The Report: Bahrain 2015

As the region faces up to the challenge of the recent drop in oil prices, Bahrain’s fundamentals indicate the kingdom is well positioned to weather the dip. The focus on diversification goals outlined in Economic Vision 2030 is helping establish a more competitive and sustainable economy in the kingdom. The financial sector, which represents Bahrain’s second-largest GDP contributor, has continued to recover robustly since the global economic downturn.

Country Profile

The kingdom of Bahrain hosts a diverse and multicultural population, which in 2011 totalled around 1.2m people, of which 585,000 were Bahraini and 610,000 expatriates. Finance and energy remain key drivers of GDP growth in Bahrain. Energy still accounts for the majority of government revenues, but is shrinking as a proportion of GDP as Bahrain pushes ahead with economic diversification plans in line with Bahrain’s Economic Vision 2030. The island’s location enables it to serve as a key trans- Gulf transportation hub, while expansion plans at Bahrain International Airport will boost the kingdom’s status as a centre for trans-shipment and logistics. Expansion plans will also fan tourism growth, an increasingly important sector with Manama being designated the capital of Arab tourism in 2013 and showpiece events like the Bahrain Formula 1 Grand Prix driving sector growth.

This chapter contains a viewpoint from King Hamad bin Isa Al Khalifa; and an interview with Lim Hng Kiang, Singapore Minister for Trade and Industry.

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While Bahrain has witnessed strong growth in recent years, there are concerns that sluggish oil prices and rising debt levels will limit growth into 2015. However the finance and banking sector, which represents the kingdom’s second-largest economic contributor, is expected to continue expanding, with the country having emerged in recent years as a financial services hub, especially in regards to its Islamic finance and insurance offerings. Moreover, foreign direct investment (FDI) flows into the kingdom continue to grow steadily since 2009, totalling $989m in 2013, up 11% from $891m in 2012 and outpacing global FDI flows, which increased by 9% in the same period. Three of Bahrain’s industrial areas are included among a list of the top 20 global free zones of the future, with the additional investment incentives and benefits for foreign investors on offer expected to ensure the kingdom remains an attractive location for companies setting up in the region.

This chapter contains interviews with Kamal bin Ahmed, Acting Chief Executive, Bahrain Economic Development Board; Sheikh Ahmed bin Mohammed Al Khalifa, Minister of Finance; Le Luong Minh, Secretary-General, Association of South-East Asian Nations; Abdul Latif Al Zayani, Secretary-General, GCC; Alderman Fiona Woolf, Lord Mayor of London; and Mahmood Hashim Al Kooheji, CEO, Mumtalakat.

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Despite being buffeted by successive financial storms since 2008, Bahrain’s banking sector has remained resilient and in February 2014 the Central Bank of Bahrain’s (CBB) “Financial Stability Report” showed many areas of strength and renewed vigour. In 2014 the finance and banking sector accounted for nearly 17% of GDP, according to the CBB, making it the second-largest contributor after the hydrocarbons sector. Deposits reached BD15.23bn ($40.4bn) in February 2013, their highest levels since 2008, while the central bank expected credit growth to the private sector to increase in 2014 after reaching a peak of $18.56bn at the end of September 2013. Meanwhile, the CBB has been urging greater consolidation across the sector to strengthen against future financial shocks, with both conventional and Islamic banks on the lookout for merger opportunities.

This chapter contains a viewpoint from Khalid Hamad, Executive Director - Banking Supervision, CBB, and Chairman, International Islamic Financial Market; and CEO, National Bank of Bahrain; and Hassan Jarrar, CEO, Standard Chartered Bahrain.

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Capital Markets

June 2014 marked the 25th anniversary of trading on the bourse, which began operating as the Bahrain Stock Exchange in 1989. The market looks to have recovered from the global financial crisis, and in 2013 posted an 18.9% year-on-year increase in market capitalisation, with the trend continuing into 2014, with a 21.7% rise to BD8.47bn ($22.45bn) at the end of September 2014. The banking sector accounts for the bulk of activity, with commercial banks comprising 69.16% of the value of all shares traded in the first nine months of 2014. In a drive to increase liquidity the Bahrain Bourse has recently extended its trading day, and in July 2014 it upgraded its NASDAQ OMX trading platform from the Horizon platform to the X-stream system. Moreover, positive steps to encourage more trading – particularly within the GCC – have been taken, while discussions are also under way to increase listings, including development of a specific framework under which SMEs might be attracted to trade on the exchange.

