The Report: Bahrain 2018

Economy

The kingdom of Bahrain, renowned for its open markets and one of the most vibrant financial industries in the region, has faced economic headwinds in recent years. Lower oil prices have affected the many corporates that have chosen Manama as a base for their regional operations, and a stubborn fiscal deficit has resulted in a record-high level of public debt. The government has responded with a process of financial adjustment that is slowly narrowing the fiscal gap, but its longer-term solution to the economic challenges it faces rests on wider reform initiatives that aim to build on the kingdom’s already relatively diversified economy.

This chapter contains an interview with Khalid Al Rumaihi, Chief Executive, Bahrain Economic Development Board; and Mahmood Al Kooheji, CEO, Mumtalakat.

Banking

Bahrain’s reputation as a regional financial centre rests in part on the early flourishing of its banking industry. The country’s first modern bank was established nearly 100 years ago following an agreement between the kingdom’s ruler at the time, Sheikh Isa bin Ali Al Khalifa, and the UK-owned and Indian-headquartered Oriental Bank. As Bahrain’s banking sector completes its third full year of operation in a lower oil price environment, profitability and asset growth in the industry has turned flat. However, thanks to a robust regulatory framework there has been no significant deterioration in asset quality, and there is sufficient liquidity in the system to allow banks to pursue lending opportunities. The sector has also seen some interesting regulatory changes over the past year, aimed at maintaining the kingdom’s position as a regional leader.

This chapter contains an interview with Jean-Christophe Durand, CEO, National Bank of Bahrain.

Capital Markets

Despite a challenging investment environment, Bahrain’s exchange showed a relatively strong performance in 2017, with index gains in most sectors. Macroeconomic challenges remain in 2018, but new investment instruments and some significant changes to the exchange’s infrastructure are helping it to maintain its status as one of the most progressively regulated markets it the region – a key asset in the regional competition for investment capital.

This chapter contains an interview with Sheikh Khalifa bin Ebrahim Al Khalifa, CEO, Bahrain Bourse; and Najla M Al Shirawi, CEO, SICO.

Islamic Financial Services

Reduced oil prices and fiscal austerity measures being carried out by governments across the GCC have resulted in a challenging environment for Bahrain’s sharia-compliant financial institutions. The competitive domestic market – home to the largest concentration of Islamic financial institutions in the Middle East – has reacted to adverse conditions, with what appears to be the beginning of a long-awaited period of consolidation: both the banking and takaful (Islamic insurance) segments saw significant merger and acquisition activity over the past year. The sector also received notice in 2017 of a change in the regulatory framework that will usher in a new era of oversight.

This chapter contains an interview with Hassan Jarrar, CEO, Bahrain Islamic Bank.

Insurance

A low oil price environment has presented a number of challenges for Bahrain’s vibrant and fiercely competitive insurance sector. Downward pressure on premiums and a dearth of underwriting opportunities across the region have negatively affected the bottom lines of most Manama-based insurers. However, new opportunities in areas such as health care insurance and the extension of compulsory cover to more areas of the economy are offering routes to growth during this difficult period.

Energy

While Bahrain has pushed successfully to become one of the most diversified economies in the Gulf region, petroleum products still make up a significant share of the country’s total exports: 50% of all exports in 2016, according to data from the UN International Trade Statistics Database and the World Bank. In addition, the drive to establish a flourishing industrial base, coupled with favourable oil and gas subsidies over the years, has put pressure on the kingdom’s ability to meet domestic energy needs with its own supplies of natural gas. The construction of a liquefied natural gas (LNG) terminal, which will start receiving LNG in 2019, as well as reductions in energy subsidies, are likely to help address this shortfall. However, in the long term more will need to be done to raise domestic production or import more oil and gas into the country.

This chapter contains an interview with Abdul Hussain bin Ali Mirza, Minister of Electricity and Water; and Peter Bartlett, CEO, Bahrain Petroleum Company.

Transport

Targeting improvements in domestic infrastructure as well as expanding the links between the kingdom, the rest of the Gulf region and further afield, Bahrain is investing heavily in its transport networks. Among the major ongoing developments is the Airport Modernisation Programme, launched in 2015 to cater for rising air traffic, with the aim of turning Bahrain International Airport into one of the key regional hubs for tourism and services. Plans to construct a second causeway linking Bahrain and Saudi Arabia are also on the agenda, while the ambitious Gulf Railway, a network that would run through all six Gulf nations, has been pushed back and is now likely to move forward in 2021. Proposals to create a light rail system in Bahrain are also in the works, albeit slowly, while roads and bridges are under construction.

This chapter contains an interview with Mohamed Yousif Al Binfalah, CEO, Bahrain Airport Company.

