Bahrain: Year in Review 2012

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While 2012 may have been marked by an ongoing political stalemate and effects from regional and local unrest, Bahrain managed to overcome negative pressures and produce solid growth for 2012.

The Kingdom’s progress in diversifying its economy, anchored by a tested and well regulated financial sector, was viewed as a key contributing factor to Bahrain’s recovery from the 2011 crisis, alongside substantial government investment in major projects.

However, the country’s political intractability remains quite salient, as small-scale anti-government demonstrations continue in the midst of a protest ban, opposition figures remain incarcerated, and substantive dialogue has yet to take place. Some forces in the government have called for transparent dialogue and institutional reform, yet internal divisions make this difficult to implement. The same goes for the Opposition, where Al Wefaq party leader Sheikh Ali Salman has called for dialogue without preconditions. The new year will therefore serve as a crucial test for Bahrain’s political trajectory.

Economic growth for the third quarter of 2012 was up 0.7% on the previous three-month period, while a year-on-year (y-o-y) comparison for July to September showed real GDP rose 3.1%, state news agency BNA reported in early December. Growth came despite a decline in crude production at the Abu Safa field, which led to a 7.1% drop in Bahrain’s petroleum industry output for the third quarter, the BNA said, citing Central Informatics Organisation statistics.

The Economic Development Board said in a second-quarter report that non-oil sector growth was up 8.1% on 2011. Analysts polled by Reuters in September said they expected real GDP growth to reach 2.8% in 2012, up from 1.9% in 2011.

Both Fitch Ratings and Standard & Poor’s (S&P) maintained their assessments of Bahrain’s long-term sovereign credit ratings, signalling continued confidence in the Kingdom’s economic performance. Fitch upheld Bahrain’s foreign currency rating at “BBB” and local currency at “BBB+”, while S&P maintained a “BBB” for both categories. Both agencies, however, said they considered the ongoing political situation a cause for concern, with S&P highlighting additional risks and vulnerable areas, such as lower oil prices, government debt and slower growth.

A 10-year, $1.5bn sovereign bond issuance, which had a 6.125% coupon, was launched by the Central Bank of Bahrain (CBB) in June and oversubscribed by 400%. The capital raised will be used to fund some of the Kingdom’s key major projects.

While the 2011 crisis hit bank lending hard, the retail segment made considerable headway in 2012. Retail balance sheets grew 4.5%, while deposits rose by 8.2% in the year to July, Arabian Business reported in December. Although the wholesale sector has struggled to achieve similar success, local bankers have told OBG they expect government infrastructure projects to stimulate corporate credit.

Housing looks set to top the project list, as the government moves to meet rising demand for affordable homes estimated at around 50,000 units, by offering tenders to local contractors. Bahrain’s banking and construction industries should also benefit from GCC commitment of up to $10bn over a 10-year period for housing and infrastructure development.

The Kingdom is preparing to roll out three large-scale government investment initiatives, which will see $4.8bn channelled into the national oil company Bapco; $2.2bn into Aluminium Bahrain (Alba); and $1.2bn into the Gulf Petrochemical Industries Company (GPIC). The projects are due to reach the market by end-2013 or the beginning of 2014.

In an early-December statement, Khalid Hamad, CBB’s executive director of banking supervision, said he hoped more of the projects would see greater private sector participation. “If you walk around [Bahrain], you will see a lot of government spending, a lot of projects started,” he said. “And when you see a lot of government spending, there is a need by the private sector to get some lines from the banks to be able to service these projects.”

Petroleum continued to play a central role in Bahrain’s economic development, despite hiccoughs in hydrocarbons production at the Abu Safa field. The government took steps to significantly increase its domestic production capacity through enhanced oil recovery (EOR) techniques under the direction of Tatweer, the state’s upstream operator. As a result, production was reached up to 45,000 barrels per day (bpd). The Kingdom has set a target of reaching 100,000 bpd by 2017.

Bahrain is also pushing forward with plans to boost gas production. Occidental Petroleum Company’s deep gas exploration is expected to increase overall gas production from 1.5bn cu ft per day to 2.5bn before 2020, while the tender to develop Bahrain’s first LNG import terminal should be awarded early in 2013.

While political uncertainty hovers over Bahrain, its economy has proved to be tenacious in 2012, benefitting from long-standing decisions to expand the non-oil sector. In the near term, government investment will guide big-ticket investment projects, which should signal substantial added value and opportunity for contractors, banks and consumers.

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