This chapter contains an interview with Khalifa bin Ebrahim Al Khalifa, CEO, Bahrain Bourse; and a viewpoint from Najla M Al Shirawi, CEO, Securities & Investment Company.

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Islamic Financial Services

Bahrain remains a world leader in Islamic finance, boasting the highest concentration of Islamic financial institutions globally, with six licensed Islamic retail banks and 18 licensed Islamic wholesale banks. Islamic wholesale banks’ investment portfolios have begun to demonstrate promising diversification in recent times, with a shift away from risky real estate fuelling interest in other sectors. Meanwhile, in 2014 the Central Bank of Bahrain, which regulates the kingdom’s Islamic financial institutions, introduced regulatory changes aimed at ensuring best practice is applied to sharia-compliant transactions, including the issuance of sharia-compliant bonds and the Islamic insurance segment. Today takaful represents one of the fastest-growing segments of Bahrain’s insurance sector, with gross contributions of takaful companies growing 7% from $142.31m in 2012 to $151.58m in 2013, according to the central bank.

This chapter contains a dialogue between Adnan Ahmed Yousif, President and CEO, Al Baraka Banking Group; and Aabed Al-Zeera, CEO, International Investment Banking.

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Bahrain boasts the highest insurance penetration rate in the GCC at 2.3% of the population. This is a result of its comparatively long insurance history, the clear regulation in place and the large number of companies involved in the sector. Motor insurance remains the primary source of revenue and claims within the sector, with motor lines representing almost 26% of premiums and contributions written in the market in 2012. A regulatory regime that allows for the free movement of capital and 100% foreign ownership of companies, as well as the availability of a highly skilled workforce has attracted many international insurance providers to set up shop in Bahrain. Moving forward the takaful segment is expected to play an increasingly prominent role in the sector, with new regulations being introduced to govern the framework of the segment and with international trends indicating that takaful’s global value will reach $17bn by 2015.

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Oil and gas remain key to Bahrain’s economy, with 87% of government revenues generated from hydrocarbons in 2012 and the oil sector growing robustly in 2013, posting 15% real GDP growth. While falling oil prices are a concern in the short term, the kingdom is looking to boost oil production in the medium term. Efforts are under way to double the output of the Bahrain field by 2020 through the use of enhanced oil recovery techniques while a new round of offshore exploration drilling is expected in 2015. Meanwhile plans were announced in 2014 for the kingdom’s first liquefied natural gas (LNG) terminal, with the LNG regasification facility expected to import 3m tonnes per annum. Elsewhere, a major upgrade to the kingdom’s oil refinery on Sitra Island will ensure Bahrain remains competitive at a time when a number of similar expansions are taking place in the region.

This chapter contains interviews with Abdul Hussain bin Ali Mirza, Minister of Energy; and Pete Bartlett, CEO, Bahrain Petroleum Company.

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Expansion of the transportation sector is regarded as crucial for future economic growth in Bahrain; the sector’s contribution to GDP is expected to increase from 4% to 7% in the coming years, driven in large part by the rising population. Upgrades at Bahrain International Airport will boost the facility’s passenger and cargo capacity with the addition of 13 new gates and 40 new check-in counters while plans to reduce congestion on the roads include a government initiative aiming to switch at least 15% of all personal journeys from automobiles to public transport by 2030, with the latter expected to receive significant public investment as a result. Meanwhile the Bahrain Logistics Zone, which began operations in 2008, continues to build up Bahrain’s role as a regional logistics centre as the kingdom looks to position itself as a key entry point to the GCC.

This chapter contains an interview with Maher Salman Al Musallam, Acting CEO, Gulf Air.

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Construction & Real Estate

The residential segment is well on its way to returning to pre-2009 levels of growth, with the volume of real estate trading expanding by 30% in 2013 and total value of transactions reaching $2.28bn, compared to $1.76bn in 2012. State-funded housing projects are expected to drive expansion, with the government signing its first-ever housing public-private partnership agreement in 2012. Spending on social housing has boosted the kingdom’s construction sector, which is projected to return to stable growth in the next few years, expanding by 8.59% annually until 2018. Meanwhile private contractors have benefitted from transport construction and expansion projects, with rail and road links set to aid development under the auspices of the Economic Vision 2030 plan. The government intends to invest a total of $22bn in infrastructure over the next four years, with industrial construction poised to see strong growth as a result of new transportation and logistics builds.

