Kingdom of Bahrain ECONOMIC YEARBOOK 2013

Transcription

1 Kingdom of Bahrain ECONOMIC YEARBOOK 2013

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3 H.R.H. Prince Khalifa bin Salman Al Khalifa The Prime Minister of the Kingdom of Bahrain H.M. King Hamad bin Isa Al Khalifa The King of the Kingdom of Bahrain H.R.H. Prince Salman bin Hamad Al Khalifa The Crown Prince, Deputy Supreme Commander and First Deputy Prime Minister of the Kingdom of Bahrain

4 KINGDOM OF BAHRAIN INTRODUCTION 2

5 ECONOMIC YEARBOOK 2013 Introduction This book is intended as a comprehensive reference work on the Bahraini economy. It offers a compendium of data and analysis covering the development, composition, and prospects of the national economy. Apart from reviewing the recent performance and key characteristics of the economy as whole, this work provides a detailed overview of individual sectors ranging from the historically important hydrocarbons sector to emerging champions in areas such as private education and health care. The book contains seven chapters, which are: Profile of the economy, Macroeconomic developments, Financial markets, Foreign trade, Social infrastructure, International benchmarking, and Individual sectors. The opening discussion on the Bahraini economy since the turn of the millennium depicts a decade success. Annual real GDP growth in Bahrain averaged 5.0% between 2000 and The economic expansion was underpinned by strong structural drivers in the form of demographic dynamism, economic diversification, and an advantageous location. The contribution of these factors was significantly enhanced by a decade of economic reform designed further develop the education system, improve the business climate, and upgrade the national infrastructure, among other things. Growth further benefited from a long period of high oil prices, rising government spending, a real estate boom, and high demand for health care and educational services. This work highlights Bahrain s track record as a regional pioneer of economic diversification. While partly attributable to maturing hydrocarbons sector, the track record also reflects Bahrain s long-standing investments in human capital and regulatory reform. The past decade proved transformative in terms of diversification as the real GDP weight of Mining & Quarrying (primarily oil and gas) declined from 44% in 2000 to 20% in All non-oil sectors, with the exception of Real Estate, saw an increase in their GDP share. The analysis further reveals the resilience of the Bahraini economy which has continued to record growth even in the face of major challenges created by the global crisis. After 1.9% expansion in 2011, the rate of increase accelerated to 3.4% in 2012, despite technical disruptions in the oil sector. With hydrocarbons production normalizing and continued momentum in the non-oil economy, real GDP growth in 2013 is expected to exceed 5.0%. The Yearbook highlights the competitive advantages of Bahrain, above all in the areas of qualified human capital and a central location. Bahrain s long history of economic openness has led to a high degree of integration in the global economy. A benchmarking of Bahrain s standing in a number of international indices underscores substantial competitive strengths in areas such as human development, macroeconomic stability, finance services, efficient business regulations, openness to trade, and ICT readiness. 3

6 KINGDOM OF BAHRAIN A SNAPSHOT OF BAHRAIN 4

7 ECONOMIC YEARBOOK 2013 Key Indicators Surface area sq km Population, 2010 est. 1,234,600 Population density Main population centers GDP, 2011 est. PPP GDP per capita, 2011 est. PPP Currency HDI Language 1,630/sq km Manama (capital) Muharraq Riffa Isa Town Hamad Town USD26.1bn USD31.1bn USD23,100 USD31,100 1 Bahraini Dinar (BHD) = 1000 Fils = USD2.65 Arabic 2012 proved to be the year of steady consolidation Bahrain Economic Outlook e 2014e Real GDP growth (%) Non-hydrocarbon sectors Hydrocarbons sector Inflation (CPI %) Nominal GDP growth (%) Current account (% of GDP) Fiscal balance (% of GDP) * -5.3** -5.7** Oil price in USD (Arabian Medium) * Based on the 2012 budget, oil price is USD80. ** Based on the draft budget for , oil price is USD90 Source: Central Informatics Organisation, Ministry of Finance, Economic Development Board team analysis 5

8 KINGDOM OF BAHRAIN TABLE OF CONTENTS 6

9 ECONOMIC YEARBOOK Profile of the economy GDP Breakdown: A pioneer in Diversification 9 2. Macroeconomic developments Economic prospects Financial markets Equity markets 39 Bond and sukuk markets 43 Interbank markets Foreign trade Current account 48 Capital and financial account Social infrastructure Education in Bahrain 55 Healthcare 59 Entrepreneurship International Rating environment 75 Bahrain global rankings performance Individual sectors Oil and gas sector 79 Financial services 83 Insurance and takaful 9 Manufacturing 9 Transport and communications 104 Real estate and construction 112 Trade 116 Social and personal services 118 Government services 120 Tourism 121 References

10 KINGDOM OF BAHRAIN 01 PROFILE OF THE ECONOMY 8

11 ECONOMIC YEARBOOK 2013 GDP Breakdown: A pioneer in diversification Historical growth ( ) The opening decade of the 21st century proved a period of rapid economic development in Bahrain. Real output growth averaged 5.0% annually 1 between 2000 and 2012, driven by high oil prices, rising government spending, expansion in property and construction, as well as high demand for private social and personal services (mostly private health and education). Figure 1: Nominal and real GDP ( ) Source: Central Informatics Organisation Economic diversification Bahrain, partly due to its relatively modest hydrocarbon endowments, has long been a pioneer of economic diversification in the Gulf region. While it was first regional economy to discover oil in 1932, it also was home to the first oil refinery (1936), as well as industrial ventures such as Aluminium Bahrain (ALBA, set up in 1968). A significant offshore banking sector emerged in the 1970s. But the first decade of the 21st century proved particularly transformative in terms of economic diversification and witnessed rapid expansion across much of the non-oil economy. Using 2010 as a base year, mining and quarrying (primarily oil and gas) accounted for 44% of real GDP and decreased to 20% in 2012, while nominal GDP remained at 25% of GDP in both years. With the exception of real estate and mining and quarrying, the share of all major sectors increased their share of real GDP between 2000 and The three fastest growing sectors over the period were social and personal services, construction, and transportation and communications. 1 Real GDP has been rebased from 2001 to The result has been an adjustment of sector proportions, most notably with the mining & quarrying sector, which experienced relatively high inflation. 9

12 KINGDOM OF BAHRAIN Figure 2: Share in real GDP by sector Source: Central Informatics Organisation Figure 3: Real GDP by sector ( ) Sector CAGR % 2000 Share 2012 Share of GDP of GDP Social and Personal Services % 2% 5% Construction % 2% 7% Transportation and Communication % 4% 7% Other % 5% 7% Retail % 3% 5% Government 514 1, % 9% 12% Finance 781 1, % 14% 17% Manufacturing 713 1, % 12% 15% GDP 5,736 10, % 100% 100% Real Estate % 5% 4% Mining and Quarrying 2,510 2, % 44% 20% Source: Central Informatics Organisation, Economic Development Board team analysis 10

13 ECONOMIC YEARBOOK 2013 Figure 4: Real GDP composition, 2000 Figure 5: Real GDP composition, 2012 Source: Central Informatics Organisation Source: Central Informatics Organisation Recent trends Following a exceptional decade of robust growth and increasing oil prices, Bahrain continued to record significant growth despite a number of challenges faced in recent years. Despite a severe global downturn since 2009, regional political challenges in 2011, and oil production dips in 2012, the economy has consistently posted positive growth throughout this period. In 2012, Bahrain real GDP grew by 3.4%, despite a 8.5% fall in oil production due to unscheduled maintenance in the Abu Sa afa field, which accounts for the majority of Bahrain s crude oil production. Thus, growth in 2012 was driven by the non-oil sector, which expanded by 6.7%. The hotels and restaurants sector experienced the fastest growth of any sector in 2012, growing by 13.6% over the year. While impressive, this growth rate in large part represented normalization from disruptions in Manufacturing as well as social and personal services grew by a robust 5% and 13%, respectively. The main drivers were expansion in the petrochemical and oil-related industry as well as private health care. 11

14 KINGDOM OF BAHRAIN Figure 6: Quarterly real GDP growth ( ) Source: Central Informatics Organisation Figure 7: Quarterly real GDP growth (YoY) Figure 7: Quarterly real GDP growth (YoY) Source: Central Informatics Organisation 12

15 ECONOMIC YEARBOOK 2013 Figure 8: Quarterly real GDP growth (YoY) YoY growth Annual Q1 Q2 Q3 Q4 Annual Q1 Q2 Q3 Q4 Q1 Q2 Crude Petroleum & Natural Gas 3.6% 0.5% 3.0% 17.4% -4.3% -8.5% -4.7% -14.6% -6.8% -8.0% 8.0% 18.6% Manufacturing 3.1% 21.2% 6.0% 4.8% -13.2% 4.7% 8.7% 8.8% 2.4% -1.1% 2.0% -1.9% Construction -7.9% -1.1% -5.8% -9.7% -14.4% 4.1% 1.4% 5.8% 2.8% 6.6% 2.8% 5.6% Trade -1.7% 1.6% -3.1% -1.8% -3.2% 5.9% 5.8% 8.1% 7.9% 1.7% 1.6% 1.8% Hotels & Restaurants -17.2% -19.8% -20.6% -13.5% -15.4% 13.6% 13.5% 20.7% 13.5% 7.7% 13.5% 8.9% Transport and Communication 6.1% 7.3% 6.0% 4.8% 6.4% 4.4% 6.1% 3.1% 5.4% 3.2% 4.8% 1.7% Social & Personal Services 11.2% 14.8% 8.7% 5.4% 16.1% 12.5% 13.6% 11.6% 15.1% 10.0% 6.2% 7.8% Real Estate & Business Activities -6.6% -2.3% -5.8% -9.0% -9.1% 3.6% 1.2% 3.4% 3.8% 6.2% 1.7% 1.8% Financial Corporations -0.4% -1.4% -2.2% 0.0% 2.1% 4.0% 4.3% 3.7% 4.2% 3.9% 3.0% 2.8% Government Services 14.4% 16.5% 14.7% 13.5% 13.0% 12.0% 13.3% 12.5% 11.3% 11.1% 4.2% 2.7% Other 1.2% 1.4% 5.6% 4.8% -6.5% 11.6% 10.5% 11.8% 7.5% 17.0% 0.4% 3.4% GDP 2.1% 4.8% 2.2% 4.5% -2.7% 3.4% 4.8% 3.0% 3.4% 2.5% 4.2% 5.3% Source: Central Informatics Organisation Population According to the Central Informatics Organization (CIO) s 2010 Census, Bahrain s population grew at a rapid pace between 2001 and 2010, nearly doubling from 0.66mn to 1.22mn - an annual average growth rate of 7.4%. The Bahraini and non-bahraini population grew by an annual average of 3.7% and 11.8% respectively. Consequently, non-nationals increased their share of the total population from 38% in 2001 to 54% in Figure 9: Bahraini and non-bahraini population by gender (2001 and 2010) Source: Central Informatics Organisation National Census Data 2001 and

16 KINGDOM OF BAHRAIN In terms of age composition, the local population is fairly young with 42% under the age of 20 and just 4.1% over 65 as of For Bahrainis, the dependency ratio 2, which is commonly used to compare the size of working age population to the dependent population, decreased between 2001 and This indicates a continued increase in the working-age population over the decade. The dependency ratio stood at 89% in 2010 compared to 104% in 2001 implying that the Bahraini population in the age group of is now larger than the dependent (0 19 and 65+) segment. The non-bahraini population is overwhelmingly in the working-age category with 88% aged between 20 and 64 as of 2010 and is characterized by a low dependency ratio of 14%, compared to 20% in Also, non-bahraini males outnumber females with 2.6 males per female. These indicators reflect the significant numbers on low wage expatriate workers who are primarily employed and numerically dominance in labor-intensive sectors such as retail and construction. Figure 10: Bahraini and non-bahraini population by age (2010) Source: Central Informatics Organisation 2 Dependency ratio is defined as 0 19 and 65+ population over those in the age group of

17 ECONOMIC YEARBOOK 2013 Figure 11: Population by nationality and broad age group ( ) Population Annual avg. growth Share of population Total 650,604 1,234, % 100.0% 100.0% , , % 35.7% 25.9% , , % 61.8% 71.9% ,363 26, % 2.5% 2.1% Bahraini 405, , % 100.0% 100.0% , , % 47.4% 42.3% , , % 48.9% 53.5% ,964 23, % 3.7% 4.1% Non-Bahraini 244, , % 100.0% 100.0% ,918 79, % 16.3% 12.0% , , % 83.1% 87.6% 65+ 1,399 2, % 0.6% 0.4% Source: Central Informatics Organisation Bahraini workforce and participation rates The Bahraini workforce participation rate 3 stood at 58.4% in This is relatively low as compared to developed countries such as the US, where the participation rate in the age group of stood at 78.7% in the same year. A lower participation rate is largely reflective of a significant, albeit diminishing, gender differential in participation among Bahrainis. Labor force participation by Bahraini women is significantly lower than that of men, 40.1% as compared to 76.5% respectively. However female participation rates have risen by an average of ten percentage points over the decade. As depicted in the graph below, both males and females in the age group of 25 and 35, have the highest levels of labor force participation in Bahrain, followed by a gradual decrease for males in higher age groups and a more pronounced decline in female participation. Figure 12: Bahraini participation rates (2010) Source: Central Informatics Organisation, Economic Development Board 3 Participation rate defined as workforce aged over the population aged

18 KINGDOM OF BAHRAIN Figure 13: Bahraini population and workforce pyramid (in 000), 2010 Source: Central Informatics Organisation, Economic Development Board Labor market Total civilian employment in the Kingdom increased from 307,000 to 647,578 between 2002 and As non-bahraini employment outpaced Bahraini employment, the share of employed Bahrainis as a share of total employment fell from 34% to 23% over the period. Non-Bahraini employment and Bahraini employment grew by 3.5% and 8.7%, respectively, over the same period. Figure 14: Employment by nationality ( ) Source: Labour Market Regulatory Authority In terms of the sectoral breakdown, over one-third of civilian Bahraini employment was in government, with retail and manufacturing being the next largest employers of Bahraini s, at 16% and 11% of total Bahraini employment, respectively. While the public sector continues to account for a large share of overall Bahraini employment, it should be noted that the proportion is markedly lower than in the other Gulf Cooperation Council (GCC) member states. Among non-bahrainis, 63% are employed in construction, retail, or domestic work. 16

19 ECONOMIC YEARBOOK 2013 Figure 15: Bahraini workers by sector (2011) Figure 16: Non-Bahraini workers by sector (2011) Source: Social Insurance Organisation, Labour Market Regulatory Authority Source: Social Insurance Organisation, Labour Market Regulatory Authority Figure 17: Employment in 2011 (by nationality) Source: Social Insurance Organisation, Labour Market Regulatory Authority Total Bahraini Non-Bahraini Manufacturing 80,867 15,707 65,160 Construction 130,793 10, ,873 Trade 127,403 23, ,437 Hotels and restaurants 33,556 3,118 30,438 Transport and communication 20, Social and personal services 22, Real estate and business activities 37, Finance 14,849 9,273 5,576 Government 58,147 52,730 5,417 Domestic workers 95,297 95,297 Other 25,729 10,264 15,465 Total employment 647, , ,

20 KINGDOM OF BAHRAIN 02 MACROECONOMIC DEVELOPMENTS 18

21 ECONOMIC YEARBOOK 2013 Economic Prospects Bahrain s real GDP grew by 3.4% in However, the recovery was, to an extent, contained by a protracted dip in oil production due to technical disruptions in the Abu Sa afa offshore oilfield during most of the year. In 2013, growth is expected to reach 5.3%, largely thanks to the normalization of oil production from the Abu Sa afa field, as well as planned further increases in production from the Bahrain Field. The EDB expects real GDP growth to revert to 4.2% in 2014e. Figure 18: Table. Medium-term macroeconomic forecasts ( ) e 2014e Real GDP growth (%) Non-hydrocarbon sectors Hydrocarbons sector Inflation (CPI %) Nominal GDP growth (%) Current account (% of GDP) Fiscal balance (% of GDP) * -5.3** -5.7** Oil price in USD (Arabian Medium) * Based on the 2012 final accounts ** Based on the draft budget for Source: Central Informatics Organisation, Economic Development Board, National Oil and Gas Authority Figure 19: IIF, IMF, and EDB s GDP forecasts ( ) IIF IMF CIO * Source: Central Informatics Organisation, International Monetary Fund, Institute of International Finance, * Economic Development Board Monetary policy Bahrain has a long history of pursuing a fixed exchange rate policy. The Dinar was officially pegged to the International Monetary Fund s (IMF) Special Drawing Rights (SDRs) in In 2001, the fixed exchange rate parity with the USD was made official and a countercyclical fiscal policy was utilized to stabilize growth. Bahrain is committed to an exchange rate peg at BHD per US Dollar, corresponding to approximately BHD 1 = USD The exchange rate is a nominal anchor of the Kingdom s monetary policy framework, which aims at protecting the currency s external value while ensuring internal price stability. Within this framework, the Central Bank has some flexibility to alter domestic monetary conditions by changing policy interest rates (repo rates), introducing prudential guidelines on bank lending, and adjusting reserve requirements to achieve the required balance between price stability and growth. 19

22 KINGDOM OF BAHRAIN The Central Bank of Bahrain (CBB) defines its role as the main authority responsible for maintaining monetary and financial stability, and having the instruments and operational independence in pursuing its policy objectives. It is also the single integrated regulator of Bahrain s financial industry. As part of the fixed exchange rate policy, CBB offers a foreign exchange facility, implying that it stands ready to buy and sell US dollars, at rates very close to the official exchange rate. CBB provides this facility to commercial banks located in the Kingdom of Bahrain. 4 Figure 20: Exchange rate: Bahraini Dinar vs. US Dollar Source: Central Bank of Bahrain Since Bahrain is a small and open economy with foreign trade accounting for more than 110% of nominal GDP 5, the exchange rate represents a logical anchor for monetary policy. It reduces transaction costs and exchange rate uncertainty, and thereby stimulates trade. Given the role of the US Dollar as the leading global reserve currency as well as its central role in international trade and finance, pegging Dinar to the Dollar enhances the credibility of monetary policy and contributes to financial stability. Monetary policy instruments The CBB utilizes three main monetary policy instruments to influence liquidity conditions in the banking sector, as shown below. Exchange rate facility: CBB offers to buy/sell Bahraini Dinars against the US Dollar at rates very close to the official exchange rate. Standing facilities: A set of lending and deposit instruments are designed to influence overnight liquidity, overnight interest rates and steering the short-term money market to the key policy rate determined by the CBB Central Informatics Organisation National Accounts

23 ECONOMIC YEARBOOK 2013 Minimum reserve requirements: Credit institutions in Bahrain are required to hold a minimum reserve of 5% of the value of non-bank deposits on accounts with CBB. These funds are used to ease temporary fluctuations in bank liquidity and influence interbank transfers. Monetary policy developments Interest rates In line with the loose monetary policy pursued by the US Federal Reserve, money market and commercial interest rates have been on a downtrend in Bahrain since Key policy interest rates Policy interest rates refer to the rates that CBB extends on its deposit and lending standing facilities. The one-week deposit rate, which serves as the key policy rate, normally provides a ceiling and a floor for the overnight market interest rate. The CBB s policy rates influence short-term interest rates in the money market that, in turn, impact the deposit and lending rates that retail banks offer to their customers. With the US Fed undertaking several rate cuts since 2008, the CBB reduced its key policy interest rate (oneweek deposit facility) eight times: from 5% in Oct 2007 to 0.5% in Sep Figure 21: CBB and US Federal Reserve policy rates (%) Source: Central Bank of Bahrain, Federal Reserve In 2012, the CBB maintained the one-day Bahraini Dinar deposit rate at 0.25% and one-week maturity rate at 0.5% for retail banks; similarly, it retained the 2.25% lending rate for the overnight repo and BHD secured rate. Interbank rates In 2006, the CBB developed the Bahrain Interbank Offered Rate (BHIBOR) in collaboration with a number of Bahraini banks and Reuters. BHIBOR indicates the interest rate charges between banks on short- term loans ranging from overnight to 12-month maturities

24 KINGDOM OF BAHRAIN Figure 22: Interbank rates, quarterly averages,% Source: Central Bank of Bahrain As of 4Q12, the three-month BHIBOR rate stood at 0.32% compared to 0.25% in 4Q11, while the sixmonth rate was 0.56% in 4Q12 compared to 0.50% in 4Q11. Loan and deposit rates As of 4Q12, the weighted average Bahraini Dinar time deposit rate (3 12 months) stood at 1.00%, marginally lower than 1.11% in 4Q11. The weighted average savings rate decreased from 0.24% to 0.22% over the same period. Figure 23: Time and deposit rates,% Source: Central Bank of Bahrain Commercial loan rates have generally declined over the past year. The weighted average interest rate on business loans rose slight to 5.67% in 4Q12 from 5.58% in 4Q11, while that on personal loans fell to 5.96% from 6.28% during the same period. Mortgage rates fell from 6.71% to 6.58%. 22

