first, institutional reforms are needed including allowing foreign investors unlimited access and with no limits on foreign equity ownership, as in Egypt.
Bahrain is fast developing into a regional fund management centre. The number of mutual funds being marketed now total about 300 covering futures, equities, bonds and Islamic funds.
It is hoped that Bahrain will consolidate and expand its financial role in the Gulf, similar to Singapore in southeast Asia.
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|Title Annotation:||Survey on Bahrain|
|Comment:||Bahrain might experience zero growth or go into a technical recession in 1999 as a result of a decline in investment and private consumption for the year.|
|Author:||Siddiqi, Moin A.|
|Publication:||The Middle East|
|Date:||May 1, 1999|
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