Bahrain Annual Economic Review, 2010

ANNUAL ECONOMIC REVIEW 2010

Sustainable Prosperity

A successful decade for Bahrain completed, a challenging new decade begun

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Welcome to the inaugural edition of the Economic Development Board’s Annual Economic Review 2010. Its role is to monitor major economic trends in the Kingdom of Bahrain, and to identify global trends which affect us here in Bahrain.

The first issue includes a short survey of the last decade of economic development in Bahrain, and looks to the challenges of the coming decade – as well as assessing the current state of the Bahrain economy and some of its key industries.

I hope that over coming years the Annual Economic Review will take its intended place as an authoritative and comprehensive survey of the Bahrain economy and the state of its development. It will always be factual and it will consistently apply high quality economic analysis to the issues which concern us in the Kingdom.

I hope too that by assembling the facts and applying analysis it will sometimes challenge our complacency and stimulate further economic reform as we proceed on the path towards attainment of the Kingdom’s Vision 2030.

Mohammed bin Essa Al Khalifa CE – Economic Development Board

The Economic Development Board’s first Annual Economic Review focuses on Bahrain’s recent economic performance. It also surveys the experience of the previous decade and assesses some of the challenges of the decade to come.

The lead article discusses the strong performance of the economy over the last decade and particularly in the five years to 2008, the downturn in output growth through 2009, and the outlook for the economy in 2010. It also looks at the challenges for the coming decade presented by an emerging fiscal deficit and faltering productivity growth.

SPECIAL ARTICLES INCLUDED IN THE REVIEW DISCUSS:

labour productivity and Bahraini participation in the workforce.

and the Kingdom’s oil revenues over the next fifteen years.

This publication was issued in July 2010

CONTENTS

EXECUTIVE SUMMARY ................................................................................................. 1

ECONOMIC OVERVIEW ............................................................................................... 4

1. Bahrain’s economic performance in the global crisis ............................................................ 4

2. Bahrain’s strong decade ........................................................................................................ 9

3. Bahrain’s changing industry structure ................................................................................. 11

4. Challenges in the new decade ............................................................................................ 12

SPECIAL ARTICLES ...................................................................................................... 16

................ 16

2. Measuring Bahrain’s progress ............................................................................................. 19

3. Jobs ..................................................................................................................................... 23

4. Export performance and export structure ............................................................................ 26

5. Micro, small and medium enterprises in the Bahrain economy ........................................... 29

6. Real estate downturn ........................................................................................................... 33

....................................................................................... 36

8. Tourism sector performance ............................................................................................... 38

9. Additional indigenous oil – from Bahrain field .................................................................... 41

APPENDIX

Sources ................................................................................................................................... 45

Abbreviation ............................................................................................................................ 45

1

EXECUTIVE SUMMARY

After nearly a decade of success and a particularly strong economic performance in the five prior years, Bahrain’s growth slowed through 2009 and into 2010. The slowdown was most apparent in construction and finance, sectors affected by the global financial crisis. But while economic growth slowed, Bahrain avoided the recession apparent in Europe and North America and

expand during the sharpest global downturn in well over half a century testifies to the strength of its economy and the value of the extensive reforms undertaken by the Kingdom over the preceding decade.

Moving into the new decade, the Kingdom confronts both challenges and opportunities.

Among the challenges, the most immediate is that of the fiscal deficit. Lower oil prices have exposed a structural fiscal deficit which, if left unaddressed, would eventually see the Kingdom’s debt climb to an unacceptable level. A second challenge is the decline in productivity in recent years. A third is the need to renovate Bahrain’s industry structure to put more emphasis on innovation and the development of products and services incorporating new technologies.

Bahrain brings considerable strengths to meet these new challenges. It has the most industrialised

than that of crude oil. Manufacturing output has become more varied in recent years, and manufactured exports have been expanding strongly. The economy is fully participating in the

Bahrainis are deeply engaged in the economy, composing the majority of the workforce in the major industries of oil and gas, aluminium and finance. The Kingdom has built up a strong small and medium enterprise sector which nurtures business skills and accounts for three quarters of

of the Bahraini workforce over the coming decade, a decline in the ratio of dependents to workers and a steady improvement in the education and skills of new entrants to the workforce. These are substantial strengths which the Kingdom can leverage in the new decade.