25 ECONOMIC YEARBOOK 2013 Figure 24: Business and personal loan rates,% Source: Central Bank of Bahrain Inflation The average rate of consumer price inflation in Bahrain rate stood at 2.8% YoY in 2012 compared to 0.4% in Housing and food carry the two largest weights in the Consumer Price Index (CPI), at 24% and 21% respectively, and have in recent years been the main drivers of inflationary trends in the Kingdom. Figure 25: Inflation in Bahrain (2006 = 100) Source: Central Informatics Organisation 23

26 KINGDOM OF BAHRAIN Figure 26: Growth in CPI (YoY) Source: Central Informatics Organisation In 2011, the decline in inflation was primarily ascribed to the 12.4% YoY fall in housing cost in the Housing, Water, Electricity, Gas and Other Fuels category. The correction in rentals matched broader regional trends as several market segments witnessed an oversupply due to a sharp reversal in the economic cycle. However, recent trends suggest the market is in the process of bottoming out. Although housing inflation further declined by 3% YoY in 2012, the main CPI index increased due to a sharp rise in the recreation and culture (22% YoY), and alcoholic and tobacco (13.7% YoY) indices. Food and beverages (4.0% YoY), and furnishings, household equipment and routine household maintenance (4.9% YoY) were the other main contributors. The large increase in recreation and culture prices was mainly ascribed to a higher number of tourism package deals, particularly in the pilgrimage and Umrah category. Figure 27: CPI index (YoY growth) CPI 2.0% -0.4% 2.8% Food and beverages 4.9% 2.0% 4.0% Alcoholic beverages and tobacco 5.6% 5.1% 13.7% Clothing and footwear 1.7% 2.2% 2.2% Housing, water, electricity, gas and other fuels -1.2% -12.2% -3.0% Furnishing, household equipment and routine household maintenance 1.5% 2.0% 4.9% Healthcare services 3.5% 3.2% 1.0% Transport 3.5% 3.7% 2.4% Communication -2.4% -2.5% -4.1% Recreation and culture 0.1% 6.9% 22.0% Education 6.1% 1.9% 1.9% Restaurants 6.0% 0.9% 1.5% Miscellaneous goods and service 2.3% 11.6% 3.5% Source: Central Informatics Organisation 24

27 ECONOMIC YEARBOOK 2013 Money Supply Reflecting the dynamism of the economy, all measures of money supply have grown consistently since The narrowest measure, M1 (defined as currency outside of banks and demand deposits) increased more than five-fold from BHD449.2mn in 2000 to BHD2.61bn in The broadest measure, M3 (which includes all types of deposits, also general government) expanded more than four times from BHD2.48bn in 2000 to BHD10.43bn at the end of Figure 28: Money supply ( BHD mn) Source: Central Bank of Bahrain The broad money supply, as measured by M3, has exhibited continuous growth. It includes M2 as well as large time deposits, institutional money-market funds, short-term repurchase agreements, along with other larger liquid assets. The slightly narrower measure, M2, grew at a steady rate between 2002 and 2004, and recorded an average growth rate of 32% YoY in Since 2009, growth in M2 was moderately positive and reached 6.1% YoY in An increase in the money supply over the past decade was primarily driven by a rise in private sector time and savings deposits (quasi money) which surged 233%, as well as demand deposits (+410%) between 2001 and Figure 29: Components of money supply 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12 Currency Outside Banks (g) 34.4% 21.0% 17.2% 15.0% -6.9% 4.3% 5.2% 4.8% Demand Deposits 1, , , , , , , ,189.7 (g) 6.1% 0.1% 4.9% 14.3% 13.0% 11.7% 14.2% -2.0% Time and Savings Deposits 5, , , , , , , ,853.7 (g) 9.0% 3.2% -1.1% -1.2% 4.3% 3.7% 7.1% 6.5% Source: Central Bank of Bahrain 25

28 KINGDOM OF BAHRAIN Public Debt Bahrain s domestic public debt instruments increased by 575% between 2001 and According to the CBB data, the aggregate value of the Kingdom s public debt instruments totaled BHD3.87bn as of December 2012 implying a growth of 22% YoY. Of this total, BHD2.6bn was issued in conventional bonds and BHD1.27bn in sukuk. Figure 30: Public outstanding domestic debt by type of instrument (in BHD mn) Source: Central Bank of Bahrain In recent years, the funding of Bahrain s public debt has become increasingly dependent on sukuk rather than conventional bonds. The main types are Ijara leasing securities and Al Salam Islamic securities issued by CBB. Between 2001 and 2008, Government of Bahrain lowered its reliance on conventional debt and did not issue any development bonds during the period. However, in 2012, it issued conventional development bonds worth BHD564mn (USD1.5bn), which was oversubscribed four times. This demonstrates confidence in the Kingdom s economic prospects. In a pioneering move by international standards, the CBB began regular sukuk issuance in The market grew steadily in subsequent years as is evident from the fact that Islamic instruments were used to finance 32% of the Kingdom s total public debt in 2012 as compared to 24% in Increasing the relative importance of Islamic instruments is in line with the government s plans to boost the Kingdom s stance as an Islamic financial hub. The standard CBB Ijara leasing securities have a maturity of 182 days, while that of Al Salam securities is 91 days. The former dominate the CBB s Islamic debt instruments accounting for 96% of total Shariahcompliant issuance in 2012, while the remainder is made up of Al Salam issues. The total outstanding volume of Islamic leasing securities increased from BHD112.8mn in 2002 to BHD1.2bn in In value terms, Al Salam Islamic securities totaled BHD54mn in 2012, almost equivalent to the level witnessed in This highlights their primary role as short-term liquidity management instruments for the banking sector. 26

29 ECONOMIC YEARBOOK 2013 Fiscal policy Bahrain s fiscal position in recent years has reflected the sharp economic cycle linked to the global economic crisis and the oil price boom that preceded it. After a small deficit in 2002, Bahrain accumulated substantial surpluses totaling BHD1.7bn between the years 2003 and During that period, the government debt-to-gdp ratio decreased from 32.5% in 2003 to 12.6% in The collapse in global oil prices in the second half of 2008 triggered a deterioration in the fiscal situation which became manifest in As a result, Bahrain s deficit reached BHD446 million, while the debt-to-gdp ratio rose to 21.4% in 2009 and further to 29.7% in In 2011, oil prices again rose to reach a level close to the estimated fiscal break-even price of USD114 per barrel. This, coupled with reduced public project spending, helped contain the deficit to BHD31.3mn, a reduction of 93% as compared to In 2012, spending growth outpaced revenue growth raising the deficit to BHD227mn or 2% of GDP. As of 2012, debt to GDP was 36.7%, compared to 21.4% in 2009 (Figure 31). The collapse in oil prices in late 2008 highlighted the growing dependence of the current fiscal system on high and growing oil prices at a time when permanent current expenditures dominate government spending. Figure 31: Fiscal overview Source: Ministry of Finance, Economic Development Board Revenues Oil and gas-related revenues are the main sources of government income and their importance has been further underpinned by historically high oil prices in recent years. Since 2007, revenues from hydrocarbons have contributed at least 80% of total government revenues (Figure 32), although the contribution of oil and gas to GDP was only 25.2% of nominal GDP as of The offshore Abu Sa afa field, a resource shared with and managed by Saudi Arabia, is the main source of oil revenues. Over the past three years, revenues from this field alone have constituted an average of 80% of total hydrocarbon revenues. Although the revenue share of the onshore Bahrain Field has been more modest, it has been growing since the establishment of Tatweer Petroleum Company in The company aims to substantially increase Bahrain Field production, with the original target set at 100,000 b/d. Tatweer boosted its crude oil output from 32,000 b/d in 2009 to 42,500 b/d in 2011 and further to some 45,300 b/d in The fiscal contribution of gas remains marginal, representing around 10% of total hydrocarbon revenue. 27

30 KINGDOM OF BAHRAIN Non-hydrocarbon revenues account for a small share of the total government revenues, and their relative importance has been declining in recent years due to higher oil prices. The share of non-oil revenues fell from 31% in 2001 to 13% in 2012, however, the absolute value of non-hydrocarbon revenues remained relatively stable during the decade, growing by annual average of 2% between 2001 and Non-hydrocarbon revenues mainly comprise different fees and levies, with the majority of revenue comes from the Public Administration sector, and specifically from the Customs and Ports and Maritime Affairs, the Ministry of Interior, the Survey and Land Registration Bureau, and the Ministry of Justice and Islamic Affairs. Figure 32: Hydrocarbon and non-hydrocarbon government revenues Source: Ministry of Finance The dominance of hydrocarbon revenues as a source of government income remains the norm across the GCC region. Bahrain s share of hydrocarbon revenues is in line with the regional average with four other the GCC countries sourcing at least 80% of their revenues from hydrocarbons. Kuwait had the highest share as of 2010 at 94% while Qatar represented the other end of the spectrum at 49%. Figure 33: Hydrocarbon revenues as % of total revenues, 2010 Source: Bahrain Ministry of Finance, Central Bank of Kuwait, Oman Ministry of National Economy, Qatar Ministry of Economy and Finance, Saudi Arabian Ministry of Finance, UAE National Bureau of Statistics 28

31 ECONOMIC YEARBOOK 2013 Expenditure Bahraini government expenditures rose sharply during the past decade, alongside increases in GDP. Spending grew by 314%, from BHD0.79bn in 2000 to BHD3.26bn in 2012, driven by robust growth in recurrent (280%) and project expenditures (500%). Figure 34: Government expenditure by category (BHD mn) Source: Ministry of Finance, Economic Development Board analysis Figure 35: Recurrent spending by category, 2001 Figure 36: Recurrent spending by category, 2012 Source: Ministry of Finance Source: Ministry of Finance 29

32 KINGDOM OF BAHRAIN Project expenditure has been relatively volatile in recent years. The sharpest increases were recorded in 2002, 2006, 2010 and These hikes were mostly driven by the infrastructure sector, mainly by the Ministry of Housing and the Ministry of Works. Figure 37: Growth rate of government expenditure by category Source: Ministry of Finance, Economic Development Board analysis Public debt and the debt-to-gdp ratio Between 2000 and 2012, Bahrain s total government debt rose from BHD0.9bn to BHD4.2bn. As a share of GDP, total debt, which includes domestic and foreign borrowing reached 32.5% in 2003 and 36.7% in This marked a sharp reversal from the trend seen during the preceding decade. Factors such as favorable oil prices, large budget surpluses, and reduction in borrowing needs had allowed Bahrain to decrease its debt-to-gdp ratio to a low of 12.6% in This positive dynamic was reversed with the onset of the global economic crisis. Due to Bahrain s dependence on oil revenues, debt rose quickly between 2009 and 2010 as oil prices dropped, and countercyclical fiscal policy saw a rise in government expenditure, which totaled BHD3.26bn in Although foreign borrowing 7 has increased both in absolute terms and as a proportion of total government borrowings in recent years, domestic borrowing 8 still accounts for the majority of Bahrain s debt. In 2012, domestic borrowing made up 55% of total government debt, as compared to 85% in By contrast, foreign borrowing increased from a modest 15% of total loans in 2000 to 45% in International development bonds, international Islamic leasing securities, development funds owned mainly by GCC 8 Local development bonds, local issuing of Islamic leasing securities, T-bills, al salam leasing securities, and other local loans with domestic creditors 30

33 ECONOMIC YEARBOOK 2013 Figure 38: Proportion of domestic and foreign loans for Government of Bahrain Source: Central Bank of Bahrain, Ministry of Finance Key growth drivers Over the last decade, a range of key development indicators in Bahrain improved significantly due to extensive economic and social reforms. Important steps included: (i) the corporatization of state-owned businesses; (ii) the adoption of improved governance and transparency standards through the formation of a Tender Board and National Audit Court; (iii) the elimination of red tape which constricted foreign investment; (iv) the liberalization of the telecommunications sector through the establishment of the Telecommunication Regulatory Authority (TRA); and (v) the formal regulation the healthcare sector to elevate the standards of care through the establishment of the National Health Regulatory Authority (NHRA). Bahrain s real GDP expanded by 78% from 2000 to 2012, while aggregate employment grew by 133% from 2002 to 1Q13. The rise in commodity prices and a strong global economy over the past decade drove a significant increase in exports. From 2002 to 2012, Bahrain s goods export revenues grew by 229%. These trends bolstered the living standards as average real wages of Bahrainis increased 33% between 2002 and

34 KINGDOM OF BAHRAIN Figure 39: GDP, employment, exports, and wage growth Source: Central Informatics Organisation, Labour Market Regulatory Authority, Economic Development Board analysis It should be noted, however, that the rapid development since the turn of the century was in important ways linked to extensive growth increases in overall inputs rather than productivity. For instance, a rapid increase in low-cost foreign workers, especially in labor-intensive sectors such as tourism and construction, went hand in hand with declines in labor productivity. This highlights the need for more innovation and the need to stimulate growth in higher value-added sectors. Figure 40: Private sector employment by nationality ( 000) Source: Labour Market Regulatory Authority 32

35 ECONOMIC YEARBOOK 2013 Figure 41: Employment and GDP growth Source: Central Informatics Organisation, Labour Market Regulatory Authority, Economic Development Board analysis In spite of the desirability of rebalancing growth, the contribution of employment to overall growth is projected to further increase over the next two decades as the projected expansion in the workforce is likely to be higher than real GDP growth. This will likely mainly be fueled by faster growth in the workingage population relative to the dependent population (below the age of 20 and above 65). Income components as drivers of GDP growth 9 Figure 42 breaks down GDP growth between 2006 and 2011 into the contributions of the individual expenditure components. Increasing consumption was by far the most important driver of GDP growth over the last six years, growing by an annual average of 10%. The GDP share of consumption rose from 42% in 2006 to 58% in Consumption registered robust increases (in excess of 10%) between and accounted for the bulk of growth over the past few years while investments faced volatile growth. Government and private consumption experienced relatively similar average growth rates over the same period at 11% and 10% respectively. However, government consumption was particularly strong in 2011 at 18%, due partially to salary increases for civil service employees and the government reacting to the global downturn through countercyclical policy. 9 GDP = Consumption +investment + government spending + net exports 33

36 KINGDOM OF BAHRAIN Investments experienced low annual average growth over the period between of 2%, however, growth was very volatile, ranging from a low of -35% in 2011 to a high of 38% in Investment accounted for 24% of GDP in 2006 and 20% in 2012, however, government investments as a share of GDP have actually increased with slow growth in private investments being the primary cause for the overall GDP contribution decrease. Figure 42: Contribution to real GDP growth by expenditure components Source: Central Informatics Organisation, Economic Development Board analysis Despite the substantial GDP contribution of investment, the amount of investment needed to generate an additional unit of output has more than doubled over the past decade 10. This highlights the importance of new initiatives to boost efficiency and thereby long-term growth. 10 Efficiency of investment is measured by the Incremental Capital Output Ratio (ICOR). This indicator measures the amount of investment needed to generate one additional unit of GDP. Lower ICOR signifies higher efficiency. 34

37 ECONOMIC YEARBOOK 2013 Figure 43: Efficiency of investment Source: Central Informatics Organisation, Economic Development Board Analysis Net real exports have had a decreasing share of real GDP over the past decade, from 37% in 2000 to 21% in Net exports have grown by an annual average of 0% over the period, however there has been large volatility over the period, with the largest fall in net exports experienced in 2008 at -28%, followed by 29% growth the subsequent year. Changes to real net exports have been predominantly caused by shifts in real imports rather than real exports which have experienced a relatively subdued growth rates over the period. Sectors driving GDP growth In recent years, growth in the Bahraini economy has been driven above all by four main sectors: manufacturing, financial corporations, telecommunications and transport, and personal and social services. The first two segments have a remarkably consistent track record of high growth rates over the last decade, while their contribution to GDP has remained almost constant in recent years. The analysis below is based on CIO s national accounts data from While construction and real estate output grew significantly at the start of the decade, their pace of expansion has slowed down in recent years as the regional property boom lost momentum. However, with continued growth in population, and developers increasingly focusing on affordable housing options, these sectors are expected to recover gradually base year 35

38 KINGDOM OF BAHRAIN Manufacturing, which is historically dominated by oil-related downstream industries, registered an annual average growth of 6.5% between , with the sector growth peaking at 16% in The sector s contribution to GDP increased from 12.4% in 2000 to 14.8% in 2012, and has been responsible for 18% of GDP growth between 2000 and Manufacturing has led the process of economic diversification in the Kingdom and is one of the largest employers of Bahraini nationals. The sector has been resilient to economic shocks due to the relatively inelastic demand associated with its outputs. Financial corporations have successfully capitalized on the wealth of skilled national labor as well as the government s liberalization efforts, including strengthened central bank supervision, anti-money laundering laws, and flexible ownership rights. The annual pace of growth in the sector between was 7% and its real GDP contribution has hovered around 17% of GDP over the last seven years. With the exception of 2009 and 2011, the sector was responsible for a substantial proportion of growth; 17% in 2008 and 29% in 2010, for instance. Similarly, the transport and telecommunication sector emerged as one of the most dynamic sectors of the economy toward the end of the last decade mainly due to privatization and liberalization initiatives. Its share of GDP increased from 4% in 2000 to 7% in 2012, although the pace of growth subsequently slowed down. Going forward, the telecommunications sector is projected to grow as the TRA fulfills its licensing targets and executes additional phases of its liberalization agenda. Despite the slowdown, the sector was still responsible for 9% of the GDP growth in Figure 44: Sectoral contribution to growth Source: Central Informatics Organisation, Economic Development Board analysis 36

39 ECONOMIC YEARBOOK 2013 Growth in the social and personal services sector had the highest average annual growth between at 14.3%, increasing its share of GDP from 2.1% to 5.4% over the period, and representing 10% of growth over the period in The success of economic diversification has happened in tandem with a significant decline in the hydrocarbon sector s share of GDP (from 43.6% to 19%) between The hydrocarbon sector faced had an overall negative contribution in as of 2012 from 2000 of -12.6%, however, this is largely due to a fall in the sector of 8.5% in 2012 due to temporary maintenance in the Abu Sa afa oil field. The oil sector is expected to have a strong recovery in Figure 45: Comparison of sectoral contributions to real GDP (2000 and 2012) Source: Central Informatics Organisation, Economic Development Board analysis 37

40 KINGDOM OF BAHRAIN 03 FINANCIAL MARKETS 38

41 ECONOMIC YEARBOOK 2013 Equity Markets Bahrain is an established center of capital market activity. The Bahrain Stock Exchange (BSE), now Bahrain Bourse (BHB), commenced operations in 1987 with the government being an active issuer in the bond and sukuk markets. Institutional development of the markets has led to significant progress in the form of stricter corporate governance directives and the opening of the Kingdom s second exchange, Bahrain Financial Exchange (BFX), in The development of the equity market over the past decade is a familiar story echoed by other stock markets in the GCC region. Equity issuance and trading volumes increased in early 2000 and reached their peak around the middle of 2008 before the global crisis sharply pushed down the indices and trading volumes alike. Although the Bahraini market has been relatively resilient amid external uncertainty, the equity market failed to develop significant positive momentum since the sharp corrections during the global crisis. However, total market capitalization is slowly rebounding to the pre-crisis levels. Figure 46: GCC equity market indices (Jan 2007 Jun 2013) Note: Jan 2007 = 100 Source: Bahrain Bourse, Kuwait Stock Exchange, Muscat Securities Market, Qatar Exchange, Tadawul, Abu Dhabi Securities Exchange, Dubai Financial Market, Economic Development Board analysis Bahrain Bourse The establishment of formal capital markets in Bahrain dates back to the 1950s. With the establishment of Bahrain s first national holding company in 1957, the Al Jowhara Market came into being as an informal platform for the trading of company shares took place. However, the collapse of this as well as other regional unofficial markets in the 1980s prompted the need for an organized, regulated capital market platform. In 1987, the Bahrain Stock Exchange (BSE) was established according to Amiri Decree No. 4, and operations commenced in 1989 with 29 Bahraini listed companies being traded in an Auction Trading 12 system. About a decade later, the system was upgraded to an automated trading platform, which facilitated the listing of multiple asset classes alongside common stock, including bonds, sukuk (Islamic securities), mutual funds, and preferred stock. The BSE s legislative transformation in 2002 from a government-owned entity to a closed shareholding company regulated by the CBB marked the conception of what stands today as the Bahrain Bourse (BHB). 12 A system where investors place their bid and offer orders with the broker, and the broker then matches between them manually 39

