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Bahrain Business Forecast Report Q3 2014

  • May 2014
  • -
  • Business Monitor International
  • -
  • 44 pages

Core Views

We expect Bahrain’s economy to expand at a moderate pace over 2014 and forecast real GDP growth of 3.4%, accelerating to 4.2% in 2015. Business activity in the non-oil sector will be underpinned by elevated public spending and GCC aid, but will remain subject to political risk. Output gains in the hydrocarbon sector will be more limited than in 2013, weighing on the headline growth figure. A return to pre-crisis rates of real GDP growth above 7% remains off the cards in the near term.

In light of record oil revenues and the weakness of private investment, we expect public spending to outperform over the coming quarters, which should support activity in the non-hydrocarbon economy. Efforts to address the shortage of affordable housing will see government CAPEX accelerate. Bahrain’s reputation as a stable and welcoming location to do business in the Gulf has suffered as a result of the volatile political climate. At the moment, it remains to be seen if Manama will be able to compete with Doha and Dubai in attracting investment into the all-important hospitality and financial services industry. The economy’s medium-term outlook remains contingent upon a lasting
solution being found to the current political crisis. Unfortunately, we maintain our relatively guarded outlook on the prospects that the government and opposition can come to some form of agreement in the near term.

Bahrain’s weak medium-term fiscal prospects will force the government to make difficult choices. We believe that Manama will have little option but to introduce new taxes over the coming years, while the issue of spending consolidation will loom large on the agenda. Support from Saudi Arabia could delay these pressures, but would entail a significant loss of sovereignty.

Table Of Contents

Bahrain Business Forecast Report Q3 2014
Executive Summary . 5
Core Views 5
Key Risks To Outlook 5
Chapter 1: Political Outlook 7
SWOT Analysis .. 7
BMI Political Risk Ratings .. 7
Domestic Politics 8
Status Quo To Continue, Limiting Reform 8
Bahrain's political stalemate will stay unresolved throughout the coming quarters. Although attacks on the country's security forces by
increasingly organised militant groups will continue, we expect the Khalifa regime to remain in power. Yet the regime's limited support
base and the reduced sway of moderates in both the government and opposition will constrain the prospects for political and economic
Long-Term Political Outlook . 9
Sun, Sea, And Sectarianism: Prospects For Future Stability Assessed ..9
Bahrain's political future is complicated by growing tensions between the Sunni elite and the Shi'a majority, labour and population
imbalances, the need to stay on side with both Iran and Saudi Arabia, and economic vulnerability. We believe the most likely long-term
scenario is for democratisation to be brought about by political and economic necessity, although there is no guarantee that this would
be peaceful.
Chapter 2: Economic Outlook . 13
SWOT Analysis 13
BMI Economic Risk Ratings 13
Economic Activity 14
Growth Reliant On Public Investment ..14
Bahrain's economy will grow by 3.4% in real terms in 2014, accelerating to 4.2% in 2015. With the oil sector set to remain broadly flat in
the coming years and private investment still weighed down by political uncertainty, growth will be primarily driven by progress on Gulf
Cooperation Council -financed public infrastructure projects.
Table: Economic Activity .14
Economic Policy 17
Wave Of Consolidation Beginning ..17
We expect the number of mergers and acquisitions in Bahrain to increase from this year onward as consolidation in the financial
services and insurance industries becomes a key trend. While this will strengthen growth in these sectors, escalating competition from
the rest of the Gulf means that Bahrain will not regain its position as the region's leading financial centre.
Banking Sector .. 19
Better Lending Opportunities Over 2014 19
The Bahraini commercial banking sector should see an improvement in growth over 2014, as the government's infrastructure
investments provide renewed avenues for an expansion in lending. We forecast growth of 10.0% for both total assets and private sector
loans by end-2014, up from 5.0% and 6.6% respectively in 2013.
Tab le: Banks ' Net Profit (USD) .19
Regional: Islamic Banking .. 20
Growth To Slow, But New Markets To Surface 20
Islamic Finance is set for continued growth as several countries vie to become global centres, although expansion rates have peaked.
At present, we expect Malaysia to remain the global leader in Islamic banking, although there will be concerted competition from Dubai.
In addition, there is huge growth potential in India, Nigeria and Thailand.
Tab le: GCC Islamic Bonds (2014) .21
Chapter 3: 10-Year Forecast . 25
The Bahrain Economy To 2023 . 25
Political Crisis Raises Risks ..25
Assuming oil prices do not collapse and political stability is eventually restored, Bahrain's economy will be able to post relatively
moderate levels of real GDP growth over the coming decade. That said, the ongoing political crisis has raised a host of questions
surrounding Bahrain's long-term outlook, with concerns growing that the country's financial services and tourism sectors will suffer
Table: Long-Term Macroeconomic Forecasts .25
Chapter 4: Business Environment 27
SWOT Analysis 27
BMI Business Environment Risk Ratings .. 27
Business Environment Outlook 28
Institutions 28
Infrastructure .. 29
Market Orientation . 30
Operational Risk . 33
TABLE: Top Export Destinations, 2001-2009 .33
Chapter 5: Key Sectors 35
Freight Transport .. 35
Tab le: Air Freig ht, 2011-2018 ('000 tonnes) ..36
Tab le: Maritim e Freig ht - Throug hput , 2011-2018 ('000 tonnes) 36
Real Estate . 38
Tab le: Offic e Forecast Net Yield, 2012-2018 (%) .39
Tab le: Retai l Forecast Rents , 2014 And 2015 (USD per m2/month) .. 39
Tab le: Forecast Offic e Rents , 2014-2015 (USD per m2/month) .39
Other Key Sectors . 41
Tab le: Oi l and Gas Sect or Key Indicat ors .41
Tab le: Pharma Sect or Key Indicat ors ..41
Tab le: Aut os Sect or Key Indicat ors ..41
Tab le: Telecoms Sect or Key Indicat ors .42
Tab le: Infrast ructu re Sect or Key Indicat ors 42
Tab le: Food and Drink Sect or Key Indicat ors ..42
Chapter 6: BMI Global Assumptions .. 43
Global Outlook . 43
Growth Increasingly Polarised ..43
Table: Global Assumptions ..43
Table: Developed States, Real GDP GrowtH, % 44
Tab le: Em ergi ng Markets , Real GDP Growt h, % ..45

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