Economic growth has been consistently strong, with a real average growth rate of over 6% during the last decade. Some of that growth, however, depended on a real estate and property development upswing, which was restrained by the global financial crisis. The boom brought with it a sharp increase in the number of guest workers in Bahrain, and an accompanying fall in labour productivity. Nearly as many additional guest workers were employed in wholesale and retail trade as in construction. In contrast to construction, however, there was a negligible increase in the output of trade and consequently a sharp decline in output per employee.

Over the coming decade, the growth model will change, with a markedly slower rate of increase of the number of low wage guest workers, and more emphasis on industries capable of paying higher wages.

modest growth in the productivity of the Bahraini workforce and at the same time an increase in labour force participation closer to the OECD average, Bahrain will be able to attain three important objectives. The first is that it will be able to employ all those Bahrainis who seek jobs. The second is that it will be able to substantially increase Bahraini real wages and household income. The third is that it will be able to attain both those supremely important objectives while at the same time restraining the growth rate of the foreign workforce to the growth rate of the Bahraini workforce.

2

Kingdom’s objectives of providing Bahraini employment opportunities and increasing the standard of living is somewhat slower than in the preceding decade.

But while Bahrain has every prospect of following a path of sustainable prosperity which permits Bahrainis to remain in control of their national destiny, the Kingdom recognises that an essential prerequisite is for the government’s own financing to also be sustainable. The decline of oil prices in 2008 exposed a structural fiscal deficit, to which the Kingdom is responding with spending

the same level as 2008, and the Kingdom intends that spending increases for the remaining year of the current budget (2010) and for the two years of the new budget (2011 and 2012) will be held to only a little more than the inflation rate.

4

ECONOMIC OVERVIEW

1. BAHRAIN’S ECONOMIC PERFORMANCE IN THE GLOBAL CRISIS

Following the deep global economic downturn that began with the second half of 2008, a slow but durable economic recovery was very evident in the first half of 2010. Unlike Europe and North America, Bahrain avoided recession in 2009, though growth slowed sharply. At 3.1%,

employment rose. Construction and real estate activities declined through 2009 and the finance sector was flat. Manufacturing was firm, however, and a government stimulus package together with low interest rates and a more competitive real exchange rate cushioned the downturn. The downturn in property development is likely to persist throughout 2010 in Bahrain, but the outlook for most other sectors is quite favourable.

Output growth in most major advanced economies collapsed at the end of 2008 as the financial crisis, which followed the bankruptcy of the US investment bank Lehman Brothers, hit confidence, trade and credit. Through the first half of 2009, North America, Europe and the UK experienced the deepest recessions since the 1930’s, with unemployment reaching 10% of the workforce in both the United States and Europe, and government debt vastly increasing due to bailouts and stimulus packages. A slow but durable economic recovery in North America, and to a lesser extent in the UK and Europe, became evident by 2010. The expansion was slower in the mature industrial economies than in emerging economies, a divergence that is expected to continue.

Moving into 2010, almost all member economies of the OECD are once again expanding, with almost all the emerging economies of Asia, South America and Eastern Europe expanding somewhat faster.

rebounding, profit shares are rising and consumer confidence is beginning to recover. China, the second largest economy in the world, expanded at just under 12% in the year to March 2009.

-8

-6

-4

-2

0

2

4

6

Real, YoY GDP Growth

U.S.A European Union U.K.Source: US Bureau of Economic Analysis, Eurostat, UK Office ofNational Statistics

%

02468

10121416

China and India's Real YoY GDP Growth

China India

Source: China's National Bureau of Statistics, India's Central Statistical Organization

%

5

Even so, there remains some hesitancy in global growth forecasts. The unemployment rate remains high in both Europe and the United States, and it will decline only very slowly.

A significant share of the recovery so far has depended on restocking, as it usually does in the early stage of an upswing. This source of growth will fade through 2010. The upswing has also depended on the substantial fiscal stimulus and extraordinarily low interest rates deployed to arrest the rapid deterioration in the global economy, particularly after the collapse of Lehman Brothers in September 2008.

Throughout 2010 and into 2011, the fiscal positions in most major economies will become less expansionary as the growth of deficits is arrested, and policy interest rates will be gradually increased. Meanwhile, bank lending growth remains feeble. Consumers in Europe and North America are cautious in the face of high unemployment and the loss of considerable financial wealth since the peak of the upswing in 2007. The

With these headwinds we expect only a modest rate of recovery in mature economies compared to some past global upswings.

Cooperation Council, output growth fell during 2009. The major regional economy – Saudi Arabia – recorded zero output growth for the year mainly due to lower oil output combined with a high level of imports.

development was weak as lending became more cautious. The problems of the property development sector were most apparent in Dubai, where debt reconstruction proved necessary. Oil prices picked up but remained well off their peak of mid 2008.