42 KINGDOM OF BAHRAIN As of June 2013, BHB was home to 48 listed companies classified across a number of defined sectors: commercial banks, investment, insurance, services, industrial, and hotel and tourism, along with non- Bahraini companies, closed companies, and preferred shares. Figure 47: BHB market capitalization, by sector Source: Bahrain Bourse Figure 48: BHB market capitalization, Jun 2013 Source: Bahrain Bourse, Economic Development Board analysis The seven commercial banks represent the largest sector on BHB, accounting for 45.4% of the total market capitalization (BHD6.5bn) as of June The traded eequities include Ahli United Bank, the largest listed company in Bahrain, which accounts for 21.5% of overall capitalization. The second largest sector comprises 12 investment firms (with 23.1% of total capitalization), including Arab Banking Corporation and Investcorp Bank. These sectors, along with five insurance companies, 13 constitute 70.8% of the market capitalization reflecting Bahrain s prominence as a regional financial center. 13 Including Al-Ahlia Insurance Co., Arab Insurance Group, Bahrain Kuwait Insurance Co., Bahrain National Holding, and Takaful Insurance Co. 40

43 ECONOMIC YEARBOOK 2013 The services sector consists of nine companies (with 14.8% of total capitalization) dominated by Bahrain Telecommunications Company (Batelco), which accounts for 59.7% of the sector s capitalization. Hotels and tourism held 2.8% of the total market capitalization in June The industrial sector, whose share in overall market capitalization stood at 11.6% of the total, was heavily dominated by Aluminium Bahrain (Alba) which is responsible for 97.9% of the sector s capitalization. Alba is the second-largest public company listed on BHB and one of the world s largest aluminum producers. The exchange has broadened its range of tradable instruments beyond equity listings to include mutual funds and a debt market comprising conventional bonds and sukuk. As of June 2013, BHB had 26 listed mutual funds and nine bonds and sukuk. BHB remains a low-volume market compared to regional and global equity markets. The exchange accounted for less than 1% of the aggregate GCC market capitalization as of December Three main indices Bahrain All-Share, Esterad and Dow Jones Bahrain are used to track the performance of the Bahraini stock market. The market was fairly steady during mid-2000 and reached a record peak in This was followed by a sharp contraction, alongside other global markets, with the three indices plummeting around 41.9% YoY by January The Bahrain All-Share Index grew 11.5% to 1,187.8 points during 1H13. A closer look reveals an impressive growth of 27.1% in the commercial banks sector, followed closely by an expansion of around 21.0% in the industrial sector, mainly driven by Alba. Figure 49: Bahrain Bourse performance (January 2005 June 2013) Source: Bahrain Bourse BHB witnessed relatively high market activity during the years leading up to the recent financial crisis; since then, activity has slowed down considerably with an average overall market turnover of 16.2% over January 2009 to the end of 1Q13. However, overall market turnover reached 74.0% in May and averaged 50.3% during 2Q13. Primarily, the spike in activity reflects the acquisition of 51.6% stake in Bahrain Islamic Bank (BisB) by National Bank of Bahrain (NBB) and SIO Asset Management Company (SIOAMC). Market turnover 14 is a ratio of how often shares change hands and is a measure of market liquidity. Consequently, the volume of shares traded reached 302.1mn in February 2008, and has since declined, averaging 59mn shares between January 2009 and the end of 1Q13. However, the volume of shares traded peaked at 612mn shares in May, with the stake purchase by NBB and SIOAMC in BisB. 14 The ratio is calculated by dividing the total value of the shares traded during a period by the market capitalization for that period. 41

44 KINGDOM OF BAHRAIN Figure 50: BHB s market turnover and traded volume (September 2005 June 2013) Source: Bahrain Bourse In 2011, to stimulate the equity market, BHB undertook measures to encourage the listing of additional companies through amendments to its listing rules, which proved challenging amid the difficult post-crisis market conditions. One such revision canceled an article stipulating that a company must have realized profits during the two years prior to its application, or at least for three of the past five years. Furthermore, the Ministry of Industry and Commerce (MOIC), in collaboration with the CBB and the National Corporate Governance Committee, introduced a new Corporate Governance Code in 2010 combining nine core principles that reflect the highest international governance standards 15. Enforced under a comply or explain framework, the Code is part of the longer-term initiative to extend BHB and instill confidence in capital markets among investors and companies seeking to raise capital through a listing. Bahrain Financial Exchange Bahrain Financial Exchange (BFX), which commenced operations in 2011, is the first of its kind in the Middle East. The entity is wholly owned by India s Financial Technologies Group and is directly regulated by the CBB. BFX offers investors internationally accessible platforms for multi-asset trading in cash instruments, derivatives, and Shariah-compliant financial products. Products that have been approved for trading on the exchange include gold futures, natural gas futures, and Eurodollar futures, among other index futures. BFX aims to recover the region s liquidity and capital invested in overseas markets and to pool the wealth into one market to drive investments and growth opportunities in the regional economy. 15 The nine core principles cover a range of governance issues, including the role of Board of Directors, internal compliance and audit procedures, remuneration, management structure, and clearer communication with shareholders, in addition to requirements for Shariah-compliant companies. 42

45 ECONOMIC YEARBOOK 2013 Bond and Sukuk Markets Bond and sukuk markets in the GCC remain less developed compared to other financial market segments and possess significant growth potential 16. In particular, there is growing emphasis on the need for debt securities to finance the region s massive infrastructure boom. Although Bahrain, owing to CBB issuance, is a relative pioneer in the regional bond and sukuk markets, corporate issuance has been comparatively rare to date. In recent years, growth in the national bond and sukuk markets has been almost entirely driven by increased government issuance. Over the past three years, the conventional bond market in Bahrain has seen corporate issuances by Batelco, Bank of Bahrain and Kuwait (BBK) and Investcorp Bank. Specifically, Investcorp diversified its funding profile through its recent and oversubscribed USD250mn 5-year bond maturing in November Similarly, the Bahrain-domiciled but largely Saudi-controlled Gulf International Bank has been a regular issuer. In other cases, Bahraini corporates have mostly preferred bank finance. For instance, in late December 2012, Alba announced it had opted for bank loans to refinance an USD169mn bond maturing in March Furthermore, Batelco launched its USD650mn 7-year corporate bond in April 2013, after completing its acquisition of Cable & Wireless Communications Monaco and Islands business division. The Kingdom of Bahrain is an established issuer of conventional debt securities and sukuk. With growth of almost 526% since 2Q03, the total outstanding debt issued by the government stood at BHD3.7bn by the end of 1Q13. Of this, BHD2.6bn was conventional debt, while BHD1.1bn was funded through Islamic securities. Government debt issuance has increased markedly following the financial crisis of Government debt reached 37.9% of GDP in 2012 compared to less than 10% during the years prior to the financial crisis. Figure 51: Total outstanding domestic public debt ( ) Source: Central Bank of Bahrain, Central Informatics Organisation, Economic Development Board analysis 16 Deutsche Bank: GCC Financial Markets (Nov 2012) 43

46 KINGDOM OF BAHRAIN A key element of CBB issuance is short- and medium-term government Treasury bills (T-bills). Denominated in BHD, these include weekly issuances of BHD25mn with three-month maturity, monthly offerings of BHD20mn with six-month maturity, and quarterly placements of BHD50mn with 12-month maturity. Government T-bills account for almost one-quarter of the total outstanding domestic public debt (BHD930mn as of 1Q13). Government development bonds are long-term conventional bonds issued on an irregular basis and are denominated either in USD or BHD, with maturities typically ranging from three to ten years. These bonds constituted around 45% of the outstanding public debt as of 1Q13. In 2012, the CBB held two government development bond issuances of BHD564mn (maturing in July) and BHD185mn (maturing in November). The third issuance was undertaken in July 2013, with an offer size of BHD150mn. In the Shariah-compliant space, the CBB issues Sukuk Al Salam on a monthly basis, with a standard issue of BHD18mn. These short-term BHD-denominated securities have a maturity of three months. Al Salam accounted for less than 2% share of the outstanding government debt in 1Q13. CBB s Sukuk Al Ijara are issued every month in installments of BHD20mn and a six-month maturity. Also long-term Sukuk Al Ijara are issued on an ad hoc basis. They are denominated in USD or BHD and have maturities ranging from 3 10 years. Sukuk Al Ijara accounted for the second-largest proportion of total outstanding government debt at 29.0% in 1Q13. Figure 52: Outstanding debt by security (2003 1Q13) Source: Central Bank of Bahrain, Economic Development Board Analysis 44

47 ECONOMIC YEARBOOK 2013 Interbank Lending Market The interbank money market in Bahrain remains relatively small. It is used by banks extend loans to one another at various maturities, mostly overnight. The CBB, in collaboration with Thomson Reuters and the Bahrain Association of Banks (BAB), established the Bahraini Dinar Interbank Offered Rate (BHIBOR) in 2006 as the first official interbank lending market benchmark rate. It represents the average offered interest rate of 10 commercial banks in the Kingdom and is provided for eight tenors, ranging from overnight to 12 months. Following the onset of the financial crisis, BHIBOR fell from 5.4% in 3Q07 to around 2.8% by mid Due to escalating fears in the interbank lending market,primarily triggered by the collapse of Lehman Brothers, rates plummeted further during the subsequent year to reach 0.8% by mid Since then, BHIBOR has remained below 1%; as of 1Q13, it reached 0.29%, close to the Saudi Arabian Interbank Offered Rate (SAIBOR 17 ) of 0.291% and the London Interbank Offered Rate (LIBOR 18 ) of 0.51% 19. Monitoring and responding to the US Federal Reserve s monetary policy changes, the CBB has undertaken interest rate adjustments to extend liquidity and ensure the interbank markets function effectively and smoothly during turbulent times. Figure 53: Bahraini Dinar interbank market rate (quarterly average, % pa) * Saudi Arabian Interbank Offered Rate ** London Interbank Offered Rate Source: Central Bank of Bahrain, Saudi Arabian Monetary Agency, British Bankers Association 17 Saudi Arabian Interbank Offered Rate 18 London Interbank Offered Rate 19 Quarterly averages of three-month BHIBOR, 3-month SAIBOR and 3-month LIBOR 45

48 KINGDOM OF BAHRAIN 04 FOREIGN TRADE 46

49 ECONOMIC YEARBOOK 2013 As a small, but strategically located island nation, Bahrain has a long history of and dependency on trade. This, in turn, has engendered a culture of economic openness. For instance, according to the Heritage Foundation and Wall Street Journal 2013 Index of Economic Freedom, Bahrain ranks as the 12th freest economy in the world. In the Middle East and North Africa (MENA) region, Bahrain ranks first. Another index measuring economic freedom, published by Fraser Institute, ranks Bahrain seventh in the world and first in the MENA region. Openness to trade is recognized as one of the main component areas determining the level of economic freedom. This indicator is used to measure the ease of cross-border transactions, and flow of goods and services. Bahrain s strong position in this regard is built on the reality of no exchange controls, no restrictions on repatriation of profits or capital, no restrictions on converting or transferring funds, and relatively few non-tariff barriers. Moreover, the Kingdom s established regulatory system and strong financial sector makes it more attractive to investors. Receipts from oil exports generate the majority of government revenue and the funds required to finance imports. The ratio of openness to trade, defined as the sum of imports and exports to GDP, was approximately 109% in 2012, representing one of the highest percentages in the region after the UAE. Prior to 2008, trade, as a percentage of GDP, was the highest in the GCC at around 145% in As important as foreign trade is, Bahrain export profile is still heavily concentrated on one product, viz. oil. Figure 54: Trade as a percentage of GDP (GCC states) Source: World Bank 47

50 KINGDOM OF BAHRAIN Terms of trade 20 have been improving in the GCC since 2009, following a large decline during the financial crisis and the concomitant oil price correction. Nevertheless, the purchasing power of imports is increasing due to larger export receipts. However, Bahrain s terms of trade are the lowest in the GCC, owing to lower oil exports. Figure 55: Net barter terms of trade index, World Bank (WDI) 2000=100 Source: World Bank Current Account Bahrain recorded a current account surplus of BHD835mn in 2012, a decrease of 31.5% from As a percentage of GDP, the current account surplus declined from 11.1% in 2011 to 7.3% in 2012, but was still much higher than the 2009 and 2010 figures of 2.4% and 3.0% respectively. The decrease in 2012 was primarily attributable to lower oil exports, caused by a technical disruption to oil production in the Abu Sa afa offshore field. On the other hand, the value of oil imports increased 20% in 2012 from a year earlier. Growth in non-oil exports has been consistent; however, non-oil imports decreased in 2011 and 2012, by 28% and 7% respectively. While the drop in imports indicates lower demand, a reduction in the size of the decline is a sign of normalization. 20 Terms of trade refers to the value of a country s exports relative to its imports. When a country experiences improving terms of trade, its export prices are increasing faster than its import prices; otherwise, the terms of trade would be worsening when prices of exports are increasing at a lower rate than imports. 48

51 ECONOMIC YEARBOOK 2013 Figure 56: Bahrain s current account (BHD mn) * 2012 data is provisional Source: Central Bank of Bahrain Goods Bahrain s oil imports and exports grew by 52% and 65% respectively between 2006 and As of 2012, imports stood at BHD3.4bn, while exports totaled BHD5.7bn. An increase in the value of oil trade during the given years is predominantly due to higher oil prices rather than increases in production, particularly in 2008 and While prices first rose in 2008 due to fears of supply shortages and rising demand from emerging markets, they subsequently fell by 34% owing to the global economic crisis and subdued demand. Following the global crisis, political instability in the Middle East in 2011 dented investor sentiment and raised fears of future supply shortages and disruptions in production. Consequently, oil prices increased and remained at a historically high levels in Figure 57: Petroleum product exports (2011) Source: National Oil and Gas Authority 49

52 KINGDOM OF BAHRAIN Oil and refined petroleum products accounted for 77% of Bahrain s total goods exports in In general, the composition and share of products has not changed since 2000, although the volume of diesel and fuel oil has declined. Conversely, there has been an increase in the volume of jet fuel and asphalt. The total volume of petroleum exports has decreased 7% from 2000, however, a rise in prices during the same period led to an overall increase in the value of oil exports. Figure 58: Bahraini exports of petroleum products Petroleum Products Price % change Asphalt USD per barrel % Diesel USD per barrel % Fuel USD per barrel % Gasoline USD per barrel % Jet A-1 Cargo USD per barrel % Jet A-1 Airport USD per barrel % LPG USD per barrel % Naphtha USD per barrel % Sulfur USD per barrel % Source: National Oil and Gas Authority Bahrain s non-oil exports predominantly consist of mineral products (43%) and metals (39%), mainly including exports of mineral fuels, aluminum and aluminum products, and iron. Figure 59: Non-oil goods exports (2011) Source: Central Informatics Organisation Oil constituted 62% of Bahrain s total imports in , a marked rise from 48% in The majority of oil imports were from Saudi Arabia, sent directly to the Bapco refinery where they were manufactured into various petroleum products and then exported at a higher value. On an average, non-oil imports constituted 50% of total imports during the past six years. Bahrain s imports are more diversified than its exports and the top categories include machinery, mineral products, transportation, metals and chemicals. 21 That is largely due to general increases in oil receipts due to an increase in the price level 50

53 ECONOMIC YEARBOOK 2013 Figure 60: Non-oil goods imports (2011) Source: Central Informatics Organisation The GCC is the dominant destination of Bahraini exports, with Saudi Arabia accounting for 21% of total exports in 2011, followed by Oman and Qatar (12% each), the UAE (8%) and Kuwait (2%). The share of exports to the GCC region has risen from 21% of the total in 2001 to 38% in 2005 and 55% in At the same time, the share of exports to Asia-Pacific declined from 26% in 2001 to 12% in 2011, while the proportion of exports to the Americas fell from 25% to 7% during the same period. By contrast, exports to South Asia increased from 5% to 9%, largely due to higher trade with India, while exports to MENA countries (minus the GCC) and Europe remained constant. A large portion of Bahraini imports arrives from China, Brazil and the US, although the composition of imports is highly diversified. The share of non-oil imports from various regions has remained largely stable with the exception of a noticeable shift from Europe to the Americas. Share of imports from Europe declined to 23% in 2011 from 31% in 2001, while that from the Americas grew from 12% to 23% during the same period. Figure 61: Non-oil goods exports by country of origin (2011) Figure 62: Non-oil imports by country of origin (2011) Source: Central Informatics Organisation Source: Central Informatics Organisation 51

54 KINGDOM OF BAHRAIN Services In 2012, Bahrain s net service exports increased by 6% following a 41% decrease in The 2011 correction was due to a decline in the travel (by 63%), financial services (by 44%), and communication services (by 24%. The fall in travel and communication services was due to regional instability in 2011 including the cessation of flights to major destinations such as Lebanon, Iran and Iraq, and traffic disruption via the King Fahd Causeway. The decision to postpone the Formula 1 Grand Prix in 2011 also added to the decline. In 2012, the economy experienced gradual normalization which led to an increase in net services, particularly in financial and transportation services, by 21% and 16% respectively. Travel and communication services also witnessed a slight rebound of 2% and 1% respectively in Figure 63: Net services exports (2011) * 2012 data is provisional Source: Central Bank of Bahrain Income and current transfers Bahrain s net investment income has been declining in recent years, dipping by 59% and 2% in 2011 and 2012 respectively. The decrease is mainly due to an increase in inward direct investment and a reduction in other investment income. In 2012, net direct investment income grew marginally, however, portfolio income continued to rebound at a slower rate. Workers remittances experienced a large growth in 2011, growing at 25% 22, followed by a slight dip in 2012 of 1%. 22 Except for 200, when remittances dropped 22% 52

55 ECONOMIC YEARBOOK 2013 Figure 64: Net income from investments Source: Central Bank of Bahrain Capital and Financial Account Net capital transfers increased by 31% in 2012 after surging by 52% in Outward investments rose 168% in 2011, after a steep reduction in 2009, and continued the uptrend in 2012, albeit at a slower rate of 3%. Moreover, inward foreign direct investments escalated 401% in 2011 and 14% in 2012 after a protracted downtrend due to the financial crisis. Receipts from both portfolio and other investments decreased, indicating lower sales of acquired assets abroad. However, positive net assets still indicate some sale of assets abroad. On the other hand, acquisition of portfolio investments by foreign investors increased 163% in 2012 after a sharp decline in Moreover, there was a reduction in the amount of other investments sold by foreign investors in Figure 65: Capital and financial account Source: Central Bank of Bahrain 53

56 KINGDOM OF BAHRAIN 05 SOCIAL INFRASTRUCTURE 54

57 ECONOMIC YEARBOOK 2013 Education in Bahrain Bahrain in 1919 became the first GCC country to introduce formal education. In another pioneering move in 1928, schools for girls were established to provide equal access opportunities. Currently, education is compulsory for all students until ninth grade in both public and private institutions. More than 265 primary and secondary schools currently operate in the Kingdom, including 65 private schools with curricula from the UK, US, France, India and Pakistan. Bahrain is also home to 16 public and private universities. The education sector has experienced robust growth in recent years, expanding by a cumulative 205% between 2000 and The GDP contribution of the sector rose from BHD136mn in 2000 to BHD452mn in 2012, pushing up the GDP share of education from 2.3% to 4.4%. According to the National Accounts, growth in private education outpaced that in government education over the past 12 years. Government education experienced a somewhat volatile aggregate increase of 130% over the period. Private education grew 5.5 times faster. The latter is due to the establishment of private universities and institutions over the past few years. Figure 66: Share of private and public educational services in real GDP Source: Central Informatics Organization, Economic Development Board analysis The total number of teachers in primary and secondary schools was approximately 15,630 in Women constitute a clear majority of tachers in the Kingdom, accounting for an average of 65% of total employment in education between 2001 to The number of teachers grew 74% during the same period, with the majority being employed in government institutions. 23 Only schools without high education institutions due to lack of information. Here, we focus on both private and government schools 55

58 KINGDOM OF BAHRAIN Figure 67: Education workforce Source: Central Informatics Organization, Economic Development Board analysis Between 2002 to 2010, teachers made up an average of 2.9% of the total workforce in Bahrain. Although the number of teachers in the Kingdom has increased since 2001, their proportion of the total workforce has contracted somewhat due to rapid growth in labor-intensive sectors such as manufacturing, construction and retail. Figure 68: Number of teachers as a share of total employment Source: Labor Market Regulatory Authority, Central Informatics Organization, Economic Development Board analysis 56