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

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Industry in Bahrain continues to grow as increasingly low borrowing rates, particularly for manufacturing, demonstrate banks’ willingness to finance projects in the sector. Bahrain’s manufacturing sector accounts for 15% of GDP making it the country’s third-largest economic contributor after hydrocarbons and financial services, and is expected to reach 20% of GDP within the next decade. The sector is dominated by basic metals, refined petroleum products and chemical products, and in 2012 employed 13% of the total workforce in the kingdom. Bahrain is home to the sixth-largest aluminium smelter in the world, which has encouraged the clustering of several downstream businesses, while the kingdom’s burgeoning pharmaceuticals sector was worth $260m in 2012 and is expected to rise by a compound annual growth rate of 10.1% to 2017.

This chapter contains interviews with HE Dr Hassan Fakhro, Advisor to the King for Economic Affairs; and Tim Murray, CEO, ALBA.

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Tourism’s total contribution to Bahrain’s GDP reached $3.26bn, or 10.2% in 2013, with this is expected to increase by 7.6% in 2014 and then by 5% each year until 2024. Continued investment in infrastructure will help drive future growth in the sector, with the $980m expansion of Bahrain International Airport due to increase capacity to 13.5m passengers per year. Meanwhile, plans to expand the country’s already vibrant hotel offering are under way, with five new five-star hotels due to open over the next few years. Additionally, the kingdom is looking to unlock its rich potential as an ecotourism destination while also boosting its reputation as a regional sporting destination, building on the success of the Formula 1 Bahrain Grand Prix, a major event on the kingdom’s sporting calendar which attracts visitors from all around the world.

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Bahrain was the first country in the region to start developing universal education and today this continues to form a central tenet of government policy. The World Economic Forum currently ranks Bahrain 48th worldwide in terms of the quality of its education system, and the kingdom has a literacy rate of 91%. In June 2014 the Higher Education Council approved Bahrain’s first National Strategy for Higher Education and Scientific Research. The strategy focuses on six priority areas for reform and improvement, including the development of quality teaching, increasing student engagement and the enhancement of higher education institutions, while work placement schemes and vocational training aimed at matching skills with high-growth areas are also key elements. Government goals to attract greater private sector participation present a bright outlook for investors looking to target the segment.

This chapter contains an interview with Solveig Nicklos, Director, Bahrain Institute of Banking and Finance.

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The Bahraini constitution guarantees access to health care for all nationals. The government budget allocation for health care rose from $1.4bn in fiscal year 2011/12 to $1.8bn for 2013/14, while the sector currently contributes 2.5% to GDP, a figure set to grow to 7% by the end of the decade. Attitudes towards health issues among the local population shifting in recent times; an increased focus on healthy living is expected to fuel demand for health products while the government’s drive to increase the participation of the private sector to meet the medical needs of the growing population will provide further opportunities moving forward. As well as catering to local demands, government efforts are in place to expand Bahrain’s medical tourism offering, with various projects aimed at capturing a slice of the GCC’s medical tourist market.

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Telecoms & IT

Privatisation and liberalisation initiatives have led to increased competition in the Bahraini telecoms sector in recent years, making it one of the most dynamic in the kingdom’s economy, with telecommunications accounting for roughly 4% of GDP in 2012. Mobile penetration stood at 166% in 2013, well above the regional average of 110% and the global average of 96% while the roll out of 4G long-term evolution services is accommodating the huge rise in data demand. Meanwhile the IT sector continues to thrive, with 2013 figures showing that 82% of households in Bahrain had internet access and more than 90% had computers. Government services have increasingly become available online since 2007, with The National eGovernment Strategy for 2016 aiming to bring over 90% of key services used by Bahraini residents and businesses online, including business and office registration, banking services and e-tendering of government contracts.

This chapter contains a roundtable discussion with Alan Whelan, Group CEO, Batelco; Ulaiyan Al Wetaid, CEO, VIVA Bahrain; and Mohammed Zainalabeddin, General Manager, Zain Bahrain.

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Legal Framework

This chapter contains an outline of the legal framework in which local and foreign investors operate, including a review of the effects that new labour legislation will have on employers, an examination of corporate law in Bahrain and a look at a proposed law to address the threat of cyber crimes.

This chapter contains a viewpoint from Qays H Zu’bi, Senior Partner, Zu’bi & Partners.

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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 and business and leisure visitors alike.

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