The IMF’s April 2010 World Economic Outlook expected Middle East and North Africa output growth to be 4.2% in 2010 and 4.3% in 2011 after contracting 0.6% in 2009.

02468

10

%U.S. Unemployment Rate

Source: IMF

02468

10

%OECD Unemployment Rate

Source: OECD

0123456789%

Annual, YoY GDP Growth for Saudi Arabia

Source: KSA's Central Department of Statistics

020406080

100120140160

02/01/2007 02/01/2008 02/01/2009 02/01/2010

$/bblOil Price - Brent

Source: British Petroleum

6

In Bahrain, monetary policy settings became more accommodating through 2009 as the global recession deepened. The policy rate cuts in Bahrain were largely in line with US Federal Reserve settings. The policy change was necessary to support the US dollar peg to the Bahraini dinar, but was also helpful in cushioning Bahrain from the severity of the global recession.

Fiscal policy also switched to a more expansionary stance, with the national budget moving into a deficit after five years of firm surpluses. The deficit was partly due to increased public spending, as private development spending faltered, and partly due to the downturn in revenue as oil prices fell.

Bahrain’s export performance was supported by a small decline in the trade weighted value of the Bahraini dinar, largely due to the decline of the US dollar.

average) in 2009. This is a marked slowdown compared to the 7% average of recent years, but it also serves as evidence of the resilience of the Bahrain economy in the face of a serious and prolonged contraction in Europe, the United States and Japan.

of 2009 5.4% higher than the same quarter a year before. See graph on the following page.

0

1

2

3

4

5

6

2003 2004 2005 2006 2007 2008 2009

%Average Inter-bank Rate

3 Months 6 Months

Source: CBB

0

2

4

6

8

10

12

%Average Lending Rate

Business PersonalSource: CBB

-1,000-500

0500

1,0001,5002,0002,500

BDMillion

Bahraini Government Expenditure and Deficit

Budget Balance Total Expenditure

Source: MOF* Figures as initially budgeted by Ministry of Finance for 2009

767880828486889092

Real Effective Exchange Rate Index Based on Consumer Price

Index: Year 2005=100

Source: IMF

7

The slowdown in Bahrain was most evident in property development and construction, which declined through 2009 as expectations of future demand were cut back and financing became more difficult. The decline was most marked in the first quarter of the

year construction sector output declined by 9.7%. The finance sector declined by less than 1% overall, with insurance and domestic retail banking expanding. Offshore (wholesale) banking, however, contracted by 15% through the year due to increased

financial crisis. Wholesale and retail trade also declined relative to 2008, but other sectors of the Bahrain economy remained firm. Manufacturing was particularly strong, with a 6.5% gain through

was up 10.1% and government services output increased by 7.7%.

Import growth remained strong in major Bahrain export markets, particularly Saudi Arabia. Nonetheless, the disarray in the world economy at the end of 2008 hit Bahrain’s exports, both through the decline in oil prices and the fall in trade volumes. In US dollar terms, Bahrain exports

plummeted in January 2009 from their all time high in December of 2008, and bottomed out in February, before slowly increasing over the remainder of the year. Even so, the third quarter level of exports was still less than it had been two years earlier.

Though output growth slowed markedly, employment in Bahrain rose during 2009.

employment, but in year average terms Bahraini employment also increased.

In preliminary forecasts by the Central Bank of Bahrain, Bahrain’s current account surplus fell sharply in 2009. The fall was mainly due to investment income falling by 60% and net trade surplus falling by 25%. Current transfers, which mainly consists of workers’ remittances decreased by 22% in 2009.

Despite a fall in assets, the net international investment position increased by 4% due to a larger decrease in foreign liabilities.

Source: CIO

0123456789

Bahrain's Real GDP Growth%

01,0002,0003,0004,0005,0006,0007,000

BD Million

Net International Investment Position (IIP)

Source: CBB* Provisional data** CBB forecast

05

1015202530

$Billion

Bahrain Exports

Source: IMF

8

banking sector, the EDB expects the finance sector to recover only slowly from the downturn.

only slowly in 2011 and 2012.

On the other hand, there is considerable investment planned for the oil and gas sector, regional tourism to Bahrain continues to grow, manufacturing continues to perform well, and services such as logistics, education and health are expanding. See graph below.

Looked at from the spending side, the EDB expects household consumption to continue to strengthen over the next few years, while investment spending continues to moderate reflecting the downturn in property development.

