Bahrain Builds Towards A More Resilient Future

Forbes Middle East: The Kingdom of Bahrain has achieved some key political milestones in 2021. Following Bahrain’s signing of an agreement to establish normal ties with Israel in September 2020, two of Israel’s largest lenders—Bank Leumi Le-Israel and Bank Hapoalim Ltd—have now signed individual memorandums of understanding with the National Bank of Bahrain to enable smooth commercial transactions between both countries according to a Bloomberg report.

At the beginning of the year, in January 2021, Bahrain resumed air connectivity with Qatar after several Arab states lifted a three-year boycott of the country. The U.S. named both the U.A.E. and Bahrain as “major security partners,” which is the first designation of its kind. Bahrain hosts about 5,000 American troops, and is home to the U.S. Navy’s 5th Fleet.

Despite these key achievements, Bahrain remains in an especially vulnerable position economically. While the COVID-19 pandemic has been challenging for numerous countries across the world, the country’s accumulation of substantial debt since the 2014-2015 oil price plunge has taken a toll on its economy. Wealthier neighbors pledged a $10 billion bailout package for Bahrain in 2018, with a condition for fiscal reforms.

Despite a commitment to implementing the Fiscal Balance Program’s reforms, in March 2021 the International Monetary Fund stated that Bahrain needed to take additional measures to lower its public debt, restore macroeconomic sustainability, and reduce its revenue dependence on oil.

Economy

According to the IMF, Bahrain’s economy was expected to contract by 5.4% in 2020 as a result of a 7% fall in non-oil growth. The overall fiscal deficit dropped to 18.2% of GDP in 2020, public debt stood at 133% of GDP, and international reserves declined to about 1.4 months of prospective non-oil imports, while the current account deficit widened to 9.6% of GDP.

However, Bahrain’s economic growth appears to have bounced back as real GDP growth reached 5.7% year-on-year in the second quarter of 2021 while real non-oil growth hit 7.8% during the same period. Bahrain’s government posted a 23% increase in net revenues in the first half of 2021, compared to the first half of 2020, to reach $2.9 billion, bolstered by a 33% jump in oil revenues. It also posted a 35% decrease in deficit to $1.3 billion. Overall, Bahrain expects its economy to rebound with an estimated 5% growth in 2021. However, , Bahrain is expected to grow at 2.5% according to PwC, and 2.4% according to the IMF.

Bahrain also expects a budget deficit of $3.2 billion in 2021, as public expenditure of $9.5 billion tops revenues of $6.3 billion. Fitch Ratings has predicted Bahrain’s budget deficit to narrow to 9.1% of GDP and 8.8% of GDP in 2021 and 2022 respectively.

Despite the economic impact of the coronavirus pandemic, Bahrain’s regional trade with the GCC reached $5.7 billion in 2020, accounting for 25% of its globa`l bilateral trade in that year, according to Bahrain’s Economic Development Board (EDB). Real estate transactions in Bahrain also reached $1.9 billion in 2020, powered by a surge in real estate deals in the second half of the year, according to the EDB.

Abu Dhabi Customs announced at the end of 2020, that the volume of non-oil trade exchange between Abu Dhabi and Bahrain through the emirate’s ports amounted to $11.3 billion from 2015 to November 2020. Dubai Customs announced that trade with Bahrain grew 170% between 2010 and 2019, reaching $4.4 billion up from $1.6 billion.

Financing

In 2020, Bahrain put its target of balancing its budget by the end of 2022 on hold as it focused on helping its economy recover from the pandemic and fall in oil prices. The government is taking robust measures in order to finance its rising debt and plug its deficit. For example, it carried out a government-wide spending review and created a task force to analyze the efficiency of spending.

The country’s central bank offered deferral options and reduced reserve ratio requirements to ensure sufficient liquidity for banks. It also came up with salary support for citizens working in private sector companies. The country rolled out a voluntary retirement scheme for public sector workers and implemented value-added tax (VAT) in 2019 in a bid to boost non-oil revenue. Now, according to reports, Bahrain is planning to double its VAT to 10%. If amended, Bahrain’s 10% VAT rate would make it the second-highest in the Gulf region after Saudi Arabia’s which stands at 15%.

The country’s economy has been aided by the government’s pandemic stimulus, which included measures such as doubling its liquidity support fund to $530 million, central bank-enabled loan deferrals, lesser reserve requirements for banks, and relief on utility bills, according to Bloomberg.

The Central Bank of Bahrain issued a $530 million Government Development Bond in April 2021, in an effort to help the government raise funds to shore up its finances. The bond issue will give a fixed return of 3.6% on the Bahraini dinar per annum to investors. Bahrain may also consider selling stakes in its energy and infrastructure assets to raise new sources of income , the country’s oil minister, Mohammed bin Khalifa Al Khalifa, told Bloomberg in May 2021.

Investment

Bahrain attracted $885 million in direct investment in 2020 through new companies setting up and expanding in the kingdom, according to the EDB. These investments are expected to generate more than 4,300 jobs up to 2023.

Some major investment deals have already been made in 2021. For example, Tencent Cloud—the cloud computing unit of Chinese technology giant Tencent Holdings—announced that it is partnering with the EDB to set up its first data center in MENA by the end of 2021.

In the energy sector, Bahrain’s field development company, Tatweer Petroleum, will use international oil forums in an effort to draw the attention of foreign companies to sign exploration and production sharing agreements. In a deal with Italy’s energy major Eni, Bahrain’s National Oil and Gas Authority (NOGA) began drilling its first exploration well in the north of the country in June 2021, spread over 2,800 square kilometers.

Bahrain awarded 1,688 tenders worth $4.1 billion in 2020. This was 15% less than the $4.8 billion worth of tenders offered in 2019, according to the Tender Board, the country’s government procurement regulator.

According to the EDB, Bahrain was ranked among the top 20 global economies in attracting direct investment on the Financial Times’ Greenfield FDI Performance Index 2021. Bahrain ranked 15th among 84 countries from around the world that were included in the report. Bahrain also ranked second in the Gulf and third in the Middle East and North Africa. The report compares the size of the economies of countries and the direct investments that were attracted in 2020. Bahrain climbed 12 positions from its previous global rating of 27.

The latest figures released by Bahrain’s eGovernment and Information Authority show that trade between the GCC and Bahrain reached a total value of nearly $1.7 billion in Q2 2021, up by 38% compared to the same period in 2020. Trade between Bahrain and the GCC reached around $3.4 billion in the first half of 2021, up from nearly $2.9 billion in H1 2020. Non-oil bilateral trade between Bahrain and the U.A.E. increased by 76% year-on-year to reach $672 million in Q2 2021. Half of all Bahrain-GCC trade was between Saudi Arabia and Bahrain. Trade between the two kingdoms reached $781 million, while trade between Oman and Bahrain stood at $141 million, and trade between Bahrain and Kuwait reached $99 million in Q2 2021. The value of Bahrain’s global exports spiked by more than 70% year-on-year, reaching $1.1 billion by the end of Q2. Import values fell by around 8% to just over $1 billion.

Download the full Bahrain report in PDF format here.