Bahrain strives to expand its role as a regional financial hub.
As the Covid-19 crisis drags on towards a new normal, Bahrain is moving forward with plans to improve growth in a post-pandemic economy. The growth in the country’s GDP sank in 2020 due to the crisis, but rebounded in 2021 to approximately 3.5% and will grow this year at about 3.2%, the World Bank forecasts.
The growth in the country’s GDP sank in 2021 but will improve this year to approximately 3%, driven by rising oil prices, according to Omar Al-Ubaydli, president of the Bahrain Economists Society. “That means the government has more money to spend, which means higher growth,” he says. Growth could drop to below 3% in 2023, he predicts, due to lower oil prices and reduced government spending, which would lead to lower consumption and reduced downstream spending.
Bahrain’s status as a financial hub is one of its many strengths, and its importance has increased with the kingdom’s need to diversify and reduce dependence on oil revenues. Other strengths include the United States-Bahrain Free Trade Agreement. Bahrain is one of only two Gulf countries with such a deal; the other is Oman. It also has a well-developed infrastructure, including port facilities, a well-educated workforce, tourism prospects aided by features such as Babylonian historical sites, and its close relationship with Saudi Arabia. That connection is boosted by the King Fahd Causeway, which links the two countries and facilitates trade between them. Plans call for another causeway, scheduled to open in 2027.
Support for the kingdom as a financial hub includes hosting the headquarters of the Accounting and Auditing Organization for Islamic Financial Institutions, which sets the international standards for Islamic finance, Al-Ubaydli explains. However, Bahrain has also benefitted from Lebanon’s misfortunes. As significant institutions shifted to Bahrain, Lebanon lost its status as a banking hub due to its political and economic difficulties. This trend will not likely reverse within the foreseeable future, as Lebanese banks have stopped lending and do not attract deposits.
Bahrain’s financial status has several drawbacks. They include its break-even oil price at $106.60 per barrel, referring to the price at which an exporting country can break even on its budget needs. By comparison, Saudi Arabia needs only $72.40 per barrel while tiny Qatar needs only $44.10. This disparity increases the costs of borrowing and the urgent need for diversification.
In 2020, according to Fitch Ratings’ April 2021 Rating Action Commentary, “Real GDP contracted by 5.8%, and government debt surged to 129% of GDP from 101% of GDP in 2019, owing to the combined impact of the coronavirus pandemic and sharply lower oil prices.” The agency adds that “foreign reserves declined to $2.3 billion in 2020” and that “the current account deficit ballooned to 9.4% of GDP.” Bahrain faces payments of $6.6 billion in external debt due at the end of 2024 and other large debts afterward; and it will continue to need annual issues of $2 billion to $2.5 billion, according to Fitch.
Finance Flexes Its Muscles
In the post-pandemic world, the financial services sector is a strong priority, according to Khalid Humaidan, CEO of the Economic Development Board (EDB) of Bahrain. “Financial services represent the largest non-oil sector that we have in the kingdom. They represent 17% to 18% of our GDP. We think the financial services sector in the next five years should be able to contribute around 20% of our GDP.”
According to Khalifa bin Ebrahim Al-Khalifa, CEO at the Bahrain Bourse, achieving that goal means making financial processes as easy and seamless as possible for companies and investors. “We have been a financial hub for a long time and it’s our job to maintain this competitive edge.”
These strategies are designed to build up the financial ecosystem over time. The Bourse guides promising organizations and companies from the startup stage to the small-to-midsize stage and eventually to public listing. It encourages companies to launch direct listings instead of more-expensive initial public offerings (IPOs), to save on costs.
“Right now, the cost of an IPO is too expensive [and] definitely not the first option for many companies,” says Al-Khalifa.
Boosting the Bourse
The Bourse has forged relationships with sell-side analysts at BlackRock, JP Morgan and BNY Mellon. For investors, its offerings include multicurrency trading facilities allowing for trades in major currencies. Offerings also include an electronic link between the Bourse and the Abu Dhabi Securities Exchange, resembling the connection between the Shanghai and Beijing exchanges. The linkage allows an investor in one exchange to execute a trade entirely on the other exchange. Citibank recently launched a global technology hub at its Bahrain offices, the first of its kind in the region, to employ 1,000 coders over the next decade. The Bahrain Central Bank provides its fintech regulatory sandbox to allow companies to test technology-based solutions.
Other foreign banks, including India’s ICICI Bank, France’s BNP Paribas, the UK’s Standard Chartered Bank and Pakistan’s Habib Bank, also have operations in Bahrain.
Increasing Bahrain’s status as a financial hub requires increased foreign direct investment (FDI), explains Jarmo Kotilaine, chief strategy and data analytics officer at Tamkeen, an organization mandated to provide private-sector businesses and individuals with assistance and training and to promote development of that sector. “[Being] a regionally significant player or a hub comes from external investors recognizing that and using Bahrain as such a hub, and one way they do that is through foreign direct investment,” he says.
That means moving aggressively to boost its human capital. In February, Bahrain introduced the Golden Residency Visa program, which lets individuals qualified by salary level and length of in-country residency or real estate ownership stay in the country indefinitely.
Boosting the sector’s financial picture also means slightly redefining FDI. “FDI … doesn’t [always] involve new entrants into the market,” Kotilaine says.
However, existing investors are encouraged to reinvest profits rather than repatriate them. That would keep more cash in the country.
“So instead of remitting profits to the mothership, they invest in growth in Bahrain and thereby in the broader region,” says Kotilaine.
Looking to the future, Bahrain is positioned for the emerging markets of Asia and Africa. “More and more of the economic growth will be coming from Africa and Asia. So the Gulf region and Bahrain within in it [will be] well positioned,” he adds.
Notwithstanding this optimism, Bahrain’s plans face risks: the uncertainty of oil prices, computer security breaches, the ever-present possibility of regional conflict, and periodic sabotage in the Persian Gulf by assailants suspected of Iranian links.
Bahrain faces ill feelings among some Arab states for its treatment of Palestinians and its rapprochement with Israel. Bahrain and some other Gulf states have forged alliances with Israel for fear of Iran and uncertainty about American willingness to come to their aid. How all of this plays out remains to be seen, as politics cannot be separated from economics.
In March, S&P Global Ratings said the Bahrain banking sector is “edging closer to pre-pandemic profitability.” Its economy should continue to recover with higher oil prices and increasing regional economic activity.