Exports are also expected to strengthen in response to a more competitive exchange rate and higher oil prices. As the aluminium production and petroleum refining sectors build additional capacity, import growth will moderate, reflecting the impact of slower investment spending on capital equipment imports, and the replacement of some imported oil by higher local production.

we expect this to continue throughout 2010. Consumer price inflation in Bahrain was a little less than 2% during 2009, and we do not expect any substantial acceleration for 2010.

The EDB expects overall output growth to pick up to a little over 4% in 2010 and reach 5.5% in 2012. The forecasts are shown in table 1 on the following page.

Current Account Surplus

0200400600800

1,0001,2001,400

BDMillion

Trade Surplus


0200400600800

1,0001,200

BDMillion


Current Account Surplus

-25-20-15-10-505

101520

Q1 Q2 Q3 Q4

2009

Through-the-Year Growth by Industry - GDP by Sector

Constant Price

Hotels & RestaurantsGovernment ServicesTradeManufacturingFinancial CorporationsConstructionReal Estate

Source: CIO, EDB analysis

%

9

2. BAHRAIN’S STRONG DECADE

The economic slowdown in Bahrain through 2009 followed nearly a decade of persistent, firm and

exceptional prosperity demonstrate that continuing economic success is an attainable goal for the Kingdom. There is no doubt that rising oil prices helped, as did a strong global economy and a cheaper exchange rate as the US dollar depreciated. The five previous years had seen the biggest

greater. But it is also true that economic reform within Bahrain permitted the Kingdom to expand potential output and take advantage of favourable regional and global developments.

These reforms built on earlier foundations, and included the corporatisation and privatisation of government businesses, minimisation of corruption in government contracts and in the public sector through the National Audit Court, additional transparency through creation of the Tender Board, removal of impediments to foreign

customs union based on low tariffs, signing free trade agreement with the United States, reforms in the labour market, liberalisation

of the telecommunications sector, the establishment of a telecommunications market regulator and improvements to public education. As a result of the reforms, Bahrain is ranked in the top 20 nations in the World Bank’s Doing Business Report, and scores well in the World Economic Forum’s

The five years to the end of 2008 confirmed the wisdom of insisting upon the Kingdom’s openness to the global economy and maintaining the pace of economic reform. The Kingdom’s economy diversified. Output in the finance sector nearly doubled. By 2008, the finance sector accounted for over one quarter of output, compared to less than a fifth five years earlier. Output also increased in education services, tourism, manufacturing and logistics.

TABLE 1

2008 2009 2010 2011 2012 2013 2014 2015

4,734 4,881 5,081 5,320 5,612 5,955 6,360 6,817 Constant: 2001 (BD mn)

6.3% 3.1% 4.0% 4.7% 5.5% 6.1% 6.8% 7.2%

8,235 7,744 8,380 9,063 9,586 10,240 11,011 11,865 Current (BD mn)

70%

39%

116%

25%

020406080

100120140

Real GDP 2000 - 2009

Bahraini employment 2002 - 2009

Real exports 2000 - 2008

Real Bahraini wages 2002 -

2009

2000-2009

Source: LMRA, CIO, EDB analysis

%

05

10152025303540

Oman KSA Kuwait UAE Bahrain Qatar

Inward FDI (2005-2008) as a Share of Nominal 2008 GDP

Source: UNCTAD World Investment Report 2009, CIO, EDB analysis

%

10

Manufacturing output increased by 80% over the five years to 2008, the output of private education services nearly doubled and the output of private health services more than doubled. The output of hotels and restaurants – a proxy for tourism services – more than doubled, and the annual number of foreign visitors increased by 80%. While it remained a vital component of Bahrain’s economy, oil output was unchanged in the period. Employment in the oil and gas sector (including refining) increased, but accounted for less than 1% of jobs in the Kingdom.

As the economy became more open, both exports and imports increased. Over the five years to 2008, exports increased by 166% in value and doubled in volume. By 2008, Bahrain was one of the most open economies in the world. It ranked with the UAE as the most open economy measured by trade share in the GCC. Bahrain’s exports plus imports, a common measure of trade intensity, totalled 128% of GDP in 2008.

Oil revenues rose by 172% over the five years to 2008, total profit rose by 150% and total wages and salary income nearly doubled (all in nominal terms), yet the Kingdom managed prosperity wisely.