59 ECONOMIC YEARBOOK 2013 Approximately 80% of the total number of public school teachers in the Kingdom are Bahraini national. In private schools, by contrast, the corresponding share of nationals is less than 20%. Figure 69: Education workforce (by nationality) Source: Central Informatics Organisation, Economic Development Board analysis Public spending 24 on education in Bahrain remains below the average of the advanced economies, although this may be partly attributable to lower prices and the absence of taxes in the Kingdom. Public education spending per student in OECD countries 25 averaged USD7,600 (BHD2,865) in 2007 across primary, secondary and tertiary levels. The average for Bahrain in the same year was lower at USD4,337 (BHD1,635). Spending on public educational at the primary, secondary and tertiary levels in the OECD countries averaged approximately 4.6% of GDP 26 in The corresponding figure in Bahrain was a comparable 4.4% of real GDP. Literacy rates 27 in Bahrain are relatively high by international standards and have increased in recent years. The most common measure of literacy is the percentage of population above 15 years who can read and write. According to the United Nation Development Program (UNDP) the literacy rate in Bahrain increased from 86.5% in 2001 to 91.9% in School attendance in Bahrain is high by international standards. The gross enrolment rate 29 iis defined as the ratio of those enrolled in schools to those who are in school enrolment age. Enrolment at the primary 30 and secondary levels stood at 107% and 103%, respectively 31. The Bahraini ratios are in fact higher than those of the US, the UK, and the rest of the GCC. This reality Bahrain s fairly favorable ranking of 48th out of 187 in the UNDP S 2013 Human Development Report. The overall number of students in Bahrain grew by 22% from 138,000 in 2000 to 171,000 in Private school students accounted for 21% of the total number during that period. 24 Here focus is only on the public source for funds. 25 OECD 2007 (latest data available) 26 OECD 2007 (latest available) 27 From this section onward, we focused only on schools without high education institutions due to lack of data 28 Latest data available 29 GER can exceed 100% due to the inclusion of over-aged and under-aged students because of early or late school entrance and grade repetition 30 Includes elementary and intermediate levels 31 According to the UNDP Human Development Report 2013: Data refers to the most recent year available during the period from 2002 to 2011 for the education indicator 57

60 KINGDOM OF BAHRAIN Figure 70: Total number of students in Bahrain Source: Central Informatics Organization, Economic Development Board analysis Between 2000 and 2010 slightly fewer girls than boys enrolled at the elementary and intermediate levels in Bahrain. The number of girls averaged 95% and 96% of the number of boys during the two years, respectively. by contrast, girls outnumbered boys at the secondary level averaging 104% of the number of boys. Figure 71: Female to male ratio Source: Central Informatics Organization, Economic Development Board analysis Class size and student-teacher ratios are considered among the key determinants of the quality of teaching in a given country. In 2010, Bahrain had an average of 11 students per teacher. The corresponding OECD average is markedly higher at students per teacher. The highest student to teacher ratios seen in Bahrain since the turn of the century were in the private school segment in Since then, however, the figures have been consistently below the OECD average and fairly steady in recent years. Moreover, the ratios have largely converged between the public and the private sector. 32 OECD 2011: Education at a Glance. In 2010, OECD student-teacher ratio for primary level was 16 and secondary level was 14. Here we considered the average of both due to lack of data availability 58

61 ECONOMIC YEARBOOK 2013 Figure 72: Student-teacher ratio Source: Central Information Organization, Economic Development Board analysis To improve employability and efficiency while more directly catering to the needs of the job market, the government introduced reforms in the education sector over the past decade. These initiatives included a teacher training program, a new polytechnic college for technical and vocational training, an improved upper secondary vocational program, and a quality assurance initiative. Teachers received increased training based on up to date pedagogical standards and techniques. New support and accountability systems for school performance were introduced and national numeracy and literacy strategies were implemented. The quality assurance authority, now in its fifth year of operation, is providing external assessment of public and private educational establishments leading to enhanced student outcomes. According to the World Economic Forum (WEF) s Global Competitiveness Report of Bahrain s ranking in educational standards has improved and the Kingdom is now placed 48th worldwide in terms of the quality of the educational system in the latest report. This compares to the 56th position in Enrolment rates in the primary, secondary and tertiary segments currently stand at 97.8%, 103% and 29.8% respectively. Healthcare Public healthcare services are provided free of charge to all Bahrainis, and are heavily subsidized for expatriates through a network of Ministry of Health (MoH) hospitals, maternity units and primary healthcare centers. Non-Bahrainis employed in corporations with more than50 employees are covered under a mandatory health insurance scheme 33. Moreover, private healthcare is an increasingly important sector in the Kingdom and encompassed 14 hospitals as of This scheme imposes a health tax of BHD60 for each non-bahraini employee, payable by the employer. Expatriates not covered by this scheme pay a flat rate of BHD3 per visit. 59

62 KINGDOM OF BAHRAIN The Bahraini healthcare sector registered strong growth of around 10% per year between 2006 and 2012 due to the establishment and expansion of additional public and private healthcare facilities. The annual pace of growth reached 9.5% in Rising staffing levels at the new facilities also translated into a 10.2% increase in health care employment in 2008, a pace which subsequently declined to 4% in 2010 in response to a broader slowdown in the sector. Growth in the private sector is expected to accelerate following the completion of several projects including Dilmunia Healthcare Island and King Abdulla Medical City. While GDP contribution of the health care sector steadily increased throughout the decade, its contribution to employment has remained at 2% of the national total in the last six years. Figure 73: Economic indicators for the healthcare sector Source: Ministry of Health, Central Informatics Organization, Economic Development Board analysis Healthcare expenditure as a percentage of GDP declined somewhat between 2001 and 2007 before rebounding sharply until a temporary correction in However, further growth momentum is expected from a comprehensive health care reform agenda pursued by the Ministry of Health. The plans includes a comprehensive upgrade of billing mechanisms, storage systems and cost management schemes. 60

63 ECONOMIC YEARBOOK 2013 Figure 74: Healthcare expenditure (% GDP) Source: Ministry of Health A key objective of reforms in the health care sector has been to improve the quality of the human capital available to the health facilities. The Royal College of Surgeons Medical University of Bahrain was also established in 2004 to provide access to world-class training for upcoming physicians and nurses in the Kingdom. The College of Health Sciences is increasing its training capacity for nurses which is currently at 300 students per year. Nursing has the highest potential to create national jobs due to a high number of foreign workers in this field. Bahrainization in nursing was estimated at 50% in 2009 compared to 80% for physicians. Apart from training initiatives, retention schemes have been developed to address staff shortages. Although growth in the number of healthcare practitioners has mirrored increase in the population, Bahrain continues lag behind the advanced economy average in terms of physician to population ratios. As of 2010, Bahrain had 1.4 physicians per 1,000 people, which compared to the OECD average of 2.8. Figure 75: Healthcare practitioners vs. population total growth Source: Central Informatics Organization, Ministry of Health, Economic Development Board analysis 61

64 KINGDOM OF BAHRAIN The development of Bahrain s healthcare sector over the past three decades is reflected in the steady improvement in key indicators, especially life expectancy, which is now among the highest in the world. In an important instance of positive progress, the number of hospital beds per 1,000 people is estimated to have increased 50% upon completion of the King Hamad General Hospital. Nonetheless, the ongoing implementation of the health reform agenda is critical to further elevating Bahrain s relative position in these indicators. These initiatives include allocating 6.6% of government spending for healthcare in the draft law for the fiscal budget. Figure 76: Life expectancy at birth Bahrain Norway Canada UK Malta US UAE Argentina Kuwait China Source: United Nations Development Programme Figure 77: Hospital beds per 1000 population (2009) Source: World Health Organization 62

65 ECONOMIC YEARBOOK 2013 Figure 78: Physicians per 1000 population (2010) Source: World Health Organization Figure 79: Healthcare expenditure as % of government expenditure (2011) Source: World Health Organization Figure 80: Healthcare expenditure as % of GDP (2011) Source: World Health Organization 63

66 KINGDOM OF BAHRAIN The National Health Regulatory Authority (NHRA) The National Health Regulatory Authority (NHRA) was established in 2009 in order to separate the government s regulatory function from service provision. The NHRA was set up with a view to elevating healthcare standards in the public system through improved monitoring and inspection of public healthcare facilities and practitioners. Formal supervision had previously been largely restricted to the private sector. Overall healthcare standards are being addressed through an overhaul of healthcare legislation designed to promote fair competition and an open investment environment, as well as to ensure world-class minimum standards for professionals and facilities. The NHRA also aims to improve accountability, encourage research and development, increase options for patients, ensure systemwide integration, enhance the regulation of drugs and pharmaceuticals, as well as boost investments in preventative care. Since the NHRA s establishment, public healthcare facilities devised plans to upgrade their facilities and gain international accreditation. The regulatory authority has also granted licenses to investors in ventures that were previously restricted. Among other things, the NHRA was tasked with the development of a framework for healthcare research and development in Bahrain. As a result, a project was launched to conduct genetic screening on approximately 15,000 babies in the next two years to support genetic research on prevalent disorders like diabetes (7,059 cases in 2010) and hypertension (7,522 cases). Al Jawhara Center is a research facility licensed by NHRA. It is the first comprehensive genetic research facility in the Kingdom with an academic and research focus on molecular diagnostics and genetic disorders. The center also partners with Arabian Gulf University to provide academic training for medical students. Research conducted at Al Jawhara is focused on prevalent regional disorders, endemic cardiovascular disorders, pharmacogenetics, the human genome, and biomarkers. Despite significant expansion in recent years, growth potential in healthcare in Bahrain is enormous in view of population growth and the range of existing services. The most promising opportunities exist in tertiary care facilities and research institutions. Since 2007, the private healthcare sector has grown by more than 12% per year, surpassing the pace of expansion in the public sector and thereby capturing a large market share. This movement has been prompted by the proliferation of healthcare insurance in the Kingdom upon the adoption of prepaid schemes by corporations and individuals. 64

67 ECONOMIC YEARBOOK 2013 Figure 81: Private healthcare growth outpaces government healthcare investments Source: Central Informatics Organization Entrepreneurship Bahrain s human capital is widely recognized as its greatest competitive advantage. This reality, combined with the demographic dynamics of the Kingdom and the need to achieve sustainable economic diversification have made entrepreneurship a key policy priority. Entrepreneurship is a long tradition in an economy with a centuries-long tradition as a regional trading hub. While the Kingdom is home to a large number of established private enterprises, efforts to stimulate the growth of new ones have firmly established themselves as a strategic priority in recent decades. New entrepreneurship can serve as a source of job creation, non-oil diversification, exports, and innovation. Indeed, small and medium-sized companies constitute the backbone of many advanced and a growing number of emerging markets in these areas. The importance of the SMEs is considerable also in Bahrain where they account for 77% of private sector jobs, although their GDP weight remains significantly lower at just over a quarter. In terms of the number of companies, the dominance of SME s is overwhelming as they accounting for some 99% of the total. Even beyond its numerical significance, the Bahraini SME sector is a highly dynamic part of the economy with an average of 7,200 Commercial Registrations (CRs) recorded each year. New CRs reached their height in 2006 and 2007, during which Bahrain also experienced its highest GDP growth rates. An economic rebound in 2012 also contributed to the 37% YoY increase in CRs, matching the 2007 level. 65

68 KINGDOM OF BAHRAIN Figure 82: Annual number CRs issued Source: Ministry of Industry and Commerce In spite of the rapid growth of the SME space in recent years, the overwhelming majority of Bahraini companies remain very small. Micro enterprises with more than 10 employees account for 91.2% of all corporate entities in the Kingdom. 34 By contrast, large companies account for only 0.2% of the total number of Bahraini businesses. The business activities of commercial establishments in Bahrain are heavily focused on trade services, which were responsible for 39% of all CRs in 2012, followed by finance at 18%, and other 35 service sectors at 13%. The large percentage of service activities reflects the progress made in economic diversification as the focus of economic activity has shifted away from oil. Services 36 comprise 52.7% of Bahrain s GDP at constant prices while the share of finance 16.1%. Construction and manufacturing account for 11% and 12% of the total, respectively. 34 IThere are two definitions for company sizes: The first relies on employment and the second on capital investment and annual turnover. Due to insufficient data on capital investment and turnover, the definition based on employment has been adopted. Micro enterprises hire up to 10 employees, while small enterprises hire between 11 and 50 (up to 100 for the construction sector) and medium enterprises hire between 51 and 250 (up to 400 for the construction sector). 35 Including education, health, personal & social services, and hotels & restaurants 36 These include wholesale and retail trade, hotels & restaurants, transport & communications, financial services, business services, other service industries, and real estate. 66

69 ECONOMIC YEARBOOK 2013 Figure 83: Sectorial distribution of establishments (2012) Source: Ministry of Industry and Commerce Employment in micro, small and medium enterprises constitutes 77% of total jobs in the Bahrain private sector. 13% of these jobs are held by Bahraini nationals. This reflects the relative dominance of laborintensive activities in the SME space where companies contain costs by recruiting low-cost expatriate workers. Twenty nine percent of MSME jobs in 2012 were in the construction sector followed by trade (26%) and other services (18%). By contrast, the relative presence of Bahraini nationals tends to more significant in larger companies. Whereas 39% of the workforce of large private companies is Bahraini nationals, the corresponding share for medium-sized companies is 28% and for small companies 24%. By contrast, the proportion of Bahrainis in the employee pool of micro enterprises is a significantly lower 9%. Bahraini employees are concentrated in service activities, particularly trade and finance. Figure 84: Bahraini employment in establishments by economic activity (2012) 37 Figure 85: Non-Bahraini employment in establishments by economic activity (2012) Source: Ministry of Industry and Commerce Source: Ministry of Industry and Commerce 37 This is based on industry data (employment in registered companies), which may be different than total employment within the sectors. Total employment also includes self-employment. 67

70 KINGDOM OF BAHRAIN In 2012, 98% of companies in the Kingdom were owned by Bahrainis. The entities fully owned by foreigners included 156 European-owned companies 83 entities belonging to GCC nationals. The owners of micro enterprises include Bahraini, US and GCC nationals. Figure 86: Distribution of foreign-held CRs by nationality Source: Ministry of Industry and Commerce Key determinants of entrepreneurship in Bahrain Access to finance Commercial banks in Bahrain have adopted a cautious approach toward lending to SMEs due to the risks associated with them. Apart from this, SMEs typically do not match the book-keeping, financial planning and budgeting standards of larger companies and hence frequently struggle to qualify for mainstream commercial lending, something that is common in other parts of the world as well. In response to these limitations, Bahrain Development Bank (BDB) was established in 1992 as a dedicated government-supported lending to this sector. The bank s key objective is to promote investments for the purpose of economic diversification and employment creation for Bahrainis. The bank provides both financial and advisory services. The Bahrain Development Bank has disbursed nearly BHD240mn in loans since New lending has grown significantly in recent years. The total new loans disbursed by the bank averaged BHD16.31mn a year over , as compared to BHD43.75mn during , implying a growth rate of 168% between the two time periods. About 76% of the total loans have been earmarked for the services sector, followed by manufacturing at 21%, and agriculture and fisheries at 3% since The bank s importance and resilience is also reflected in the speedy recovery in 2012 following the unrest. The BDB managed to cater to 1,162 beneficiaries during the year. 68

71 ECONOMIC YEARBOOK 2013 Figure 87: New lending by the Bahrain Development Bank (BHD) Source: Bahrain Development Bank Another important source of government SME support is the Tamkeen labor fund, which finances and guarantees loans from commercial and Islamic banks. Tamkeen guarantees 50% of the value of SME loans made by Ithmaar Bank, BDB, Bahrain Islamic Bank, BMI Bank, Al Salam Bank, Standard Chartered Bank, Kuwait Finance House and Khaleeji Commercial Bank, in addition to microfinance institutions such as Family Bank and Ebdaa Bank. Total loans disbursed to date amount to approximately BHD6.5mn to 4,764 enterprises. The majority of the loans were granted by BDB (3,176 beneficiaries). An additional BHD50mn is to be allocated by various partner banks to further extend the Tamkeen guarantee scheme. Tamkeen has granted BHD126,505 for 31 start-ups to date as part of its startup support scheme, which includes pre-seed grants and feasibility and incubation support. Tamkeen has over time introduced a number of programs designed address the needs of Bahraini SMEs. The following sections review some of the most important initiatives. 69

72 KINGDOM OF BAHRAIN Funds for general improvement Tamkeen identified poor accounting and auditing practices as a major and common impediment to funding among Bahraini SMEs. In order to address this issue, Tamkeen allocated BHD9.8mn toward its Mohasaba scheme 38, benefiting 835 enterprises to date. In addition to Mohasaba, Tamkeen recognized sustainable financing as a particular concern, most notably during times of financial and economic distress. To address the issue, Tamkeen set up a business sustainability support program under which an enterprise support fund was established with the purpose of improving the productivity and profitability of SMEs. Thus far, BHD9.2mn has been spent under the auspices of the program, catering to 2,500 beneficiaries. Funding and advice for expansion Tamkeen provides 26 programs for the expansion, development and internationalization of SMEs. So far BHD13.1mn has been offered to 3,242 enterprises. The program ultimately aims to reach out to roughly 12,000 companies and the funds allocated for the purpose total approximately BHD131mn. The activities supported by the program include marketing assistance, business development consulting, quality management, promotion in exhibitions, and technical assistance to improve productivity and e-marketplace training. Expansion and advisory services are classified under the Enterprise Growth Management (EGM) program, the second phase of which had a budget of around BHD50mn. A number of new programs are under consideration or in planning. These include legal support, information and communications technology (ICT) grants, 39 a support fund for large enterprises, and a business diversification scheme. The addition of new programs is in line with the country s overall strategy to: (i) support the expanded use of ICT; (ii) enable businesses to acquire new technologies; and (iii) enter new markets or develop new products. 38 Tamkeen supports the beneficiary for two years by paying up to BHD4, 000 out of BHD4, 500 for the full Accounting and Auditing service package and up to BHD1, 250 out of BHD1, 500 for Auditing services only. Additionally, Tamkeen provides a BHD300 grant to the enterprise to purchase modern accounting software. This support enables the enterprise to implement an advanced accounting system, utilize proper internal auditing practices, issue regular financial reports, analyze financial data, and publish auditing reports - Tamkeen 39 Support business to acquire IT-related items 70

73 ECONOMIC YEARBOOK 2013 Figure 88: Distribution of beneficiaries under the EGM program (second and third phases) Source: Tamkeen Operational Plan 2013 Sector-specific financing Through its collaboration with other entities Tamkeen has widened its financial reach to specific niche markets including agriculture and fisheries while encouraging female entrepreneurship and ICT development. So far Tamkeen has provided BHD4.3mn of funding to 835 fishermen and 369 farmers to support the purchase of machinery and equipment. The ICT finance scheme has so far reached out to 51 beneficiaries. Through its collaboration with the Supreme Council for Women and as part of its women entrepreneur support scheme, Tamkeen has benefited 95 female-run enterprises in areas of transport, fashion design and photography. Microfinance scheme Tamkeen has so far subsidized 934 micro loans through the Family Bank and HRH Princess Sabeeka bint Ibrahim Al Khalifa Entrepreneurship initiative. The number of micro loans is expected to double next year. The fund has allocated approximately BHD70,000 to assist the promotion of products from 200 productive families in Microfinance was first introduced in Bahrain in 1998 through the UNDP s MicroStart program which aimed to tackle unemployment and encourage economic diversification. The success of this project led to the introduction of microfinance institutions, with Family Bank and Ebdaa Bank 40 being the two leading microfinance institutions in Bahrain. 40 For more information on microfinance institutes, please refer to the Microfinance article in the Bahrain Economic Quarterly (2Q12) 71

74 KINGDOM OF BAHRAIN Business incubation As part of the developing infrastructure for SME development, a number of entities are setting up various business incubators across the country with a primary focus on start-up enablement. The largest of these facilities is the Bahrain Business Incubator Center that has been set up as a subsidiary of the BDB. The center provides independent work spaces (from 12 sq m to 215 sq m), a fully equipped conference hall and meeting room, a display system for project promotion, an office support center, onsite parking and a reception area. It offers various services such as business advisory, flexible shortterm lease, training and operation services. The incubator currently hosts 120 clients (of 138 available units). Additional incubators in the pipeline include a BDB center for women and a University of Bahrain facility targeting young people. Regulatory environment The Kingdom has embarked on a number of projects to improve the business environment and encourage entrepreneurship. The establishment of the Bahrain Investors Centre (BIC) in 2004 was an important step toward facilitating new businesses creation in Bahrain. The BIC serves as a one-stopshop for potential investors. Further steps to ease commercial registration are underway and will include the streamlining and automation of all business processes. Pending regulatory initiatives are linked to a new competition law and a new company law. Similarly, the CBB continuously strives to improve its regulatory framework by addressing the needs of all types of financial institutions, investors and loan recipients. Currently, it is in the process of introducing special regulations for microfinance institutes to ease the lending process. The government has allowed 100% foreign ownership of businesses in most sectors of the economy. Land ownership by non-bahraini nationals is permitted in designated areas. 41 Entrepreneurial education and training As part of its 2012 Skills for the 21st Century campaign, the Higher Education Council (HEC) is developing skills and competencies of students in the areas of entrepreneurship and innovation. In 2012 HEC held workshops led by the Massachusetts Institute of Technology (US) and Queen Margaret University (UK) which focused on how to embed entrepreneurship and stimulate innovation by improving university curriculums. The new strategy will be published in 2013 and will focus on integrating entrepreneurship into higher education and introduce performance parameters to measure its impact. 41 Government of Bahrain enacted the freehold property law of 2003, which allows foreigners to own property in designated areas of the Kingdom 72