Construction & Real Estate

While 2017 saw the construction sector’s rapid growth slow somewhat, Bahrain has an impressive pipeline of projects lined up for the next few years. A strong focus on transportation and industrial infrastructure, as well as the construction of tens of thousands of affordable housing units, is expected to be among the key drivers of growth for the sector in the near future, with much of this coming from government-backed projects tied to Bahrain’s Economic Vision. Strong real estate growth continues with a number of residential, commercial and hospitality developments coming on-line in 2017 and 2018. However, rental prices have not been immune to the ongoing regional challenges, notably lower oil prices, with rents dropping in 2017 for residential real estate, and remaining subdued for the office sector. Despite this, the overall volume of real estate transactions has grown, with strong demand from locals and residents from countries in the region.

This chapter contains an interview with Mohammed Khalil Alsayed, CEO, Ithmaar Development Company.

Industry

Since the 1970s Bahrain has made a concerted effort to diversify its economy, with efforts visible in the vibrant manufacturing segment and from the growth of the kingdom’s heavy industries. Despite the drop in state revenues due to lower global oil prices in recent years, Bahrain continues to invest in its industrial sector, notably with the $3bn expansion of Aluminium Bahrain, which will see production grow to 1.5m tonnes per year – a rise of over 500,000 tonnes. Meanwhile, Bahrain continues to capitalise on its oil and gas resources, with significant investment in the downstream petrochemicals segment. This is highlighted by the $5bn being spent on the modernisation taking place at Bahrain Petroleum Company and the $515m gas plant expansion by Bahrain National Gas Expansion Company.

This chapter contains an interview with Zayed bin Rashid Alzayani, Minister of Industry, Commerce and Tourism; and Tim Murray, CEO, Aluminium Bahrain.

Tourism & Retail

As a leading performer in Bahrain’s economy in 2017, the tourism and leisure sector has begun measuring its success and impact in billions of dollars. The kingdom expects to see annual tourism receipts of over $1bn by 2020, by which time over $1bn will have been spent on upgrading its international airport and a further $10bn on a raft of new luxury hotel developments. By the end of 2018 the national carrier Gulf Air is set to take delivery of the first of a new $4bn-fleet of Boeing 787-9 Dreamliners. Further into the 2020s up to $5bn looks set to be spent on a second causeway to Saudi Arabia to carry cars as well as trains running on the new GCC rail network. This chapter contains an interview with Sheikh Khaled bin Humood Al Khalifa, CEO, Bahrain Tourism and Exhibitions Authority.

Education

The public education system of Bahrain is poised to mark its centenary in 2019, but the main focus in the country’s schools and universities is further in the future. New institutions are being built and opened in both the public and private sectors to serve young people from nursery age through to postgraduate study. According to international indices, Bahrain’s schools are outperforming many in the region, and results are improving, but there is still some way to go if they are to match the best in the world.

This chapter contains an interview with Riyad Y Hamzah, President, University of Bahrain; and Ahmed Al Shaikh, Director, Bahrain Institute of Banking and Finance.

Health

With the pending introduction of a national health insurance scheme, and an administrative transformation that promises to bind the kingdom’s hospital system more closely together to improve transparency, efficiency and patient care, the short-term prognosis for health care in Bahrain is positive. The government has devoted more of its national wealth to the sector than any of its Gulf neighbours in recent years and its health reform agenda is designed to ensure the most efficient use of that expenditure, while also opening the door for wider participation by private providers. Unlike other countries in the region, the kingdom can draw on a deep pool of home-grown professional talent, with Bahraini doctors and nurses outnumbering expatriates in its hospitals and clinics.

ICT

Recognised by the government as an engine for growth, economic diversification and social cohesion, the ICT sector in Bahrain is expected to play a vital role in enabling the kingdom to achieve its ambition of becoming a regional centre for digital technology. Since ownership was liberalised in the early 21st century, the telecoms industry has made a direct contribution to the development of the national economy while also serving as an enabler for other important business sectors.

This chapter contains an interview with Ulaiyan Al Wetaid, CEO, VIVA Bahrain.

Accountancy & Tax

This chapter contains an overview of the tax framework in which local and foreign investors operate in Bahrain, including the new financial requirements that are set to affect banks’ financial reporting and the issues under the spotlight as the UK prepares to leave the EU.

This chapter contains a viewpoint from Ahmed Alsulaiman, Managing Partner, KSI – Bahrain Consultants & Public Accountants.

Legal Framework

This chapter contains an overview of the legal framework in which local and international investors operate in Bahrain, including a look at the laws governing business in the kingdom and an explanation of the rules covering bankruptcy proceedings.

This chapter contains a viewpoint from Hatim Q Zu’bi, Partner, Zu’bi & Partners.

The Guide

The guide contains listings of some of the leading hotels and resorts in Bahrain, and contacts for important government offices and services. It also contains useful tips and information for first-time or regular visitors.

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