While household consumption absorbed higher incomes in many other economies, consumption in Bahrain declined as a share of GDP from 65% to 59% over the five years. And while government spending rose as fast as or faster than government revenues in many other economies, much of the additional revenue in Bahrain was saved in annual fiscal surpluses. National saving increased from 39% of GDP in 2004 to 52% in 2008. Government debt declined from 37% of GDP in 2003 to 15% of GDP in 2008. Over those five years, both private and public investment rose strongly. The volume of public investment rose by 50% and the volume of private investment by 135%. Even so, savings rose faster, so that Bahrain’s current account surplus strengthened. The cumulative surplus over the five years was BD 3.3 billion, representing an addition to Bahrain’s net foreign assets.

Bahrain enjoys considerable strengths in meeting the challenges of the coming decade. GDP per capita was four fifths of New Zealand on 2009 average exchange rates, and Bahrain saving is high as a share of GDP, as is total investment. There is a well-developed finance sector and adequate local banking and financial intermediation. There are no substantial tariff barriers against imports, and there are very few economic distortions or business impediments imposed by Bahrain taxes, which are minimal. Bahrain has long fixed the Dinar against the US dollar, a policy which in recent years has implied both relatively low short term interest rates and some increase in currency competitiveness in respect of Japan, China, and Europe – all of which have currencies which have appreciated against the US dollar.

While there is substantial room for improvement in educational standards, Bahrain has high rates of literacy in both Arabic and English and a high rate of participation in colleges and universities. Bahrainis also participate in the workforce to a much higher degree than of the local populations in other GCC economies. Bahrainis, for example, account for most of the workforce in the finance, aluminium and oil and gas sectors. These are three of the biggest commercial activities in the Kingdom, and each requires high levels of education, training and skills.

048

121620

2003 2004 2005 2006 2007 2008 2009

%

Year Average Total Employment Growth by

Citizenship

Bahraini Non Bahraini Source: LMRA, EDB analysis

11

3. BAHRAIN’S CHANGING INDUSTRY STRUCTURE

The Bahrain finance industry demonstrated considerable resilience in the face of a crisis that savagely impacted the sector in North America and Europe. It will be some time, however, before the industry returns to the trend growth rate of 9% evident in the five years before the crisis. The contribution of finance in the coming five years is now likely to be below that of the last five years.

Furthermore, the structure of the industry will likely change. Wholesale banking is unlikely to expand as rapidly as before, while there are new opportunities in funds management, insurance and in associated professional activities, such as accounting and legal services.

While finance may expect somewhat slower growth, manufacturing has been performing well. Over the last five years manufacturing output has increased by 80%, and the manufacturing sector is now markedly bigger than the oil extraction sector. Refined petroleum and aluminium are the biggest elements in manufacturing output, but more diversity has become apparent in recent years, as businesses leverage the potential of the expanding regional market for food and beverages, electrical machinery and fabricated metal products.

In the basic manufacturing industries of oil refining and aluminium, meanwhile, there is increasing evidence of renovation and renewal. New investment will put the oil refining industry in Bahrain on the front rank of global technology and permit solid increases in output. There has also been

increased investment in additional production facilities for aluminium, which in the long term will benefit from the plentiful supply of gas in the region.

a decade. It is a sector which clearly requires deeper consideration. Bahrain’s capacity for additional manufacturing is now constrained by a shortage of industrial land, sometimes by long delays in local government planning approvals, by lack of clarity and delays in registration and licensing, by delays in energy connections and by lack of transparency about the Bahrainisation requirements.

-20

-10

0

10

20

30

40

2004 2005 2006 2007 2008 2009

GDP by Sector (Constant Prices)Year Average Growth

The Financial Corporations Construction Crude Petroleum & Natural GasTrade Real Estate & Business Activities


%

05

1015202530

2004 2005 2006 2007 2008 2009

GDP by Sector (Constant Prices)Year Average Growth

Transport and Communication Government Services Manufacturing


%

12

Another promising sector is the information and communications technology industry (ICT). This is partly in response to the open and stable regulatory environment provided by Bahrain, partly in response to regional opportunities and partly in response to changing technologies and consumer demand. There is considerable scope for expansion of this sector. The ICT sector is both an enabler and a major industry in its own right. It provides improved communications and better information processing services to permit other industries to expand, and the ICT industry is itself a major industry providing services to consumers and businesses.

gas reserves, the Kingdom would need to build alternative sources of prosperity more urgently than its neighbours. This certainly remains true. It is also true, however, that Bahrain is beginning a major renovation of the oil and gas industry which will greatly prolong its effective life and its

contribution to the Kingdom’s prosperity.

from improved techniques in indigenous fields have been scaled up. There is also the possibility of discoveries of new fields within the four offshore exploration blocks. Even without any new finds, the renovation of the existing industry will over the next decade make the single biggest contribution to the growth of business investment in Bahrain, and also make the single biggest contribution to the growth of capital goods imports into the Kingdom.