75 ECONOMIC YEARBOOK 2013 Higher education institutes have independently recognized the importance of entrepreneurial education. As part of the education reform agenda, entrepreneurship was added to the University of Bahrain s strategy in Also, an incubation center is scheduled to commence operations in Bahrain Polytechnic is establishing an Enterprise Development Center on its campus. The primary function of the center will be to offer entrepreneurial development courses for Polytechnic students. It will also leverage the existing incubation and startup support provided by the wider enterprise development community within the Kingdom of Bahrain. The first stage of the project includes a portfolio of entrepreneurial courses, including exploring entrepreneurship; enterprise development; entrepreneurial finance; creativity, innovation and teamwork. The Royal University for Women has also entered an agreement with the United Nations Industrial Development Organization (UNIDO) to build a training center. The center will offer entrepreneurship courses and will offer general business incubation services to new companies. Other supporting initiatives Tamkeen has launched three programs to support entrepreneurship in educational institutions. The first is the Injaz 42 company program, whose objective is to provide necessary entrepreneurial skills to secondary school students. Through this program, students are categorized into groups and asked to develop their own model company. In 2013, Tamkeen will be introducing two additional programs: (i) a nationwide business plan competition among university students (Mashroo3i) 43 ; and (ii) an entrepreneurship module for educational establishments which is intended to be embedded in school and university curricula. Institutions, in cooperation with Tamkeen, are also deploying initiatives with the aim of fostering a culture of entrepreneurship among the local population and providing Bahrainis the skills needed to create and sustainability operate a business. Partners include the Ministry of Industry and Commerce (MoIC), the Supreme Council for Women, BDB and private sector institutions like Tenmou. 42 As a member of the Junior Achievement Worldwide, it aims to embed an entrepreneurial and business mindset among the Arab youth and empower their career aspirations. Its focus lies largely on youth educational and training programs. 43 This program is already launched 73

76 KINGDOM OF BAHRAIN 06 INTERNATIONAL 74

77 ECONOMIC YEARBOOK 2013 Rating environment This section assesses the Kingdom s credit rating position according to three leading international credit rating agencies: Standard & Poor s (S&P) Fitch Ratings The International Islamic Rating Agency (IIRA) Credit ratings A sovereign credit rating assesses the credit worthiness of a national government. The rating indicates the risk level of the investment environment of a country and the ability of the country to meet its financial obligations. The rating incorporates economic and political risk, and is an indicator which investors often consider when making their asset allocation decisions. Ratings are provided by dedicated credit rating agencies, the best known of which are Fitch and Standard & Poor s. Each agency has its own methodology in measuring creditworthiness and uses a specific rating scale to publish its ratings opinions. Key factors that all agencies evaluate include the health of public finances as well as fiscal and monetary policy. Additionally, the agencies assess the economic performance and the level of public and private debt along with debt servicing capacity. The Rating agencies have four main indicators that can be assigned to countries: Short term rating, Long-term rating, Transfer & Convertibility assessment and Outlook. As defined by rating agencies a Short-term rating is a probability factor of a government defaulting within a year. This is in contrast to Long-term rating which is evaluated over a longer timeframe. S&P defines the Transfer & Convertibility assessment as the rating associated with the likelihood of the sovereign restricting non-sovereign access to foreign exchange needed for debt service. The Outlook assigned to the rating implies the transition that the rating might make over the next 12 to 18 months. The outlook could be positive, stable or negative. A positive outlook indicates that the rating could be improved; a stable outlook implies that the rating might remain unchanged; and a negative outlook suggests that the rating could be downgraded. Ratings are expressed as letter grades that range from AAA to D. The investment ratings indicate the agency s view of the creditworthiness of the country being assessed. These investment grade ratings start at BBB to AAA which is the highest assigned rating. Ratings at BBB- and below are considered to be speculative. Ratings provide an indication of a borrower s ability to make repayments in full and in a timely manner. Consequently, the higher the rating grade assigned, the lower the interest rate the borrower needs to pay to creditors. The Kingdom of Bahrain s current foreign and local long-term sovereign credit ratings are all investment grade. Additionally most of the outlooks assigned are stable. This indicates that the country s economic fundamentals are favorable. 75

78 KINGDOM OF BAHRAIN Figure 89: Bahrain s sovereign credit rating Foreign currency issuer Local currency issuer Transfer & credit/default rating credit/default rating Covertability Outlook assessment 44 Long-term Short-term Long-term Short-term Local long-term S&P BBB A-2 BBB A-2 BBB Stable Fitch BBB F3 45 BBB+ BBB+ Stable IIRA A- A-2 A- A-2 Stable Source: Standard &Poor s, Fitch, International Islamic Rating Agency Bahrain global rankings performance In this section, the Kingdom s international position is benchmarked against other economies using a number of key economic and social indicators. It assesses Bahrain s standing in international rankings and reviews its performance across various component indices. The analysis lists the most recent global rankings of Bahrain according to 14 leading international indices that are usually issued and updated on an annual basis. It uses data from a number of reputable sources including research and findings from the Heritage Foundation, Transparency International, United Nations Development Program (UNDP), United Nations Conference on Trade & Development (UNCTAD), World Bank, World Economic Forum and the Fraser Institute. Some reports and indices rely only on statistical data which some also supplement their analysis with survey data. Statistical data consists of indicators capturing quantitative information such as inflation rates, GDP and life expectancies. These data sets are collected by international organizations, including the IMF, World Bank, and various UN agencies, from reporting national entities (central banks and statistical agencies) in their member states. The survey data is more qualitative in nature and covers a variety of issues such as the protection of property rights, independence of the judiciary, and quality of the educational system. Bahrain has attained impressive results in a number of recent global rankings. Although some of these standings have seen downward trends in recent years, Bahrain s position remains highly competitive on a global scale. The table below provides a snapshot of the Kingdom s performance in the latest reports compared to the previous ones. 44 Fitch uses the term Country Ceiling 45 F3 fair quality grade with adequate capacity of obligor to meet its financial commitment, but near-term adverse conditions could impact the obligor s commitments 76

79 ECONOMIC YEARBOOK 2013 Figure 90: Bahrain s comparative ranking Index Latest rank Previous rank Change in rank Economic freedom Economic freedom of the world Ease of doing business Global competiveness Financial development Human development index Networked readiness Corruption perception Education development Travel and tourism competiveness Logistics performance Enabling trade Gender gap Source: Various reports Bahrain s economy remains strong and its key characteristics make it extremely competitive on a global scale. Figure 91: Bahrain s global ranking Source: Various reports The reports evaluation suggests that Bahrain s main comparative strengths include: High standard of human development; ranks in the High Human Development category in UNDP s Human Development Report Macroeconomic stability (low inflation) Favorable tax regime Strong banking and finance sector Efficient business regulations Openness to global trade ICT readiness 46 It is misleading to compare HDI values and rankings with those of previous reports as the underlying data and methodology have changed. In the 2013 report, the numbers for 2012 were revised and Bahrain s ranking was

80 KINGDOM OF BAHRAIN 07 INDIVIDUAL SECTORS 78

81 ECONOMIC YEARBOOK 2013 Oil and Gas Sector Bahrain the first oil economy in the region Bahrain was the first country in the Middle East to discover oil, with the Bahrain Field in the south of the island commencing production in Revenues generated by this natural resource were used to improve education and develop infrastructure, thereby placing the Kingdom at the forefront of economic modernization in the Gulf region. Since the 1970s, Bahrain has been successful in diversifying its economic base and is among the least oil-dependent economies in GCC. In 2012, the oil and gas sector contributed 19% to real GDP compared to 44% in 2000 reflecting the relatively small change in oil and gas volumes. Though Bahrain has focused on economic diversification for a number of decades, oil remains an important part of the economy. Recent years have once again highlighted the importance of the oil and gas sector in maintaining a positive trade balance, generating public wealth, and enabling the government to moderate the impact of the global economic downturn. High oil prices, among other things, have maintained oil and gas revenues as the primary source of government revenue. In 2012, oil revenues constituted 87% of total government revenues compared to 67% in The oil sector contributed 77% of total goods exports in Since Bahrain is a small open economy and heavily dependent on imports, oil exports continue to play an important role in sustaining the current account surplus and maintaining the currency peg to the US Dollar. On the other hand, while natural gas is not a large contributor to government revenues or the Kingdom s exports, it is vital for power generation and the manufacturing industry which contributed 15% of real GDP in Oil and gas production Bahrain currently produces more than 190,000 b/d of crude oil from two fields: Bahrain Field (situated in the southern part of the island) and the offshore Abu Sa afa Field (located to the north). On current projections, Bahrain s total oil output could climb as high as 250,000 b/d by 2020 or soon thereafter. The positive forecast is primarily due to ongoing efforts to rehabilitate the Bahrain Field. While production at the Bahrain Field totaled 75,000 b/d in 1970s, this figure had more than halved to 31,877 b/d by In response, the authorities in 2008 launched the Bahrain Field Development Project, an enhanced oil recovery project undertaken by the newly established Tatweer Petroleum Company 47, to reverse the declining trend. Tatweer s primary goal is to triple oil output at Bahrain Field by drilling new oil wells and eventually use the latest enhanced oil recovery techniques to extract heavy oil. In 2012, production at the Bahrain Field increased to 45,300 b/d a marked reversal of the steady decline over the past four decades. Average daily production exceeded 45,289 b/d in Output from the Bahrain Field is expected to reach 100,000 b/d by Tatweer Petroleum is a joint venture between nogaholding (the business and investment arm of Bahrain s National Oil & Gas Authority), Occidental Petroleum Corporation (US) and Mubadala Development Company (UAE). 79

82 KINGDOM OF BAHRAIN Bahrain receives export revenues from one-half of the crude oil produced from the offshore Abu Sa afa field (shared with Saudi Arabia). At the current capacity, the Kingdom s share stands at 150,000 b/d. In 2012, production in the Bahraini share of Abu Sa afa decreased to 127,642 b/d due to unscheduled maintenance work throughout most of the year. By the end of 1Q13, production at Abu Sa afa had once again normalized. Figure 92: Projection of crude oil production (b/d) Source: National Oil and Gas Authority, Economic Development Board team analysis Bahrain Petroleum Company (Bapco) owns and operates an oil refinery in Bahrain. The facility was officially commissioned in 1936 for the purpose of refining oil from the Bahrain Field. With the discovery of oil in Saudi Arabia the refinery also began refining oil from Saudi, which was transported by ships prior to the construction of the Saudi Arabia Bahrain oil pipeline in Currently, more than eight different petroleum products are manufactured at the facility. 88% of the total output is exported. These products include gasoline, diesel, jet fuel, fuel oil, asphalt, sulfur, liquefied petroleum gas (LPG), and lube base oil. Figure 93: Annual refinery production ( 000 barrels) Source: National Oil and Gas Authority 80

83 ECONOMIC YEARBOOK 2013 Figure 94: Hydrocarbons production (US b/d) Source: National Oil and Gas Authority Natural gas The Khuff gas reservoir, near the Bahrain Field, is the main source of natural gas in the Kingdom. The reservoir was discovered in 1948, but was not developed until late 1960s, when the country was planning to embark on an industrialization scheme, which would rely on Khuff gas as the main source of energy. All of the natural gas production of Bahrain is consumed domestically (Figure 96). In 2003, natural gas production totaled 339,798 million standard cubic feet per day (MMSCFD), a figure which had increased by 31% to 438,467 MMSCFD in In 2012, Bahrain also produced more than 104,000 MMSCFD of associated petroleum gas, which was processed by Bahrain National Gas Company (BANAGAS) into marketable liquid gas products such as propane, butane and naphtha. Figure 95: Production of gas (million standard cubic feet per day) Source: National Oil and Gas Authority 81

84 KINGDOM OF BAHRAIN Figure 96: Consumption of gas in 2012 Source: National Oil and Gas Authority Future development plans As a mature hydrocarbons producer, Bahrain is currently exploring new sources of hydrocarbons. Since the formation of the National Oil and Gas Authority (NOGA) in Sep 2005, Bahrain has offered all four of its offshore blocks to two international companies. Blocks 1, 3 and 4 were awarded to US-based Occidental Petroleum and Block 2 was awarded to Thailand-based PTTEP. Occidental has completed geophysical studies and performed seismic surveys 48 in Block 4. Furthermore, geological maps have been developed to identify locations for drilling new exploration wells. An exploratory well is expected to be drilled in each block. Bahrain is also focusing on boosting gas production. The government has signed an agreement for deep-gas exploration with Occidental. The project is estimated to increase overall gas production to 2.5bn cubic feet per day (CFD) by 2020 from 1.5bn CFD currently. To secure an adequate supply of gas for its future requirements, Bahrain is currently evaluating bids for importing liquefied natural gas (LNG). This involves installation of LNG receiving facilities to supplement local gas production. Bahrain has further planned a USD6bn project to increase and upgrade the capacity of the Bapco refinery, as well as replace the existing pipeline between Saudi Arabia and Bahrain. In 2011, Bahrain purchased 216,400 barrels of crude oil on a daily basis from Saudi Arabia through pipeline for finished products. The pipeline s capacity is expected to be raised to 350,000 b/d. Overall, these projects indicate a total investment of USD20bn by international companies over the next 20 years. Partnerships with these entities also guarantees greater employment for Bahraini nationals, substantial technology transfers, procurement contracts for local merchants and adherence to environmental protection laws. 48 A seismic survey is a method of exploration geophysics that uses the principles of seismology to estimate the properties of the Earth s subsurface from reflected seismic waves. It is commonly used in hydrocarbon exploration to produce high resolution 3D maps of potential oil and gas reservoirs. 82

85 ECONOMIC YEARBOOK 2013 Financial Services Bahrain s strategic central location within the GCC region provides financial institutions operating in the Kingdom with easy access to the regional economy, which is worth some USD1.4trn. The region is characterized by one of the largest concentrations of private and public wealth in the world, and supported by a growing oil and gas industry, the GCC remains critical to the global market for energy. Bahrain is the oldest financial services center in the Gulf region, having emerged as a major offshore banking hub in the 1970s. The Kingdom hosts a total of 411 financial institutions 49 ((as of May 2013), diversified over a range of well-established industry sectors, including retail and wholesale banking, Islamic finance, asset management, and insurance. The development of financial services has been actively supported by the CBB, which serves as a unified regulatory authority for the entire industry since The sector is governed by best-practice international standards, with Bahrain s business regulatory environment ranked first among 17 economies in the Middle East according to the Fraser Institute 50. Financial institutions can capitalize on the flexible regulatory environment as the Kingdom has been repeatedly recognized as the freest economy in the Gulf region. The government allows 100% foreign ownership in companies, and provides one of the most favorable taxation regimes both regionally and globally, with no tax 51 on corporate income and capital gains 52. Overview The financial services sector plays an important role in Bahrain s economy as the largest sector of the non-oil economy. It contributed 17.2% of the Kingdom s total real GDP in As of 2012, the sector s output totaled BHD1.76bn, an increase of 4.03% YoY. Financial services registered a compound annual growth rate (CAGR) of 8.14% over Figure 97: Financial services Sector output and contribution to total GDP Source: Central Informatics Organization 49 According to the Central Bank of Bahrain (CBB) 50 Economic Freedom of the Arab World, 2012 Annual Report: Fraser Institute, an International Research Foundation 51 Excluding corporate income tax of 46% on oil & gas companies 52 Ernst & Young: Worldwide Corporate Tax Guide (2012) 83

86 KINGDOM OF BAHRAIN Figure 98: Financial services Sector employment and contribution to total employment Source: Labour Market Regulatory Authority The financial services industry had nearly 14,900 employees in 2012, following a small 1.45% decline from The sector contributed 2.3% to total employment during the same period. It is characterized by a high Bahrainization rate, with nationals accounting for 62.4% of the total sectoral workforce as of This highlights the maturity of a highly skilled financial labor force that has emerged due to the Kingdom s history as a financial center. In fact, over , Bahraini employment in the financial services sector consistently held its ground at an average of 61.9%, portraying a sustained expansion of Bahraini employment in line with the sector s overall growth. This was supported by a range of competitive training facilities such as the Bahrain Institute of Banking and Finance (BIBF). Figure 99: Growth in financial services Source: Central Informatics Organisation, Labour Market Regulatory Authority, Economic Development Board analysis 84

87 ECONOMIC YEARBOOK 2013 The performance of the Bahraini financial sector in reflected the worldwide cycle experienced by financial services. The total output of the sector stood at BHD703.5mn in 2002, a figure that dramatically expanded to BHD1.1bn in 2004, reaching the highest growth levels of 36% YoY, driven primarily by wholesale banks. These banks are restricted from seeking retail deposits and raise their funds directly from investors or the interbank market. The sector experienced negative growth in 2009, for the first time since 2002, due to the impact of the financial crisis. However, it was resilient amid the uncertainty, growing at an annual average of 2.61% from 2009 to The insurance market, which expanded at an annual pace of 25.1% in 2009 and 24% in 2010, has become an increasingly important driver of growth in the financial industry over the past few years. Banking The banking sector in Bahrain is comprised of retail and wholesale banks. These include Islamic banks operating in line with Shariah principles. Among other things, Bahrain hosts a sizeable population of foreign banks, the largest of which are BNP Paribas, Citibank, HSBC, and Standard Chartered. At the end of May 2013, the number of licensed banking institutions stood at 104, including 28 conventional retail banks. The three largest local retail banks dominating the market are the National Bank of Bahrain (26 branches), Ahli United Bank (20), and BBK (19). Currently, of the 53 conventional wholesale banks in Bahrain, 13 are locally incorporated 53 including Gulf Investment Bank, Investcorp Bank, and TAIB Bank. Beyond conventional finance, Bahrain represents the largest concentration of Islamic finance institutions in the Middle East. The Kingdom is home to a total of six Islamic retail banks and 18 Islamic wholesale banks. All are locally incorporated with the exception of Kuwait Turkish Participation Bank. The largest network of Islamic retail branches is held by Ithmaar Bank (15) followed by Bahrain Islamic Bank (12), the first Islamic bank to be established in Bahrain in Despite its diverse profile, Bahrain s development as a regional financial center has been mainly underpinned by rapid advancements in the banking sector. At approximately 7.2 times Bahrain s GDP, the consolidated assets of the banking sector totaled USD195.3bn at the end of 1Q13. Apart from the strong regulatory environment and qualified human capital, the banking sector benefits from the liquidity generated by the regional oil and gas industry. The substantial presence of foreign banking institutions in Bahrain attests to the attractive market conditions. Over the past decade, Bahrain s banking sector experienced pronounced cyclical variation, reflecting the global economic crisis and the boom preceding it. Total assets of the banking sector rapidly rose to a peak of USD252.4bn in 2008 from USD74.0bn in 2002, increasing more than threefold. Since then, the global economic crisis exerted downward pressure on bank assets, which was particularly visible over By 1Q13, bank assets had once again rebounded slightly to USD195.3bn following 4.82% QoQ growth from 4Q12. Overall assets declined 2.25% over the past year due to continued corrections experienced by wholesale banks which saw a 7.33% YoY drop in 1Q13. Retail bank assets, by contrast, posted growth of 6.53% over the same period. 53 CBB Register (as of Jun 30, 2013) 85

88 KINGDOM OF BAHRAIN Figure 100: Consolidated assets of the banking system * The increase in 2007 was due to a change in the type of license of some banks, which have been converted from wholesale to retail banks Source: Central Bank of Bahrain, Economic Development Board analysis Structure of the banking sector Total deposits at retail banks and retail credit extended to the domestic economy exhibited a consistent upward trend between 2004 and 2008, both registering growth of around 164%. Despite the global credit crisis, retail deposits in Bahrain maintained their upward momentum, growing by a further 56.2% to BHD14.8bn by the end of 1Q13. This was partly reflective of an increase in investors risk aversion to other asset classes. Domestic credit contracted slightly in 2010, but totaled BHD7.03bn by 1Q13, exhibiting a growth of 19.5% over 2008 to 1Q13. Figure 101: Total deposits and domestic credit (2003 1Q13) Source: Central Bank of Bahrain, Economic Development Board analysis 86

89 ECONOMIC YEARBOOK 2013 Bank credit to the government and the private sector rose rapidly up to 2008, but slowed down sharply in 2009 and 2010 in response to the onset of the global crisis and tighter liquidity conditions. However, since mid-2011, YoY changes in credit to the private sector have been positive. By the end of 1Q13, credit increased by over BHD460mn from the previous year to BHD6.85bn. Figure 102: Growth (% YoY) in credit to the government and private sector (2007 1Q13) Source: Central Bank of Bahrain, Economic Development Board analysis Since 2008, market lending interest rates have generally been on a downtrend in Bahrain. This largely reflects the loosening of the monetary policy by the US Federal Reserve as the Bahraini Dinar is pegged to the US Dollar. Interest rates on personal loans fell to 5.8% by 2Q12, the lowest rate during the period under review, from 9.3% at the end of 2007, increasing again to 6.1% by 1Q13. Furthermore, interest rates on business loans declined from 6.9% in 4Q07 to 4.3% by 1Q13. Figure 103: Average lending rate (%), Q13 Source: Central Informatics Organisation 87

