Dr Jarmo Kotilaine, Chief Economist at the Bahrain Economic Development Board, tells Banker Middle East that it’s not all doom and gloom as it may be perceived in Bahrain
How do you view the performance of the Bahraini economy in 2017?
The Bahraini economy posted impressive growth results throughout 2017, despite some challenging regional circumstances. Following the release of the preliminary Q4 national accounts, we estimate that Bahrain’s real GDP grew by 3.9 per cent in 2017, which marked a clear acceleration on the 3.2 per cent pace recorded in 2016. Non-oil growth in 2017 reached a remarkable five per cent, and similarly reflected a clear improvement on 2016 (four per cent).
Bahrain’s growth rate in 2017 has placed it ahead of its Gulf peers. The strong economic performance in 2017 reflect the strength of structural drivers across Bahrain’s highly diversified non-oil private sector. The economy is also receiving a potent countercyclical stimulus from the largest project pipeline in its history. But 2017 was also a record year for foreign direct investment, with investors benefiting important regulatory initiatives and innovations in areas such as fintech. The fastest growing sector of the economy in 2017 was hotels and restaurants which expanded by 9.5 per cent in 2017. This partly reflected an 11.9 per cent year-on-year increase in inbound tourists to a total of 11.4 million. Their aggregate expenditure in Bahrain was 8.9 per cent higher than 2016.
This positive momentum benefited from the government’s strategy to boost the profile of Bahrain’s international tourism offerings and encourage longer stays from existing visitors. Other high performing sectors in 2017 included social and personal services (9.4 per cent), led by private education and healthcare, trade (8.5 per cent), real estate and professional services (5.5 per cent) and financial services (five per cent). The EDB attracted $733 million of foreign direct investment into Bahrain in 2017, a record year for the organisation. This represents an increase of 161 per cent from 2016. The new investment projects are expected to generate over 2,800 jobs over the next three years.
What risks face the Kingdom’s economy this year?
Regionally, our data predicts a significantly brighter outlook for the GCC in 2018, with a pronounced pick-up expected as economic diversification and fiscal consolidation efforts transition to their next phase and create a broad revenue base across the non-oil economy. The GCC presents a number of excellent opportunities for investment, growth, and collaboration and Bahrain is ideally positioned as a gateway for international businesses to access these opportunities. In particular, the liberalisation of Saudi Arabia’s economy is a real opportunity for businesses in Bahrain, it is our biggest export market, so what is good for the Saudi economy is good for Bahrain’s economy.
Bahrain’s strengths complement the development projects that underpin Saudi Arabia’s economic transformation, from manufacturing to financial services. We strongly believe that Bahrain can play an important role in supporting Saudi’s Vision 2030 programme, and that this programme represents an excellent economic opportunity. Unlocking these opportunities across the Gulf region were at the heart of the recent investor forum, Gateway Gulf, which brought together investors and business leaders from around the world in Bahrain on 8-10 May. The exclusive invitation-only forum discussed growth opportunities across the GCC and showcased new investment-ready project across diverse industries including tourism, manufacturing, real estate, transport, energy, and water. It also discussed the challenges the region faces, and collaborative solutions to these issues.
On the challenges front, we are probably looking at renewed oil market volatility in view of the recent rally in prices. However, the market fundamentals now look much healthier. We are looking at a higher cost of capital because of the ongoing US Fed tightening. However, the liquidity situation in Bahrain is benign and bank lending has actually been accelerating quite consistently over the past year.
How do you expect the recent oil discovery to impact Bahrain’s economy should it be recoverable?
Bahrain has been committed to economic diversification for over forty years now and has established itself as a regional pioneer thanks to its innovative business and regulatory environment. The successes are clear to see, in 2000 the oil and gas sector accounted for 43.6 per cent of the Kingdom’s GDP, compared to only 18.4 per cent in 2017. Despite these successes, and our long-term commitment to economic diversification, oil and gas remain an important source of revenue for the country, and the recent discovery has the potential to provide considerable additional fiscal flexibility in the future. It is naturally no less significant from the energy security perspective.
We also anticipate a range of long-term economic benefits, both directly and indirectly through downstream activities and related manufacturing. Since the visionary establishment of Bapco already in the 1930s, Bahrain has established a strong track record creating value from across the hydrocarbons value chain and important initiatives in this regard are under consideration also now. Manufacturing remains the second largest non-oil sector of the economy and has an impressive history of creating quality employment.
What sovereign-led strategies currently bolster the country’s fiscal position?
As we’ve highlighted, Bahrain has a very strong growth outlook as economic diversification continues to drive growth. Alongside this, the government has a clear strategy to ensure long-term fiscal stability based on a balanced, equitable, and sustainable plan for deficit reduction. This includes diversifying government income by increasing non-oil revenue, whilst also consolidating expenditure in a manner that enhances broader economic competitiveness and efficiency of public spending. It is important to note that key planks of the consolidation strategy are already in the law books and are being implemented through multi-year programmes. This goes for the scaling back of various subsidies, notably in energy and utilities.
The excise duty was introduced based on a GCC-wide inter-government framework agreement and the same is true for VAT which will create a broad revenue base across Bahrain’s large non-oil economy. But the Kingdom is also determined to maximise value for money across Government spending by creating an efficient, modern public sector. Examples of measures to this end include reducing the number of ministries from 18 to 16 and merging others, which will yield an annual saving of around $1.5 billion. Further efficiency and productivity led initiatives include Bahrain’s Cloud First policy, which requires government organisations to migrate data to the cloud. This has already led to 90 per cent savings for some government entities.
What is your outlook on a progressively stable economy on Bahrain?
The future for Bahrain is very bright, with our robust economic growth forecast for 2018 supported by the IMF’s World Economic Outlook which recently forecast that Bahrain’s economy would continue as the fastest growing in the GCC in 2018. This growth is evidence that Bahrain’s commitment to creating a pro-business regulatory environment, whilst also investing in sustainable long-term growth strategies and ongoing economic diversification efforts, is paying dividends.
The key growth drivers that delivered strong numbers in 2017 will remain in place for years and new ones are emerging. For instance, Alba Line 6 will start production in 2019 and will enable a further expansion in the downstream sector. We are seeing important new initiatives in sectors such as ICT and technology-based financial sectors. These factors, along with many others, are helping to put productivity at the forefront of driving growth.
We believe that Bahrain offers a compelling and essentially complementary value proposition in the GCC region, built on human capital, regulation, and connectivity. While we fully recognise the importance of nimbleness in an area of continuous change, we see these fundamentals as a solid foundation for growth in the years and decades ahead.