Reforms continue as Bahrain records strong FDI increase

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Bahrain has benefitted from a series of reforms aimed at increasing foreign direct investment (FDI), recording a strong jump in inflows in 2017.

Last year saw $519m in inward FDI, a 114% increase on 2016 and the highest rate of foreign investment growth in the GCC, according to a report issued by the UN Conference on Trade and Development (UNCTAD) at the end of June. The result is Bahrain’s best since 2014, building on inflows of $243m and $65m in 2016 and 2015, respectively. It also bucked the international trend, with global foreign investment levels falling 23%.

UNCTAD said the strong performance was supported by a number of reforms aimed at facilitating business investment, including amendments to its commercial companies law over the past two years allowing 100% foreign ownership in various segments of the economy, including real estate, manufacturing, mining and quarrying, and water supply, among others.

According to broader metrics from the Bahrain Economic Development Board, total inward investment by 71 companies measured $733m over the year, a 161% increase on 2016, which is expected to generate some 2800 jobs locally.

Calls for continued reforms to attract investment

While strong progress has been made to date, the government has outlined its willingness to undertake further measures to increase its appeal as an investment destination, with FDI and private investment featured as key parts of Economic Vision 2030, the country’s long-term economic development plan.

In late May it was announced Bahrain would extend the term of residence visas for qualified investors and professionals from two years to 10.

The proposal, designed to incentivise foreign investment, is being drafted by the Ministry of Interior and may be instituted before the end of the year.

In a report issued on July 15, the IMF stated its support of previous measures to attract FDI, but stressed the importance of continuing fiscal reforms to address public debt levels, which have expanded to 89% of GDP.

The fund said it that while ongoing subsidy reforms and efforts to increase non-oil revenue by introducing value-added tax (VAT) would help bring down the deficit and provide greater fiscal stability, it recommended further measures, including cuts to public spending and the introduction of direct taxation, including a corporate income tax.

In addition, the IMF recommended the rollout of additional privatisation projects and the deployment of public-private partnerships as a way to increase FDI, boost productivity and improve competitiveness in the economy.

Debt levels raise concerns over investment potential

Despite the increase in FDI and ongoing reforms, the broader metrics of the economy have prompted international credit ratings agency Moody’s to downgrade Bahrain’s long-term issuer rating from “B1” to “B2” while maintaining its negative outlook, potentially disincentivising international investment.

The downgrade, announced on August 3, cited continued high levels of government borrowing – which the agency predicts could push public debt to around 100% of GDP by the end of the decade – and lower foreign exchange reserves as driving forces for the ratings move.

While pushing for quicker implementation of fiscal reforms, Moody’s said a proposed aid programme being prepared by Gulf neighbours Saudi Arabia, the UAE and Kuwait could help boost stability and confidence in the economy.

International media has reported the proposed release of funding to support debt repayments and help maintain the currency peg would be offered in return for the implementation of a series of reforms, including the introduction of VAT, expected in 2019, and a cut to state spending, though the schedule of the assistance package and reforms has yet to be finalised.

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