90 KINGDOM OF BAHRAIN Islamic finance Despite cyclical variations in the broader global financial industry, Islamic financial institutions have generally remained resilient and increased their relative market share in Bahrain. A global leader in Islamic finance, the Kingdom is home to the largest market for Islamic finance institutions in the Middle East, and is a pioneer in the development of the Islamic capital market with regular sukuk issuance by the CBB. Bahrain Islamic Bank, the Kingdom s first Islamic lender, commenced operations in Over the next decade, an number of Sharia-compliant institutions were set up in the Kingdom. Bahrain s position in Islamic finance is further strengthened by the presence of a number of multilateral standard setting and support institutions for Shariah-compliant financial services. The Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) set up its headquarters in Manama in Nearly a decade later, it was followed by a number of other infrastructure institutions including the International Islamic Financial Market (2001), General Council for Islamic Banks and Financial Institutions (2001), and the Islamic International Rating Agency (2005). In October 2012, Thomson Reuters, one of the world s leading names in financial services and a leading source of market information for businesses and professionals, announced the establishment of its Global Islamic Finance Hub in Bahrain. Due to the proactive approach pursued by the CBB in support of Islamic financial services, Bahrain has also been a global pioneer of bespoke regulation for such services. The government adopted a set of industry-specific regulations in Issued in 2005, Volume 2 of the CBB Rulebook provides a comprehensive regulatory framework for Islamic financial institutions in Bahrain. Furthermore, Islamic licensees are subject to a number of national laws, such as the Financial Institutions Law of 2006 and the Bahrain Anti Money Laundering Law of As Bahrain s sole regulatory authority for Islamic finance, the CBB introduced a new module on the sector in Volume 2 of the CBB Rulebook. The new module establishes internationally accepted best practices in Risk Management (RM) for Islamic bank licensees. With effect from early 2013, the RM module s principles are classified under six categories: credit risk, market risk, equity investment risk, liquidity risk, rate of return risk, and operational risk. In 2006, the CBB established the Waqf fund, maintaining Bahrain s position at the forefront in the development of Islamic finance. Through this facility, the CBB funds research, education, and training in the field. This is undertaken alongside the joint development of new industry standards with other relevant stakeholders. Islamic banks As of June 2013, the CBB has issues operating licenses to 24 Islamic banks. While wholesale investment firms operate as offshore entities with limited access to the domestic economy, retail banks cater to the domestic demand for Shariah-compliant products. The Islamic finance sector has experienced rapid growth over the past decade. The consolidated assets of Islamic banks increased more than 12-fold from USD1.9bn in 2000 to USD25.8bn in 1Q13. Thereafter, Islamic banks have been growing in size relative to conventional banks, highlighting their resilience and untapped growth potential even during challenging economic times. The share of Islamic bank assets in total assets has risen to 13.2% in 1Q13 from1.8% in 2000, indicating robust growth in the segment. 88

91 ECONOMIC YEARBOOK 2013 Figure 104: Breakdown of banking sector assets (2000 1Q13) Source: Central Bank of Bahrain (Statistical Bulletin) The real estate sector boom prior to the financial crisis significantly contributed to the expansion in the Islamic finance industry. Shariah principles necessitate a physical asset-financed model, and Islamic finance institutions resorted to real estate as a preferred asset class during the initial development of the sector. Growth in Islamic banks accelerated 30 50% between 2004 and 2008, surpassing that in the conventional banking sector. While the subsequent real estate correction affected many Islamic institutions, the impact of the financial crisis on Islamic retailer banks was lower than that seen on wholesale banks. Figure 105: Growth of total banking assets (%), Q13 Source: Central Bank of Bahrain (Statistical Bulletin) 89

92 KINGDOM OF BAHRAIN Shariah-compliant investment products Since the first issuance of sukuk in 2001, the CBB has been a regular issuer of Islamic debt instruments. Short-term sukuk include monthly issuances of BHD18mn Sukuk Al Salam (three-month tenor) and BHD20mn Sukuk Al Ijara (Islamic leasing securities, with a six-month tenor). As of July 2013, the central bank issued a total of 146 Al Salam sukuk and 94 Al Ijara sukuk. The CBB had also issued 19 longterm Sukuk Al Ijara by the end of In Jul 2012, a BHD180mn issue with a five-year tenor was oversubscribed by 200%. The CBB also undertakes international issuances. The fourth issue (a sevenyear USD750mn sukuk) was placed by the CBB International Sukuk Company in November The sukuk is listed on the London Stock Exchange and tradable in the GCC and Malaysia. The issue was significantly oversubscribed with an order book of USD1.8bn. The secondary market architecture for Islamic financial products has developed gradually in recent years. BHB lists most long-term sukuk in the Kingdom. These include three CBB Ijara Sukuk issues and two corporate sukuk. The BFX, launched in 2011, among other things operates an Islamic division, Bait Al Bursa. Regionally, it is the first dedicated platform to offer exchange-traded solutions in the Islamic finance market. e-tayseer, a fully automated platform essentially offering a liquidity management solution to facilitate Murabaha transactions, is expected to be the first Islamic financial product on the BFX. The outlook for Bahrain remains strong for its role as a key player in the regional and global Islamic financial industry, driven by a skilled financial workforce and a leading range of innovative and sophisticated Shariah-compliant solutions. However, the industry remains fragmented, which has limited the competitiveness of several players beyond the domestic context. As a result, the CBB has encouraged market consolidation to enable firms to diversify capital resources. In January 2013, the merger of three Islamic investment banks Capivest, Elaf Bank, and Capital Management House strengthened their balance sheets with consolidated shareholder equity of around USD350mn and assets of over USD400mn. 90

93 ECONOMIC YEARBOOK 2013 Asset management The fund management industry in Bahrain traces its origins to 1980s, with the first locally incorporated fund established in The Kingdom has since established itself as an important fund management hub in the region. According to the CBB, there were 2,811 funds being managed in Bahrain as of 1Q13 (including open-end and close-end funds), 0.75% more than the total of 2,790 funds a year before. The total net asset value (NAV) of funds remained fairly unchanged at around USD8.4bn in 4Q12 (USD9.2bn in the previous year). According to the most recent annual consolidated data from the CBB, there were 127 Bahrain-domiciled funds at the end of 2011, with USD5.0bn in total assets, whereas foreign funds totaled USD3.4bn (invested across 2,711 funds). Reflecting the importance of Islamic finance, Bahrain was home to 101 Shariah-compliant funds, with assets totaling USD1.7bn (locally domiciled and foreign funds). Figure 106: Total mutual fund assets under management in Bahrain (USD bn) Source: Central Bank of Bahrain The Bahrain fund industry experienced rapid growth during the economic boom of the past decade. Aggregate assets under management surged 308% to USD8.4bn from USD2.1bn between 1Q01 and 4Q12. However, the historic peak to date for assets under management was attained in 2008 when it reached USD18.1bn. Subsequently, reflecting global trends, a sharp correction was observed in 2Q08 and Despite the downward pressure on total fund assets due to the global crisis, the number of mutual funds distributed for sale in Bahrain consistently rose from 2004 to On the other hand, the number of new fund registrations has been declining since 2006, when it reached the highest level of 80 funds within the year. 91

94 KINGDOM OF BAHRAIN Figure 107: Number of mutual funds Source: Central Bank of Bahrain The ten largest locally incorporated funds in Bahrain collectively had USD993.1mn in assets under management as of Nov The two fixed income funds that top the list manage 50% of the total across the largest funds, whereas the remaining are equity funds. The fund managers domiciled in Bahrain have focused their investments mainly in the GCC region, with some funds investing more broadly in the MENA region. Besides equity and fixed income funds, Bahrain-domiciled funds include money market, sukuk, and hedge funds. Institutions dominate the investor base in the Bahraini funds industry. Individual investors accounted for just below 30% of the total fund assets, on average, from 2001 until 4Q12. This proportion had peaked at 70.2% of the total NAV in 3Q12, while it had reached USD8.73bn in absolute terms during 1Q08. In contrast, holdings among institutional investors peaked at USD11.9bn in 2Q08. As of December 2012, fund holdings of individuals stood at USD2.2bn, a slight contraction of 5.8% YoY, while institutional investor holdings grew 2.1% YoY to USD6.2bn Figure 108: Mutual fund investments Total assets by investor type (USD bn) Source: Central Bank of Bahrain 92

95 ECONOMIC YEARBOOK 2013 With regard to the distribution of funds in Bahrain, retail and wholesale banks recorded a decline in total assets managed after the financial crisis. As of December 2012, the fund assets of retail banks increased by 1.8% YoY to USD2.4bn, whereas wholesale banks experienced a 13.6% YoY drop to USD1.5bn. Assets in funds distributed by other institutions, including representative offices, grew by 4.2% and totaled USD4.5bn. Figure 109: Mutual fund investments Total assets by distributor (USD bn) Source: Central Bank of Bahrain Under the CBB Rulebook, Bahrain offers asset managers a distinctive regulatory infrastructure and a competitive taxation regime. The first formal rules governing mutual funds were introduced by the CBB in Since then, regulations have been developed further, in line with growing investor demand for greater transparency of Collective Investment Undertakings (CIU), especially regarding the underlying risks associated with investments in these products. Initially a module within Volume 6 of the CBB Rulebook, the regulations underwent further revisions in The CBB incorporated the feedback received from an industry-wide consultation in October 2011 and addressed issues such as corporate governance. The revamped framework, released in 2012 as Volume 7, enables fund sponsors and managers to capitalize on the tailor-made opportunities to suit the needs of investors. The CIU regulatory framework provides a wide range of vehicles that asset managers can distribute in Bahrain, within defined categories of Retail, Expert, Exempt, and Private. Each of these categories is regulated separately and tailored to specific characteristics, including targeted investor profiles, level of product sophistication, and the minimum capital requirements for investment. 93

96 KINGDOM OF BAHRAIN Apart from private funds, Bahrain is home to a number of important government funds. These include the Bahrain Mumtalakat Holding Company, which serves as the independent investment arm of the Kingdom, strategically managing non-oil and gas related assets. Established in 2006 and wholly owned by the government through the Ministry of Finance (MoF), Bahrain Mumtalakat holds a diversified asset portfolio of USD7.1bn in over 35 commercial enterprises across a range of sectors in the Bahraini economy including aluminum production, financial services, and real estate (as of June 2012). Pursuing the government s initiatives of value-enhancement, increased transparency, and operational excellence, Bahrain Mumtalakat has been rated as the second most transparent sovereign wealth fund in the Middle East 54. The Social Insurance Organisation (SIO), one of the largest institutional investors in the region, was established in 2008 through a merger between the General Organisation for Social Insurance (GOSI) and the Pension Fund Commission (PFC). Bridging the gap between the public and private sectors, SIO manages the Kingdom s largest pension funds. In early 2013, SIO announced the launch of Osool Asset Management Company (Osool), an independent organization set up to manage the former s financial assets. Regulated by the CBB and MOIC, Osool aims to pursue an investment strategy to diversify assets managed away from low-return bank deposits while minimizing risks. Insurance and takaful The Bahraini insurance sector traces its origins back to the 1950s, when a group of taxi drivers formed the country s first mutual insurance company, securing coverage for their vehicles within a legal framework. Motivated by Bahrain s position as a regional center of trade, foreign insurance companies arrived from the UK, the US, and India. This foreign presence encouraged the development of domestic firms, such as Zayani Group, thereby increasing competition in the insurance market. In 1961, American Life Insurance Company (ALICO) was the first insurer to be granted a license for offering long-term life and accident insurance. In 1969, Bahrain Insurance Company was the first established insurer to become a public shareholding company. Since then, Bahrain s insurance industry has expanded at a steady pace and has been registering double-digit growth, in line with the significant developments in the financial industry. Historically, the GCC insurance sector has been small and underdeveloped by global standards in terms of most key indicators. The Bahraini insurance market contributed around 1.83% of the total GCC insurance premiums in Despite the small volume, the industry grew rapidly in line with the expansion in the broader financial market prior to Similar to its global counterparts, the insurance market in the GCC was impacted by the financial meltdown. However, growth has continued beyond , reflecting the resilience and growth potential of the market (albeit at a slower pace). However, the large exposure of some insurance companies to real estate and equity investments has led to some structural challenges. 54 Based on the Linaburg-Maduell Transparency Index 55 Alpen Capital GCC Insurance Industry Report

97 ECONOMIC YEARBOOK 2013 History of the Bahraini insurance market Bahrain s insurance market encompasses 151 insurance firms and organizations (as of Feb 2013), including 27 locally incorporated entities that are limited to offshore operations. There are 20 locally incorporated insurance firms in Bahrain, including two reinsurance firms and three retakaful firms, while foreign firms include 11 insurance firms. Evolving with the regional and local demand for Shariah-compliant financial services, Bahrain s insurance sector also incorporates six domiciled takaful and two retakaful firms. Other companies represent ancillary services such as insurance brokers, loss adjusters, actuaries, and insurance consultants. Total gross premiums in the Bahraini insurance industry grew by 2.1% YoY from BHD210.5mn to BHD214.9mn in 2011, underpinned by a 31% surge in engineering insurance along with a 10% increase in medical insurance from Medical policies are increasingly being incorporated as part of the benefit packages that companies offer to employees. The outlook for the Bahraini insurance market and the GCC in general remains positive. Recent figures indicate penetration in Bahrain stood at 2.3% in 2012 as compared to 2.2% in The GCC average was a much lower 1.1% in Across the region, penetration rates are well below the global average of 6.5%. This, coupled with low insurance density, suggests an untapped market potential. Figure 110: Bahrain insurance market (gross premiums, BHD mn) Source: Central Bank of Bahrain Insurance Market Review Swiss Re World Insurance Report 2011 and Alpen Capital GCC Insurance Industry Report

98 KINGDOM OF BAHRAIN Motor insurance was the single largest segment in the insurance market in 2011, largely due to the mandatory status of vehicle insurance. With BHD55.6mn in premiums, the motor segment was responsible for 26% of the gross written premiums. Long-term insurance was the second-largest segment with BHD48.9mn in written premiums. It represented 23% of total written premiums along with the highest retention ratio of 91% in 2011, up from 69% in The third-largest segment is fire, property and liability insurance (18%). This product category recorded 8.4% growth in total premiums to BHD38.6mn in Finally, medical insurance, and marine and aviation insurance accounted for 16% and 3% of the written premiums, respectively, in Other smaller segments comprised 14% of the total gross premiums and included areas such as miscellaneous financial losses and engineering insurance; the latter registered the highest annual growth of 31% in 2011 compared to other segments. Figure 111: Bahrain insurance market (gross premiums in 2011) Source: Central Bank of Bahrain Insurance Market Review 2011 The need for Sharia-compliant insurance (takaful) has been reflected in the general expansion in the insurance sector and is also connected with developments in the Islamic lending market. As of February 2013, six takaful and two retakaful companies existed in Bahrain. The takaful industry increased at a compound annual pace of 35.73% over , far outpacing growth in the conventional insurance sector (11.91%). Gross contributions in Bahrain s takaful industry stood at BHD40.2mn in 2011 compared to BHD1.9mn in Takaful s share of total gross written premiums/contributions has expanded more than six-fold from 3% in 2001 to 19% in

99 ECONOMIC YEARBOOK 2013 Figure 112: Takaful insurance industry, Gross contributions and gross claims (BHD mn) Source: Central Bank of Bahrain Growth in the Bahraini insurance market and the increase in the number of takaful firms in recent years has necessitated the development of a reinsurance and retakaful market. As of February 2013, there were four conventional reinsurance firms, along with two retakaful firms. Gross premiums/contributions from the reinsurance and retakaful industries increased by 8% YoY to BHD349.5mn in 2011 from BHD323.0mn in With significant growth of around 36%, gross claims stood at BHD272.8mn, according to the 2011 data published by the CBB. Licensed by the CBB in 2006, Hannover Retakaful Company is the first in its line of business to start operations in Bahrain, joined two years later by ACR Retakaful Company. Gross contributions of the two retakaful firms rose 10.3% to BHD86mn in 2011 from BHD78.1mn the previous year. The retakaful industry accounts for 25% of the total reinsurance and retakaful premiums/contributions. Figure 113: Reinsurance and retakaful firms ( ) Gross premiums/contributions (BHD mn) Source: Central Bank of Bahrain 97

100 KINGDOM OF BAHRAIN A comprehensive regulatory framework has supported robust growth in the insurance industry over the past few years. The CBB formulated the first complete insurance rulebook in 2003, when it assumed the responsibility to regulate and supervise the industry and establish Bahrain as an insurance center. Implemented in 2005, the rulebook was aligned with the core principles of the International Association of Insurance Supervision (IAIS). When the CBB became the unified financial service regulator in 2006, the insurance regulations were introduced in Volume 3 of the CBB Rulebook. Among other things, the volume provides business standards to promote the resilience of the insurance system, reporting guidelines that encourage transparency and accountability, and enforcement and redress for the protection of insurance policyholders. Manufacturing With a large and diverse domestic and expatriate workforce, an excellent logistics infrastructure, and an attractive investment environment, Bahrain provides several opportunities and advantages to businesses seeking to establish a regional manufacturing presence. These factors have helped increase real manufacturing output by 90% over the past decade. In 2012, the manufacturing industry constituted the third-largest sector after hydrocarbons and financial services, contributing 15% to real GDP and 13% to total employment. Non-oil manufactured goods comprised 20% of Bahrain s total goods exports. Figure 114: Manufacturing s contribution to GDP, exports and employment in 2012 Source: Central Informatics Organisation, Social Insurance Organisation, Labour Market Regulatory Authority *Excluding refined petroleum products 98

101 ECONOMIC YEARBOOK 2013 Figure 115: Composition of manufacturing in 2011 Source: Central Informatics Organisation The Bahraini manufacturing sector is highly concentrated. Three main industries accounted for nearly 60% of the manufacturing output in These industries and their contributions to total nominal manufacturing output are mentioned below. 1. Basic metals (23%): Aluminum production accounted for 87% of the basic metals industry in 2011, while iron and steel manufacturing made up the remainder. Alba is the main upstream aluminum producer in Bahrain, accounting for 73% of the total aluminum production 57. Midal Cables, Gulf Aluminium Rolling Mill Company (GARMCO) and Bahrain Aluminum Extrusion Company (Balexco) are midstream and downstream producers. Gulf Industrial Investment Company is the main producer of iron ore pellets, while SULB is engaged in the manufacture of heavy steel sections. 2. Refined petroleum products (21%): Bapco, the main producer of refined petroleum products, accounted for 83% of the total output of refined petroleum products in The company refines over 260,000 barrels of crude oil per day into LPG, gasoline, jet fuel, ultra-low sulfur diesel, fuel oil, naphtha, asphalt and heavy lube distillate. BANAGAS contributed 16% to the total refined petroleum production and produces naphtha, propane and butane. Bahrain Lube, which produces lube-based oil, was responsible for the remaining 1%. 3. Chemical products (15%): Gulf Petrochemical Industries Co (GPIC) was responsible for 45% of the total chemicals output of the Kingdom in Its products include ammonia, methanol and urea. Plastic products and other chemicals such as paints and manmade fibers accounted for 55% of the total chemical output. Seven smaller subsectors comprised about 35% of the manufacturing output in These industries and their contributions to total nominal manufacturing output are as follows: 4. Food and beverages (9%): Grain mills and bakeries constituted 58% of food and beverages manufacturing, while dairy products and other drinks accounted for 36%. 57 Total aluminum production includes upstream, midstream and downstream production 99

102 KINGDOM OF BAHRAIN 5. Non-metallic mineral products (9%): This segment was dominated by glass and building materials. 6. Fabricated metal products (6%): This refers to the manufacture of storage tanks, and welding and assembling non-machinery metal products. 7. Clothes and dyeing (3%) 8. Publishing, printing and media (3%) 9. Vehicle and shipbuilding (3%) More than 50% of the industrial output in Bahrain is generated by four main producers: Alba and Gulf Industrial Investment Company (GIIC), which are engaged in basic metal production, Bapco (refined petroleum production) and GPIC (chemical production). Alba Alba is a regional pioneer in aluminum production, having originally launched operations in 1968 as well as one of the world s largest smelters. Alba s high-grade output has created significant opportunities in downstream aluminum manufacturing for the automotive sector. In 2005, Alba launched its fifth potline, which dramatically increased the production capacity. In the past six years, the company s average annual production has exceeded 860,000 tons, peaking at nearly 890,217 metric tons in 2012 with a sixth production line currently under consideration. Figure 116: Aluminum production (metric tons) Source: Aluminum Bahrain, Central Informatics Organization 100

