The Kingdom of Bahrain, the Gulf’s smallest economy, sets yet again another mark of continued growth in its economy with much emphasis on SMEs and their role to spur growth in the tiny economy. Oil and gas, traditionally the leading industry, generated over one-quarter of economic output until the oil price slump of 2014-15 drove its contribution down to about 13%, according to 2016 data from the Economist Intelligence Unit.
According to the Bahrain Economic Development Board, the country recorded an overall GDP growth of 2.2% in the second quarter (Q2) of 2016, and forecasts for the next couple of years are estimated at 2% as shown in Table 1.
Bahrain’s financial sector, which is the second-largest sector after the hydrocarbon sector, continues to dwarf the size of its domestic economy. According to the Central Bank of Bahrain (CBB), at the end of 2015, the aggregated balance sheet of the banking system – retail and wholesale banks – was US$191 billion, about six times the GDP.
Table 1: Economic outlook of Bahrain |
||||
|
2015 |
2016f |
2017f |
2018f |
Real GDP growth, % |
2.9% |
2.8% |
2% |
2% |
Non-hydrocarbon sector |
3.6% |
3.2% |
2.4% |
2.3% |
Hydrocarbon sector |
-0.1% |
1% |
0.5% |
0.5% |
Nominal GDP growth, % |
-6.8% |
4.9% |
6.6% |
5.1% |
Inflation (CPI %) |
1.8% |
3.8% |
2% |
2% |
Current account (% of GDP) |
-0.3% |
-1.9% |
0.1% |
0.8% |
Fiscal balance (% of GDP) |
-13% |
-12.3% |
-9.7% |
-7.9% |
Crude Oil Arabian Medium (US dollar) |
50 |
45 |
55 |
60 |
Islamic banks continued to play an important role in the financial sector and the overall economy. The financial soundness indicators show that capital positions increased for Islamic retail to reach 15.8% while it decreased for Islamic wholesale banks to reach 19.5% in March 2015. Non-performing facilities for Islamic retail banks increased to 12.4% in March 2016 from 11.7% in March 2015 while that for Islamic wholesale banks also increased to reach 4.9% over the same period, according to the CBB’s Financial Stability Report, July 2016.
Despite the rise and fall in asset prices in Bahrain and the tightening of liquidity due to the fluctuation of oil prices, the banking sector remains well regulated, with 2015 seeing a unification of Shariah compliant banking regulations and the adoption of new capital adequacy laws in adherence to Basel III.
The Takaful industry (Shariah compliant insurance) in Bahrain has shown a 3% growth in terms of gross contributions to register BHD63.22 million (US$166.08 million) in 2015. Gross contributions of Takaful firms represent around 23% of total Bahrain gross premiums/contributions in 2015.
The government has also expanded revenue-raising measures, including the introduction of a GCC-wide value-added tax (VAT) in 2017-18.
According to the Bahrain Economic Development Board, the social and personal services is the fastest-growing individual sector with year-on-year growth at 9.9% in Q2 of 2016 followed by the construction sector.
Review of 2016
The Bahrain Bourse had obtained the approval of the CBB regarding the Bahrain Investment Market Rules. The new rules will create new landmarks in providing additional financing alternatives to SMEs with a reasonable financing cost, as well as providing more investment alternatives to investors.
The CBB has also proposed new governance rules that would require Islamic banks in the Kingdom to conduct external Shariah audits of their operations, representing a shift away from the long-held practice of self-regulation.
The Bahrain Chamber of Commerce and Industry has finalized a draft law for investment. The new draft law aims “to reinforce the competitiveness and attractiveness of the Bahraini market, remove impediments for foreign and domestic investments and enhance trust in the investment and business climate of Bahrain”.
In June 2016, the International Islamic Financial Market and the International Swaps and Derivatives Association published two new standards for Islamic forward foreign exchange products for use in Islamic hedging transactions.
In April 2016, Al Baraka Banking Group unveiled details about its ‘Al Baraka Goals for 2016-2020’, which are linked to the UN’s Sustainable Development Goals 2030. The recently developed strategy aims to create over 51,000 jobs by 2020 through financing a number of businesses and projects in countries where it operates.
In February 2016, AAOIFI and the Bahrain Institute of Banking and Finance signed a cooperation agreement to commence an e-learning platform project for standards issued by AAOIFI.
Preview of 2017
In the current uncertain climate, it is always difficult to make a forecast or prediction on economies and growth. However, what is most certain is that the continued low oil prices are likely to challenge the government into greater spending restraint in the near term. The budget is projected to record a deficit of 9.7% of GDP in 2017.
It has been reported that the real GDP growth is expected to average 2.2% in 2017-19 and inflation will rise in 2017-18, averaging 3.7% a year, on the back of subsidy cuts and new taxes. Inflation will moderate thereafter to an average of 2.6% in 2019-20, owing to lower import costs.
It is also widely believed that the government will look to tap the international and domestic debt markets to finance its budget deficits.
Conclusion
The revenue-raising strategies are likely to be seen throughout the GCC region. The introduction of VAT is inevitable. Government agencies in the Gulf have started awareness efforts and policy changes to facilitate implementation as early as January 2018.
It is also hoped that oil prices will pick up in mid and late 2017 and onwards. This will likely ease budgetary pressures on the government of Bahrain and allow for socioeconomic and investment projects to continue as planned.
Dr Hatim El Tahir is the director of Islamic Finance Group and leader of the Deloitte Middle East Islamic Finance Knowledge Center at Deloitte & Touche – Middle East. He can be contacted at [email protected].