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