Economic Update

Published 31 Jul 2018

Rising investment in infrastructure and stronger capital inflows for industrial expansion are combining to boost activity in Bahrain’s construction sector, which expanded by 6.7% year-on-year (y-o-y) in the first quarter of 2018, according to data released by the Information and eGovernment Authority last month.

Given that the sector makes up around 7.5% of overall economic activity, construction growth, along with first quarter gains in manufacturing (4.2%) and real estate and business activity (3.7%), contributed to the non-oil sector’s y-o-y expansion of 1.9%.

The sector’s strong performance helped to offset a 14.7% contraction in the oil industry, caused by a drop in production. However, the weaker showing by the energy sector drew overall GDP into negative territory, contracting by 1.2% y-o-y in the quarter.

Infrastructure projects drive activity

Construction is expected to continue to be a driving force for the economy in the short to medium term, with the increased flow of state-backed infrastructure developments filling order books and injecting capital into the country, according to a report from the National Bank of Kuwait (NBK).

Released in mid-June, the report said plans to carry out $8bn in infrastructure projects in areas such as transport, utilities and housing – the country’s largest-ever pipeline – will underpin non-oil growth, which the bank forecasts will expand by 4.7% this year and 4.5% next. NBK predicts headline GDP growth will recover to 3.8% over the next two years.

Rising activity levels in the construction sector were key factors in increased lending by Bahrain’s banks, which posted 9.7% credit growth in the first quarter, more than three times the 2.9% growth recorded during the same period in 2017.

A major development in the construction phase is local company Aluminium Bahrain’s $3bn Line 6 smelter expansion.

Expected to come on-line in January next year, the new line will lift annual output by around 540,000 tonnes to 1.5m, and will see the company account for some 25% of the GCC’s aluminium production capacity, Tim Murray, the firm’s CEO, told OBG.

Oil finds and downstream upgrades bolster prospects

While non-oil sector developments have largely driven recent construction activity, the need for new infrastructure to support recent energy finds should also provide a fillip in the coming years.

Announced at the beginning of April, the finds in the Khaleej Al Bahrain basin amount to as much as 80bn barrels of oil and up to 20trn cu feet of gas, representing the country’s first major hydrocarbons discovery since 1932.

Although it is estimated that production will not begin before 2023 or later, construction work is required in the near term to install the necessary infrastructure and capacity to extract and process the reserves.

The construction sector is also expected to benefit from the ongoing $5bn modernisation programme undertaken by the national oil producer, Bahrain Petroleum Company (Bapco).

Due for completion in 2022, the plan aims to upgrade existing infrastructure, improve efficiency and lift processing capacity at the Sitra oil refinery from 267,000 barrels per day to 360,000.

The work associated with the rollout, combined with the energy finds, is encouraging domestic contractors to take on more staff and prepare for an extended period of increased activity, according to Issam Abu Hamad, executive director of construction and associated activities firm Mechanical Contracting and Services Company.

“We were already planning for three to four years of growth due to the Bapco modernisation programme, which we expected to be followed by a drop-off in work,” he told OBG. “However, with the new oil find announcement, this dynamic may change and could mean some more sustained long-term growth for Bahraini contractors.”