103 ECONOMIC YEARBOOK 2013 Alba s main products include standard and T-ingots, extrusion billets, rolling slab, properzi ingots, and molten aluminum. Around 46% of the output is directed to Bahrain s downstream aluminum industry, while the rest is exported to regional and international customers in the Middle East, Europe, Far East, South East Asia, Africa, and North America. Figure 117: Aluminum s share in local consumption and exports (in 2012) Source: Aluminum Bahrain With an average metal purity of 99.84%, Alba s high purity grade molten metal has directly been used in midstream and downstream aluminum production which is offer the most diversified products in the region. The midstream sector is highly developed, consisting of GARMCO, BALEXCO, Midal Cables, Aluwheel and Bahrain Alloys Manufacturing Company (BAMCO). These firms export a wide variety of products, including aluminum rods, conductors, cold rolled coil, aluminum circles, alloys, and extrusion products used for doors and window frames, across the world. Bahrain has also developed the downstream sector. Aluwheel, which produces passenger car wheels, fully finished truck wheels (Tunawheels) and wheel alloy ingots, is engaged in exports to global original equipment manufacturers (OEM) and aftermarket customers. Another downstream company is Bahrain Atomisers International, a producer of aluminum powder and pellets. Alba s early success established a blueprint for other non-oil industries to follow, including a thriving downstream aluminum industry. The company is a major contributor to the social, industrial and economic development in Bahrain. Alba has over 3,000 employees, of which nearly 90% are Bahrainis. The company s shares are listed on the Bahrain and London exchanges. GIIC GIIC, wholly owned by Foulath Holding Company, has been operating in the Kingdom since The company produces high quality iron oxide pellets and is a market leader in the region with the only merchant pelletizing plant in the Arab World 58. In 2010, GIIC launched a second plant that increased capacity to 11mn tons per annum (tpa) and nearly doubled production from 3.5mn tpa in 2009 to 6.2mn tpa in 2010, 2011 and Due to its concept of importing iron ore as raw material and exporting pellets as finished product, GIIC is unique in the region and can be considered to be the only merchant plant as it is neither a part of an iron ore mining company nor a steel production industry

104 KINGDOM OF BAHRAIN Figure 118: Steel production (mn tons) Source: GIIC GIIC imports iron ores, the primary raw material, mainly from Brazil and exports iron pellets to Saudi Arabia, Qatar, Iran, India, Indonesia and Malaysia. GIIC is also expanding regionally as it has obtained licenses to build two plants in Egypt. Figure 119: GIIC s export destinations, 2012 Source: Gulf Industrial Investment Company Other basic metal companies SULB In 2010, United Steel Company (SULB), a USD1.2bn project to build a steel manufacturing plant, was launched. The project is a joint venture between Foulath Holding Company and Japan s Yamato Kohgo Company, and will be the region s only producer of beams, and medium and heavy structural steel sections. SULB is expected to have a 1.5m tpa DRI facility (pellets to be supplied by GIIC) and two 0.65m tpa casters for I beams, H beams, and large channels and angles. Construction of the facility is well under way and will become a vital link in the supply chain for Bahrain s construction industry in the future. The plant is projected to create around 1,700 jobs

105 ECONOMIC YEARBOOK 2013 UNIROL Universal Rolling Company (UNIROL) is a construction steel plant that started commercial production in December UNIROL s goal was to produce steel rebars (0.2mn tpa) that conform to the British Standard Products. The majority of the company s output is directed to the domestic market, catering to major government infrastructure projects and key private sector projects in Bahrain and the GCC region. Bapco Bapco s refinery, the oldest in GCC and one of the largest in the Middle East, refines over 260,000 barrels of crude oil daily. About one-sixth of this crude originates from the Bahrain Field and the remainder is pumped from Saudi Arabia through pipelines extending 27 km over land and a further 27 km under water before reaching northwest Bahrain. Figure 120: Refined petroleum and gas production (USD mn barrel.) Source: National Oil and Gas Authority Bapco produces a wide variety of high value refined petroleum products including LPG, naphtha, gasoline, jet fuel, diesel, fuel oil and asphalt. In 2011, the company exported about 90% of its production to customers in the Middle East, India, Far East, South East Asia and Africa. The introduction of low sulfur diesel in 2007 also allowed the company to expand in the European and US markets. Figure 121: Refined petroleum products (in 2011) Source: National Oil and Gas Authority 103

106 KINGDOM OF BAHRAIN Bapco is planning to expand its facility at a cost of USD5bn to compete with top refineries in the Middle East and Asia-Pacific regions. The primary goal is to boost capacity up to 450,000 b/d and improve the range and quality of its products and processes by focusing on higher value-added products. GPIC The petrochemical industry is the second-largest manufacturing subsector in Bahrain after aluminum and became a major industry after the establishment of GPIC in The company began operations as a joint venture of GCC member states for manufacturing fertilizers and petrochemicals by utilizing Bahraini natural gas as a feedstock. The company s main shareholders to date include Bahrain NOGA, Saudi Basic Industries Corp (Sabic), and Petrochemical Industries Co of Kuwait, each holding one-third of equity capital. GPIC manufactures methanol, ammonia and urea products, which are distributed to customers worldwide. In 2011, the company set a new annual record of producing 1.575mn tons of ammonia, urea and methanol the highest annual output in the company s history. Figure 122: Petrochemical production (mn tons) Source: National Oil and Gas Authority for , Gulf Petrochemical Industries Company for In 2011, GPIC s petrochemical exports included 666,634 tn of urea, 435,286 tn of methanol and 71,536 tn of ammonia. The main export market for urea products was the US, accounting for 53% of total exports, followed by Australia and Pakistan (13% each), India (11%), and Thailand, South Africa and Vietnam (3% each). In 2011, the main export markets for ammonia were South Korea (53%) and India (47%). Transport and communications Bahrain s central location and strong regulatory framework have made it a regional hub for transportation and telecommunications. Over the past decade the sector has grown to become a leading driver of economic growth. Its contribution to the annual real GDP expansion peaked at 36.7% in The sector s share of GDP has risen significantly over the last ten years as a result of privatization in transport and regulatory reform in telecommunications. The sector accounts for 7% of Bahrain s GDP in The slowdown in growth observed post 2009 is most likely due to the global downturn. However, the sector registered significant recovery in

107 ECONOMIC YEARBOOK 2013 Figure 123: Economic indicators for telecommunications and transport Source: Central Informatics Organisation, Labor Market Regulatory Authority, Economic Development Board analysis Telecommunications The telecommunications sector in Bahrain has historically been dominated by the country s first telecommunications company, Batelco, which began operations in Over the past decade, the sector has benefited from a number of reform initiatives. In 2002 Bahrain implemented its telecommunications law which included the establishment of an independent Telecommunications Regulatory Authority (TRA) as the industry regulator. The TRA s objective is to liberalize the telecommunications sector and protect the interest of subscribers and consumers as well as foster transparency and quality assurance. Following the launch of the sectoral reforms, two telecommunication companies have entered the market as direct competitors to Batelco; Zain (a rebranded version of MTC Vodafone) and VIVA (owned by STC Group of Saudi Arabia) entered Bahrain s market in 2004 and 2010 respectively. Both began as mobile service providers but eventually expanded to include fixed line and broadband services. The TRA liberalization agenda has driven robust growth in sector. Growth in telecommunications reached 12.8% YoY in It was responsible for 49% of total Transport and Communications sector revenue in 2007, a figure that rose further to 60.8% in Its contribution to real GDP stood at 4.1% the same year

108 KINGDOM OF BAHRAIN Liberalization efforts in the telecommunications sector have contributed to significant employment growth, taking the total number of jobs in the sub-sector to a total of 2,700 as of This marked a 50% increase since the launch of the liberalization policies in Bahrainization in this sector is also amongst the highest in the country, standing at 80% as of This is mainly due to the sector s high productivity and reliance on skilled employment. The sector also boasts a high female ratio of 28% relative to a workforce average of 21%. Figure 124: Telecommunications revenue in BD mn and growth Source: Telecommunication Regulatory Authority, Economic Development Board analysis Figure 125: Employment in telecommunications sector and growth Source: Telecommunication Regulatory Authority, Economic Development Board analysis Growth in demand for telecommunication services in Bahrain has been accelerating since the beginning of the decade. The large demand for telecommunication services is reflected in the Kingdom s internationally high penetration rates, which were achieved over a relatively short period of time. As of 2Q12, broadband penetration reached 34%, with 60% of subscribers belonging to the mobile users category. All 413,000 Internet subscribers in Bahrain are registered as broadband users. Mobile penetration rates reached 158% in June 2012 with over 1.9mn mobile subscriptions after the third mobile operator (VIVA) launched its services in

109 ECONOMIC YEARBOOK 2013 The increasingly competitive market place pushed the overall growth in domestic calls to 82% and in SMS to 175% in The composition of the workforce in Bahrain, which is approximately 70% expatriate, is an important growth driver for the international calls segment. This, alongside with the downward trend in international call prices, led to a growth of 35% in international calls in 2010 and stability in 2011 even in the face of the growing popularity of free Internet calls. 84% of all outgoing international calls were made to South Asian countries, while neighboring GCC countries were the second most important destination. The popularity of calls to South Asia reflects the presence of expatriate workers from the region while regional calls are a result of Bahrain s role as a regional tourism destination. Figure 126: User growth Source: Telecommunication Regulatory Authority Transportation As the GCC country with the shortest travel time between seaports, airport, commercial and residential areas, Bahrain holds a highly competitive position regionally in terms of transportation efficiency and speed. Bahrain is 25 minutes away from Saudi Arabia through the King Fahad Causeway and a proposed causeway project is due to link the country to Qatar. Bahrain s national carrier, Gulf Air, which originally began operations in 1950, provides competitive connectivity within the region as well as internationally. The country s logistics infrastructure further includes a dedicated logistics zone and modern port facilities. This infrastructure makes Bahrain a hub for trade and tourism with high potential for further growth. 59 Road and rail Bahrain s modern road infrastructure boasts one of the highest percentages of paved roads as a share of total roads globally, at 82% 60. However, vehicle density in the Kingdom is also very high by international standards at 537 per 1,000 people, causing strain on Bahrain s infrastructure despite rapid developments over the past decade. The high number of personal vehicles is partly attributable to a relatively rudimentary public transportation system and highly subsidized fuel prices. 59 Economic Development Board s projections 60 World Bank database 107

110 KINGDOM OF BAHRAIN Figure 127: Paved roads (% of total), 2009 Source: World Bank In order to manage environmental concerns from high motor vehicle usage and the increasing costs of traffic management, the government launched an initiative to improve and expand the public transportation system with the intention of complementing the privatization efforts of Bahrain s public transportation. A new bus system is expected to commence operations in early 2014 and offers additional and intermediate routes, upgraded stations, control centers and traffic management mechanisms. To further alleviate transportation issues and promote growth, Bahrain is expected to be linked to the emerging GCC railway network as part of a USD 4.4bn project. 61 The planned USD2.9bn Friendship Bridge between Bahrain and Qatar will be part of the network. In addition, through the road link between the two countries, travel time is expected to be reduced from over four hours to half an hour. Aviation Bahrain is an established aviation hub in the Gulf region with the establishment of its national carrier, Gulf Air, dating back to The competitive position of Bahrain as an aviation hub is evident by choice of several international airlines to base their regional headquarters in Bahrain, including Lufthansa, Cathay Pacific and Air India. In spite of a global downturn and intense regional competition in the transport sector, the aviation sector has been highly resilient in recent years. The growth of the sector slowed down in 2009 before a 12.4% correction in passenger numbers in A strong recovery with an 8.8% increase in passenger traffic was seen in Ministry of Transportation 108

111 ECONOMIC YEARBOOK 2013 Figure 128: Total airline passenger movements Source: Civil Aviation Authority The display of continuity has been even more obvious in the case of aircraft movements. The number of aircraft landing at the Bahrain International Airport (BIA) rose at an annual average pace of 5% over the years The positive trend was only temporarily disrupted by a 2.8% dip in A subsequent recovery took the total number of flights to almost 106,000 in 2012, which was only slightly short of the 2010 peak. Figure 129: Total aircraft movements Source: Civil Aviation Authority 109

112 KINGDOM OF BAHRAIN The disruptions caused by the global economic downturn have been more pronounced in the area of cargo flow which have eroded since their 2007 peak. A 15.4% fall in 2011 was due to a 14% drop in uplifted cargo (leaving the country) and a 9% drop in cargo discharged (entering the country). It was followed by a 6% decline in The Bahraini International Airport has also served as a logistics hub servicing large international companies particularly DHL which has a subsidiary of its aviation sector based in Bahrain and carries the lion s share (57%) of the cargo volume. Figure 130: Total air cargo and mail, tons Source: Civil Aviation Authority Bahrain s fundamentals point to considerable growth potential for the aviation sector, reflected the project to develop the Bahrain International Airport which is due to start in 2013 and will be undertaken in two stages. Firstly, the existing structure will be redeveloped in line with modern technical standards and design, and secondly, the airport s capacity of both passengers and aircrafts will be expanded. The development project has an estimated budget of USD363mn while the expansion is estimated to cost around USD458mn. The project is expected to result in a 50% increase in capacity from around 9mn to 13mn people in order to meet expected growth. Sea ports In attempts to further develop its position as a logistics hub in the northern Gulf region, Bahrain launched its new Khalifa Bin Salman Port (KBSP) in Built on 110 hectares of reclaimed land, the port has a 1,800m quay including a 900 sq m container terminal and is served by four 61-meter post-panamax cranes. The facility is currently operated by APM Terminals with a 25-year concession agreement, supervised and regulated by the Ports & Maritime Affairs of the Ministry of Transportation, and is a hallmark of successful public private partnership in Bahrain. The current throughput capacity of the KBSP stands at 1.1mn TEU (20-foot equivalent units) per year with plans to expand to 2.5mn. Following the opening of KBSP, the old Mina Salman Port has re-focused on specialized commercial operations, including less-than-container-load (LCLs) and warehousing for the public and private sector

113 ECONOMIC YEARBOOK 2013 Figure 131: Container throughput (Khalifa Bin Salman Port and Mina Salman Port) Source: Ports and Maritime Affairs This restructuring and expansion of Bahrain s port facilities has helped drive substantial growth in maritime trade. The container throughput of Bahrain s ports has almost doubled since the opening of the KBSP in 2009 having grown over 87% in the past four years. The increased volumes have gone hand in hand with increased crane productivity from a monthly average of 32 moves in 2011 to 35. While container throughput has experienced large growth in recent years, we see the opposite trend in general cargo, or break bulk cargo. This seems to be in line with general global trends moving away from loose homogenous products (break bulk) towards more container based trade. Figure 132: General cargo throughput (Tons) Source: Ports and Maritime Affairs 111

114 KINGDOM OF BAHRAIN General cargo volumes in Bahraini ports have declined sharply from 2009 to This is reflective of the drop in overall global trade but can more specifically be associated with a regional undersupply of building materials, particularly cement. The undersupply, in conjunction with the post-2008 slowdown in the construction sector, contributed to the reduction of incoming cargo. Export volumes were also hit by the cyclical downturn. Having subsequently remained fairly flat, the general cargo throughput of Bahrain posted a robust 39% YoY increase in the first half of Reflecting Bahrain s role as a regional hub, transshipment volumes rose by an annual 21% in the first half of Further growth is expected in 2013 in order to reach the transshipment target of 389,009 TEUs 62 in Real Estate and Construction Broadly matching the experience of its regional neighbors, the Bahraini real estate and construction sectors experienced a very sharp cycle over the past decade. Six years of history rapid growth between 2002 and 2008 was driven by a surge in commercial, luxury and freehold projects. However, the global downturn triggered a strong market correction. After a period of decline, the market rebounded in 2012, partly due to higher construction activities by the government. The authorities launched a comprehensive housing program aimed at meeting the growing demand for social housing, while private developers increasingly refocused their attention on gaps in the real estate market, offering more price-sensitive housing to mid-income Bahraini households. Real estate and construction were established as important segments of the country s non-oil economy during the past decade. In real GDP terms, the combined contribution of the two sectors stood at 11% in 2012, marginally down from 13.7% in Despite a high contribution to total employment, the 26% Bahrainization rate is relatively low due to a large number of low-cost migrant labor in the construction sector. Figure 133: Contribution of construction and real estate sectors to GDP, employment, and Bahrainization rate (in 2012) Source: Central Informatics Organisation, Labor Market Regulatory Authority, Social Insurance Organisation 62 Ports and Maritime Affairs, KBSP Performance Half Year Report 112

115 ECONOMIC YEARBOOK 2013 A number of factors could be used to explain the property market boom in the past decade. A combination of rising oil prices between 2002 and 2008, followed by an increase in pro-cyclical government spending (on higher oil and gas revenues) led to an improvement in the liquidity situation. Similarly, the decision to allow foreign nationals to acquire real estate 63 in parts of the island acted as a catalyst for a private sector-led real estate boom. Between 2002 and 2008, construction sector output increased by 292% in real terms, while the real estate sector grew by 53%. Employment in the two sectors also increased substantially, particularly in the construction sector, where the total number of jobs doubled. By the end of 2008, the real estate market in Bahrain as well as other GCC countries experienced a sharp decline and several projects were halted or faced delays. As of 2011, the number of new construction permits fell 37% compared to Permits for renovations and additions declined 17%, while reclamation permits contracted from 36 in 2008 to 4 in Figure 134: Construction permits Source: Ministry of Municipalities and Agriculture Affairs A fall in oil prices and the global financial crisis were the key reasons for an end to the property boom. Investors lost confidence in real estate investments and real estate-backed financial transactions. Expectations of an increase in future land prices, which had initially driven demand and speculation ended abruptly. Meanwhile, numerous freehold development projects came to market after the downturn. This, in turn, led to a further decline in prices due to oversupply. The price effect of the real estate boom is evident from the average price of traded land permits that grew sevenfold between 2001 and the peak of Government of Bahrain enacted various laws, such as the freehold property law of 2003, which allowed foreigners to own property across designated areas in the Kingdom. 64 It should be noted that this data includes different types of traded properties, including industrial, residential, and commercial lands, but nevertheless, is a useful general indicator of real estate prices in the past decade

116 KINGDOM OF BAHRAIN Figure 135: Average price of traded land permits (in BHD) Source: Survey and Land Registration Bureau Despite the post-boom slowdown, there was fairly a broad-based bottoming out of the market in 2012 followed by the emergence of pockets of renewed growth. The sector was estimated to have grown 4%, mainly due to increasing public spending on social housing projects and a refocusing on low to middle-income housing projects by private developers. The state budget draft incorporates a BHD580mn program to build 16,000 new houses. Of this, nearly BHD340mn is expected to be funded through the GCC Development Program 65. Figure 136: Annual growth rate in the construction and real estate sectors Source: Central Informatics Organisation, Economic Development Board analysis 65 GCC Development Program is a GCC-pledged USD10bn financial aid aimed at upgrading housing and infrastructure in Bahrain over 10 years

117 ECONOMIC YEARBOOK 2013 Social housing In recent years, demand for social housing 66 has increased considerably with the official waiting list for government housing now at an estimated 15 years with more than 53,000 applications. On average, 8,000 Bahraini households apply for social housing each year. In order to meet the growing demand and achieve the goal of reducing the waiting time for social housing to five years, MoH launched a BHD580mn program consisting of several housing projects with the aim of catering to Bahraini households that have submitted applications prior to In 2011, the Ministry provided 6,000 homes and was targeting the construction of 7,000 homes in Furthermore, it announced plans for developing 20 projects with 8,717 social housing units in the coming years. Future social housing projects Governorate Area Number of units Housing type Capital Juffair 60 Apartment Um al Hassam (Phase 2) 160 Apartment Nabih Salih 225 House Muharraq Arad 183 House Muharraq Apartment Samaheej (Phase 3) 105 House Northern Jannusan 92 House 16 Land plot Hamala 233 House Karranah 139 House Shahrakan 202 House Shakhora 300 House Central Isa Town 288 Apartment Tubli 291 House 320 Apartment Sitra (Phase 1,2,3) 1,500 House Southern Jaw (Phase 2) 95 House Askar 550 House Bar Al Dur 1,560 - Al Jazayer 2,350 - Total 8,717 In an important new approach designed to boost housing availability, the government signed a publicprivate partnership with Naseej Properties to build 3,100 social housing units and 1,000 affordable housing units at a cost of BHD208mn. The government is handling the primary infrastructure (worth BHD155mn) for the project, while the rest will be borne by Naseej Properties. The social housing units will be allocated to applicants on the government s social housing waiting list and the remaining 1,000 units will be available for sale to Bahraini households. 66 Social housing units, in the form of a house or apartment, are offered to Bahraini households earning less than BHD900 per month and are usually offered to the eligible households under a rental agreement, which is capped at 25% of the household s monthly income

