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Bahrain's gross domestic product (GDP) could slacken to around three per cent in 2009 in the wake of the global financial crisis and growth could decline further if oil prices remain weak, says Kuwait-based Global Investment House.
The bank notes in a study that Bahrain had recorded exceptionally high growth during the past few years, with the nominal GDP galloping by double digits since 2003. Higher oil prices and huge liquidity in the region also helped Bahrain to record robust performance.
Bahrain recorded current account surplus in 2003 and since then the country has recorded higher surplus in subsequent years. The current account surplus increased from BD75.4 million in 2003 to BD1.09 billion in 2007. In 2007, the current account surplus increased by 32.9 per cent over the previous year.
The current account surplus represents 15.8 per cent of GDP in 2007 as compared to 13.8 per cent in 2006. The expansion in the current account surplus was driven largely by the strong growth of merchandise exports which grew by 20.6 per cent in 2007 over the previous year.
As a percentage of GDP, the current account surplus has increased from 2.1 per cent in 2003 to 15.8 per cent in 2007. In 2008, Bahrain's current account surplus rose, boosted by the robust performance of the domestic non-oil economy, elevated international commodity prices during most part of the year, favourable economic performance in major export markets.
However, the global economic slowdown coupled with substantially lower oil prices, reduced oil production and lower consumer spending has severely marred the economies in the region and this will impact Bahrain as well, with the economic growth rate expected to come down to around three per cent for 2009 with more of a downside risk, the bank says.
"We believe economic activity in Bahrain to have moderated in the later part of 2008, leading to uncertainty and delays in important infrastructure projects. Overall the per capita GDP growth in 2009 and going forward will be muted compared to what was observed in previous years," the bank says.
The study says Bahrain, given its negligible hydrocarbon resources and relatively high public debt, is considered as more vulnerable to the global financial turmoil than its partners in the Gulf Co-operation Council (GCC).
While its oil production is small compared with that of neighbours like Saudi Arabia and the UAE, Bahrain's economy is still dependent on hydrocarbon revenues. The kingdom also holds fewer liquid assets such as foreign exchange reserves or investments by government-controlled funds as compared to other regional oil exporters, it says.
"Consequently, the global and regional economic downturn is likely to have a significant impact on Bahrain's non-hydrocarbon sectors as well.
"The financial services sector is facing the heat and is likely to be negatively impacted... The slump in the regional property markets is adding to the woes of the sector as Bahrain's banks have significant exposure to regional property investments. However, the growth in Islamic banking and the expansion of the insurance sector is likely to negate some of the negative impact."
Meanwhile, Bahrain's total exports recorded robust growth in recent years. The exports grew by 11.8 per cent in 2007 to BD5.13 billion in 2007 as compared to BD4.59 billion in 2006. During the first nine months of 2008, the total exports amounted to BD5.37 billion reporting an increase of 4.7 per cent over 2007-end. Oil is a major contributor to the total exports of the country with its share increasing substantially from 66 per cent in 2001 to 79.2 per cent in 2007.
The total oil export amounted to BD4.01 billion in 2007, an increase of 17.1 per cent over the previous year. During the first nine months of 2008, oil exports amounted to BD4.49 billion, reporting an increase of 10.6 per cent over 2007-end. Despite the diversification efforts of the government, oil continued to be the mainstay of the economy. This scenario is unlikely to change in the next few years.
The total non-oil export, which increases by an impressive 21.3 per cent in 2006, lost its growth momentum in 2007 as it declined by 4.9 per cent. The total non-oil export stood at BD1.07 billion in 2007 as compared to BD1.12 billion in 2006. During the first nine months of 2008, the non-oil export amounted to BD877.1 million, an increase of 11 per cent over the corresponding figure of 2007.
Global Investment House says it expects Bahrain's real estate and construction sector, although far smaller than in other GCC countries, to be negatively affected in the short-term with possible delays in the start of building activities.
The report highlights Bahrain's intensified drive to boost the country's infrastructure over the past two years, launching an upgrade of the existing port of Mina Salman, putting the finishing touches on the new $137 million Shaikh Khalifa bin Salman Port and expanding the Bahrain International Airport to increase its cargo handling capacity.
"However, we believe the sharp fall in oil prices will significantly constrain the government's ability to increase spending and in effect the ongoing infrastructural development projects currently under way as oil exports provide the majority of government revenue," it says.