118 KINGDOM OF BAHRAIN Apart from the direct provision of social housing, the government seeks to improve access to accommodation through special loans for qualifying families. Households earning BHD900 1,200 per month are eligible for a social housing loan. The terms of such loans have been revised recently, for example, Eskan Bank (which administers the government s social housing fund) has raised its maximum subsidized mortgage loan from BHD40,000 to BHD60,000 and has extended the maximum term of the mortgage from 25 to 30 years. In 2012, social housing loans totaling BHD40.7mn were granted to 322 Bahraini households. Since land prices have increased substantially in the past decade, the level of subsidized finance available is not always enough to cover the cost of a standalone house. The global economic downturn prompted a growing number of regional property developers to shift their focus from luxury projects to the more price-sensitive, middle-income housing projects. A growing proportion of houses are either fully attached or semi-attached to other houses with connecting walls. The projects offer homes in the price range of BHD42, ,000, with the cheaper units usually being fully attached homes. Figure 137: Residential projects in the pipeline offering affordable housing Projects Area Developer Units Price range (BHD) Buwaitat al- Fareej Sanad Capital Real Estate 85 42,000 85,000 Diyar Homes Muharaq Kuwait Finance House-Bahrain ,900+ Tubli Gardens Tubli Al Manara 57 90, ,000 Wahat al Muharaq Qalali Al Manara , ,000 Al Faridha I Al Markh Al Saraya Properties Company 50 79,500+ Janayin Al Hamala Al Hamala Al Manara , ,000 Al Dair Gardens Al Dair Aman Real Estate Development 57 75,000+ Jeyoun Bu Quwah Al Argan 18 69, ,900 Sanad Oasis Sanad Al Kobaisi , ,000 Source: [Economic Development Board team analysis] Diyar Homes, being developed by Kuwait Finance House-Bahrain, is part of Diyar Al Muharraq, one of the biggest mixed-use residential urban projects in the Kingdom. The project achieved major success in its Phase 1 launch in May 2012 with all 350 housing units that were released for sale purchased by customers within a month. The project is being marketed as affordable housing with home prices starting from BHD99,900. Another project marketed as affordable housing is Buwaitat Al Fareej in the Central Governorate, which is being developed by Capital Real Estate Company and financed by Eskan Bank. In line with other projects targeting the low- to mid-income market, developers have opted to build smaller houses with unit lot areas ranging from sq m and sale prices from BHD42,000 85,000. Trade Over the past decade, Bahrain s trade sector grew rapidly. The sector expanded 32.3% in 2004 and averaged 13.3% growth annually between 2001 and Since 2008, growth has slowed down and the sector actually experienced a contraction in As of 2012, the sector s total output stood at BHD470.4mn, which was 174.2% ahead of the 2000 level. Despite the robust growth, the trade sector remains a small contributor to the Bahraini economy, accounting for 3 5% of total GDP from and standing at 4.61% in

119 ECONOMIC YEARBOOK 2013 Figure 138: Trade sector s contribution to GDP ( ) Source: Central Informatics Organisation, Economic Development Board analysis Figure 139: Trade sector as % of GDP (2012) Source: Central Informatics Organisation, Economic Development Board Analysis The trade sector employed 127,403 people in , contributing almost 20% to total employment; thus, it was the second-largest employer after construction in that year. The proportion of employment in the trade sector as a share of total employment hovered at around 12-14% between 2002 and 2007, but jumped to 20% of total employment in Employment in the sector is largely composed of low-cost expatriate labor, with proportion of nationals standing at 18.8% in 2012, a slight decrease of 0.7 percentage points from Labour Market Regulatory Authority 117

120 KINGDOM OF BAHRAIN Figure 140: Trade sector s contribution to employment ( ) Source: Labour Market Regulatory Authority, Economic Development Board analysis Figure 141: Trade sector Growth, employment, and Bahrainization ( ) Source: Labour Market Regulatory Authority, Economic Development Board analysis Social and Personal Services Bahrain s social and personal services sector primarily comprises of private health and education services. The sector has been highly competitive and recorded one of the fastest and most consistent growth rates across any part of the Bahraini economy. Over the past decade, the annual pace of expansion consistently remained in the double digits, ranging between 10% and 20% a year. As of 2012, the total output stood at BHD553.3mn, accounting for 5.4% of total Bahraini GDP. Private education services constituted 35% (BHD191.2mn) of the sector s output, while private health services accounted for 23% (BHD127.7mn)

121 ECONOMIC YEARBOOK 2013 Figure 142: Social and personal services Output by segment ( ) Source: Central Informatics Organisation, Economic Development Board analysis The sector is characterized by high value-added employment as its GDP contribution was significantly ahead of its share of total employment. As of 2012, social and personal services employed 22,850 people, contributing 3.53% to the Kingdom s total employment. This marks a 35.0% growth from 2008, when there were roughly 17,000 employees. As of 2011, nearly 6,500 people were employed in private health services and around 3,000 in private education services. Bahraini nationals comprised approximately one-quarter of the employment in social and personal services in 2008 and They accounted for a significant 42.6% of employment in private education services in Figure 143: Social and personal services contribution to employment ( ) Source: Labour Market Regulatory Authority, Social Insurance Organisation, Economic Development Board analysis 119

122 KINGDOM OF BAHRAIN Government Services Government services in Bahrain include the provision of public health and education services. The sector has experienced strong growth over the past decade, expanding by 213% between 2002 and The sector s output stood at BHD1.23bn at the end of 2012, which marked growth of 12% YoY from However, this represented a slowdown from the previous year s 14% YoY growth, which marked the fastest annual increase during the period under review. Although the historically strong growth in government health and education has been slightly lower in recent years, growth in output has been underpinned by a rise in other government services. Figure 144: Government services Output by segment ( ) Source: Central Informatics Organisation, Economic Development Board analysis Nearly 58,147 employees were active in the government services sector as of Approximately onethird is employed in education (18, ) and around one-sixth in health services (9, ). The total number of employees in government services grew 4.2% YoY in 2012, well above the average (54,852). During the same period, as Bahrain s workforce more than doubled, while government employment remained relatively stable, resulting in a fall of the sector s contribution to total employment. The sector s employment has consisted predominantly of Bahraini nationals. Their share in total jobs varied between 80% and 91% during the period under review, making government services one of the most Bahrainized sectors in the economy. 68 Ministry of Education 69 Ministry of Health 120

123 ECONOMIC YEARBOOK 2013 Figure 145: Government services Contribution to employment, Source: Labour Market Regulatory Authority, Economic Development Board analysis Tourism Bahrain has a long history of attracting tourists from the region and abroad. The KIngdom offers a developed infrastructure of hotels, resorts, shopping malls, and restaurants that has further expanded in recent years. Efforts to develop the Kingdom s competitiveness in this sector have involved a number of new initiatives since the turn of the century. The Bahrain Grand Prix is a Formula One Championship race which became a key part of the global expansion of the Fédération Internationale de l Automobile (FIA). The event, sponsored in Bahrain sponsored by Gulf Air was launched at the purpose-built Bahrain International Circuit on 4 April It made history as the first Formula One Grand Prix to be held in the Middle East, and was given the award for the Best Organized Grand Prix by the FIA. The building of the Bahrain International Circuit in Sakhir was started in By the completion of the project, the circuit became the center of motor sports in the Gulf region, as it holds the annual Formula One race and many other races such as drag races, GT races, Formula 3 races and the Australian V8 Supercar. Recent initiatives for cultural tourism have gained international recognition. For instance, Manama held the status of Capital of Arab Culture in 2012 as part of UNESCO s cultural capital campaign and was named Capital of Arab Tourism in 2013 by the Arab Tourism Organization. In celebration of Bahrain s 2012 Capital of Arab Culture debut, the Ministry of Culture planned a year-long program of performances, seminars, and other events showcasing Arab culture. Each month provided a new focus area ranging from visual arts to poetry, and even the environment. The Spring of Culture festival in March hosted a variety of dance, music, and theatrical performances and brought internationally renowned musicians to the Kingdom. To support such events, the Bahrain National Amphitheatre opened its doors in November The facility is one of the largest of its kind in the region with a seating capacity of 1,001. World renowned artists, such as Yanni and Il Divo, recently performed at the amphitheater

124 KINGDOM OF BAHRAIN Reflecting its rich historical heritage, Bahrain is home to a number of museums, archeological sites, and other historic sites. Established in 1988, the Bahrain National Museum one of the oldest museums in the Gulf region is home to some of the oldest documents and artifacts in the region. The complex consists of two buildings and nine main galleries detailing culture, astronomy, and wildlife, among other subjects. The Bahrain Oil Museum commemorates Bahrain s prominence as the first Arab country to discover oil and the significance of oil in the development of the Middle East region. The Kingdom also has several forts, most notably the Bahrain Fort, which played a prominent role under the Portuguese rule and in the Islamic era. It was officially listed as a UNESCO World Heritage site in Business tourism Business tourism plays an increasingly important role in the Kingdom. The Bahrain Exhibition and Convention Authority (BECA) hosts a number of industry events and exhibitions. Landmark events include the annual Bahrain Boat Show and the bi-annual Bahrain Air Show, which is the island s largest exhibition. Other events in 2012 included Jewelry Arabia a gold, jewelry, watch and clock exhibition and the Autumn Fair, a consumer product exposition. Due to the growing importance of exhibitions and conferences in Bahrain in recent years, BECA is planning to expand its exhibition and conference space through the construction of the Bahrain Expo City 70. This would increase the net available exhibition space to 145,000 sq m from the current 16,000 sq m facility located in Manama city. This project is scheduled for completion by The Kingdom s tourism sector appears to have rebounded toward the end of 2011, and well into As of September 2012, total non-bahraini arrivals in the Kingdom grew 19.4% YoY. While the number of hotels increased 1% YoY in 2012, the number of hotel apartments fell 11.8% from the highest figure of 85 in The workforce in the hotel industry declined 0.6% YoY in 2011, while hotel performance grew significantly as of August According to a survey of 5-star hotels, tourism nights rose 11%, total occupants increased 30%, and occupancy rates grew 21%, albeit a slight fall of 13% was recorded in the average duration of hotel stays. Nonetheless, the 4-star hotel survey revealed a stronger performance (refer to the analysis below). According to the World Travel and Tourism Council, the tourism sector contributed BHD538mn to Bahrain s GDP in 2012, an increase of 8.5% from 2011 (BHD496mn) 71. Tourism 72 accounted for an estimated 4.9% of GDP in Furthermore, employment rose 1.58% from 2011, supporting around 32,100 employees in hotels, travel agencies, airlines, as well as restaurants and other businesses dealing directly with tourists. The sector s contribution to total employment stood at 5.2% in Ministry of Culture 71 Within the Kingdom s national accounts, tourism is proxied by the hotels & restaurants industry. In 2012, hotels & restaurants contributed BHD245.1mn, constituting 2.40% of total GDP for the year and an impressive growth of 13.6% YoY. 72 The global economic contribution of travel & tourism, as defined by the World Travel & Tourism (WTTC) in collaboration with Oxford Economics, is consistent with the United Nations Statistics Division-approved Tourism Satellite Account: Recommended Methodological Framework (TSA: RMF 2008), in terms of what is measured

125 ECONOMIC YEARBOOK 2013 Figure 146: Travel and tourism Direct contribution to GDP ( ) Source: World Travel and Tourism Council Figure 147: Travel and tourism Direct contribution to employment ( ) Source: World Travel and Tourism Council The rebound in the tourism sector in 2012 followed a difficult year in 2011, when arrivals fell 27% to 6.73mn from 9.28mn in Nonetheless, this sector witnessed positive growth during the preceding decade. Also, total arrivals rebounded to 8.06mn by the end of A vast majority of tourists were overland visitors from Saudi Arabia. The King Fahd Causeway accounted for 79.1% of the overall visitors to the Kingdom in 2012, compared to other ports of entry. Bahrain International Airport and Mina Salman, along with Shaikh Khalifa Bin Salman Port, accounted for 20.2% and 0.7%, respectively

126 KINGDOM OF BAHRAIN Figure 148: Non-Bahraini visitor arrivals ( ) Source: Central Informatics Organisation, Ministry of Culture As of 2012, there was a slight change in the demographics of non-bahraini visitors from the previous year. GCC nationals, Asians, and non-gcc Arabs continued to dominate the visitors market in 2012, jointly accounting for 88.2% of the overall arrivals. Figure 149: Arrivals by nationality (2012) Source: Ministry of Culture 124

127 ECONOMIC YEARBOOK 2013 The majority of tourist arrivals in Bahrain have consistently been for the purpose of leisure. Leisure-related arrivals grew 10.5% YoY in Arrivals for business activity, journalism, and other purposes rose 1.5%, 2.6% and 2.2%, respectively, in 2010 vis-à-vis Figure 150: Purpose of visit Source: Central Informatics Organisation, Ministry of Culture Figure 151: Purpose of visit 2011 arrivals (Jul 2011) Source: Central Informatics Organisation, Ministry of Culture, Economic Development Board analysis 125

128 KINGDOM OF BAHRAIN Hotels The number of hotels in Bahrain grew by 32.5% between 2001 and The number apartment establishments surged 142% since There has been a particularly pronounced upward trend for 5-star, 4-star, and 3-star hotels, while the relative standing of 1-star and 2-star hotels has declined. The latter establishments comprised more than 50% of the total hotels in Bahrain in 2001 which fell to around 16% in Figure 152: Number of hotels and hotel apartments Source: Ministry of Culture Figure 153: Hotels by tier in 2012 Source: Central Informatics Organisation 126

129 ECONOMIC YEARBOOK 2013 The relative economic importance of hotels has increased over the past decade even as the sectorial workforce contracted by 0.6% between 2010 and 2011 (from 9,783 to 9,725 employees). However, employment in the hotel industry grew 65% over The industry relies primarily and indeed increasingly on expatriate labor for its employment. While the number of Bahraini employees in the hotel industry fell 14% over , the number of non-bahraini employees increased 103%. Due to data limitations, our analysis on the hotel industry s performance is based on a survey of 5- and 4-star establishments 73 undertaken by the Ministry of Culture. Statistics generally reveal growth in As of August 2012, tourism nights in 5-star hotels increased 11%. The number of hotel occupants expanded 30% YoY and average occupancy rates grew 21% YoY. However, average stay showed a decline of 13% YoY. The performance of 4-star hotels was healthy; tourism nights grew by 61% YoY while the number of hotel occupants and average occupancy rates increased 55% YoY and 28% YoY, respectively. The average stay per occupant grew a marginal 4.9% YoY. Figure 154: Hotel statistics in 2012 (YoY growth) Source: Ministry of Culture, Central Informatics Organisation 73 Statistics provided by the Ministry of Culture, according to a monthly survey of hotel establishments 127

130 KINGDOM OF BAHRAIN Figure 155: Workforce in the hotel industry Source: Central Informatics Organisation, Specific Council for Training in Hotel and Restaurants Cruise tourism The 2012 cruise season in Bahrain commenced in November 2012 and ended in March 2013.The cruise season in attracted around 132,000 cruise passengers, the highest recorded in the Kingdom s history. While the number fell abruptly to about 36,000 passengers in the subsequent season, the number of cruise ships docking in Bahrain actually increased. In fact, during the season, the number of cruise ship arrivals grew 143% over the previous season. According to the Ministry of Culture, the number of cruise ships during the season increased 106% to 35. A total of 63,542 passengers arrived on cruise ships, marking a 76% improvement from the last season. Growth in cruise tourism is ascribed to an improvement in infrastructure. The new Sheikh Khalifa bin Salman port has the capacity to accommodate large cruise ships. It commenced operations in April 2009 and has contributed to the 600% growth in the number of cruise ships docking in Bahrain since then. Figure 156: Total number of cruise ships and passengers Source: Ministry of Culture 128

131 ECONOMIC YEARBOOK 2013 References Below is a list of the sources that were referred to during the preparation of this yearbook: 1. Profile of the economy a. Economic prospects Central Informatics Organisation (CIO) Economic Development Board (EDB) s analysis 2. Macroeconomic developments a. Monetary policy Central Informatics Organisation (CIO) Central Bank of Bahrain (CBB) b. Fiscal situation Bahrain s Ministry of Finance (MoF) Central Bank of Bahrain (CBB) Central Bank of Kuwait Oman s Ministry of National Economy Qatar s Ministry of Economy and Finance Saudi Arabia s Ministry of Finance United Arab Emirates National Bureau of Statistics 3. Financial markets Bahrain Bourse (BHB) Central Bank of Bahrain (CBB) Central Informatics Organisation (CIO) Ministry of Industry and Commerce (MOIC) Bahrain Financial Exchange (BFX) Deutsche Bank: GCC Financial Markets, Nov 2012 Saudi Arabian Monetary Agency (SAMA) British Bankers Association Kuwait Stock Exchange Muscat Securities Market (MSM) Qatar Exchange Tadawul (Saudi Stock Exchange) Abu Dhabi Securities Exchange (ADX) Dubai Financial Markets (DFM) 129

132 KINGDOM OF BAHRAIN 4. Foreign trade Heritage Foundation Fraser Institute World Bank Central Bank of Bahrain (CBB) National Oil and Gas Authority Central Informatics Organisation (CIO) 5. Social infrastructure a. Education sector in Bahrain Central informatics Organisation (CIO) OECD: OECD database Gender distribution of teachers (2009) Education at a Glance 2011 Human Development Report 2011 Global Competitiveness Report b. Healthcare Ministry of Finance (MoF) World Bank Economic Development Board (EDB) s analysis Ministry of Health Central Informatics Organisation (CIO) National Health Regulatory Authority c. Entrepreneurship Central Informatics Organisation (CIO) Ministry of Industry and Commerce (MOIC) Bahrain Development Bank (BDB) Tamkeen Bahrain Business Incubator Center Bahrain Investors Center Higher Education Council 6. International benchmarking a. Rating environment IIRA S&P Fitch 130

133 ECONOMIC YEARBOOK 2013 b. Bahrain global rankings performance Heritage Foundation 2012 Index of Economic Freedom Fraser Institute Economic Freedom of the World The United Nations Development Program 2011 Human Development Report The World Bank 2012 Logistics Performance Index Transparency International 2011 Corruption Perception Index UNESCO Education Development Index World Bank 2012 Doing Business Report World Economic Forum 2012 Financial Development Report World Economic Forum 2012 Gender Gap Report World Economic Forum Global Competitiveness Report World Economic Forum 2012 Global Information Technology Report World Economic Forum 2012 Global Enabling Trade Report World Economic Forum 2012 Travel and Tourism Competitiveness Report Yale University Environmental Performance Index 7. Individual sectors a. Oil Central Informatics Organisation (CIO) Labour Market Regulatory Agency (LMRA) Social Insurance Organisation (SIO) National Oil and Gas Authority (NOGA) Ministry of Finance (MOF) b. Financial services Central Bank of Bahrain (CBB) Economic Indicators, Statistical Bulletin, Insurance Market Review, CBB Review, CBB Rulebook, press releases Central Informatics Organisation (CIO) Labour Market Regulatory Authority (LMRA) National Bank of Bahrain (NBB) press releases Bahrain Mumtalakat Holding Company Social Insurance Organisation (SIO) Zawya Dow Jones Funds Monitor, Sukuk Monitor, Bonds Monitor, IPO Monitor S&P s ratings Fitch Ratings Economic Freedom of the Arab World, 2012 Annual Report Ernst & Young: Worldwide Corporate Tax Guide 2012 Alpen Capital GCC Insurance Industry Report 2011 Swiss Re World Insurance Report 2011 c. Manufacturing Central Informatics Organisation (CIO) Labour Market Regulatory Agency (LMRA) 131

134 KINGDOM OF BAHRAIN Social Insurance Organisation (SIO) Aluminum Bahrain (ALBA) Gulf Industrial Investment Company (GIIC) d. Transport and telecommunications Ministry of Transportation Economic Development Board (EDB) s analysis World Bank Civil Aviation Authority Ports and Maritime Affairs (PMA)Telecommunications Regulatory Authority (TRA) Central Informatics Organisation Zawya e. Construction and real estate Central Informatics Organisation (CIO) Labour Market Regulatory Agency (LMRA) Social Insurance Organisation (SIO) Ministry of Municipalities Affairs and Agriculture (MOMA) Survey and Land Registration Bureau (SLRB) Ministry of Housing f. Trade Central Informatics Organisation (CIO) Labour Market Regulatory Authority (LMRA) Social Insurance Organisation (SIO) g. Social and personal services Central Informatics Organisation (CIO) Ministry of Education Ministry of Health (MoH) h. Government services Central Informatics Organisationation (CIO) Labour Market Regulatory Authority (LMRA) Social Insurance Organisation (SIO) Ministry of Education Ministry of Health (MoH) i. Tourism sector Ministry of Culture, Tourism Sector World Travel and Tourism Council Central Informatics Organisation (CIO) Bahrain Exhibition and Convention Authority Zawya Investor World Heritage Convention, UNESCO 132WWW.BAHRAINEDB.COM

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