With finance, the single biggest sector, now expected to expand more slowly, the Kingdom needs to give increased attention to lagging sectors which would make a greater contribution in coming years. The most outstanding example is tourism. Currently relying on visitors from adjacent countries, primarily the Kingdom of Saudi Arabia, there is considerable potential for Bahrain to attract additional regional tourists and to diversify the tourist offerings of the Kingdom.

4. CHALLENGES IN THE NEW DECADE

Strengthened by a successful decade of economic performance, Bahrain is well equipped to meet the formidable challenges of the new decade. These challenges include:

substantial government budget deficit.

this trend to continue, living standards would eventually decline.

growth in the Bahraini workforce over the coming decade than previously expected. This is both a challenge and an opportunity. The challenge is to maintain the pace of growth of Bahraini jobs. The opportunity is that an increasing Bahraini workforce permits a higher rate of output growth while stabilizing or even increasing the share of Bahrainis in the total workforce.

0

20,000

40,000

60,000

80,000

100,000

120,000

NOGA's EDB'sEstimate

Source: NOGA, EDB analysis

13

Bahrain accumulated fiscal surpluses and significantly reduced government debt as oil prices

to 15% in 2008. Debt reduction totalled BD 137 million over the five years. Resisting the pressures

surpluses accumulated.

This underlying deterioration meant that the structure of Bahrain’s government budget was exposed when oil prices collapsed in late 2008. Bahrain moved swiftly into a fiscal deficit. The average oil price has since recovered from the plunge to below $35/bbl in the first quarter of 2009, yet average prices through the second half of 2009 were only half the record price in mid 2008.

New demographic assessments prepared by the EDB suggest Bahrain is on the cusp of a major and prolonged expansion of the Bahraini workforce. The EDB estimates that the number of Bahrainis in the age band

to 398,000 in 2019, a cumulative annual average increase of 3% over the ten years. A somewhat higher proportion of men and particularly a higher proportion of women of working age are likely to have jobs or seek jobs. The increase in the working age population will thus be amplified by an increase in the proportion of those who wish to participate in paid employment.

This is both a challenge and an opportunity for Bahrain, and in both of these aspects it changes the character of Bahrain’s economy. The new entrants to the Bahraini workforce over the next decade will be more highly educated, better prepared for a technologically more demanding work environment and more capable of continuous skills enhancement than the older members of the workforce, who will be retiring over the same period. This powerful change in Bahrain’s demography will both enable and require a continuing trend towards more highly skilled work roles.

-2,000-1,500-1,000

-5000

5001,0001,5002,0002,500

2003 2004 2005 2006 2007 2008

BDMillion

Non-Oil Deficit Compared to Overall Budget Surplus

Non-oil SurplusBudget SurplusNon-oil ExpenditureNon-oil Revenue

Source: MOF, EDB analysis

14

Recent research concludes that Bahrain’s productivity, or output per unit of input of capital and labour, has declined over the past five years. Some of the decline appears to be related to the rapidity of the business investment boom, which may well have created temporary excess capacity in some sectors such as shopping malls. This would be indicated by an increase in capital spending, without a corresponding increase in output. As the business investment boom cools, much of this excess capacity will be worked off. A sharp decline in labour productivity was also associated with a very rapid increase in the foreign workforce, which more than doubled between 2003 and 2008. Since most foreign workers are paid less than Bahraini workers, the sudden large increase permitted a rapid expansion in jobs with lower marginal productivity. This is to some extent a temporary effect which will be mitigated as the property boom turns down and as work visa ceilings begin to constrain the size of the foreign workforce. There may also be a base effect exerting downward pressure on productivity in an economy diversifying into new industries from a base of industries with very high capital intensity such as oil and gas extraction, oil refining and aluminium production.

Not all of the decline can be dismissed as temporary, however. The sharp decline in capital productivity raises a risk that the market is not correctly signalling best returns on investment.

worker economy alongside a high productivity Bahraini worker economy.

Accordingly, the Kingdom is placing greater emphasis on policies to improve productivity. Major influences include education and training, and also policies designed to encourage a swifter and more pervasive proliferation of technologies in Bahraini industries. These policies include a framework for the ICT industry to help make information and communications technologies cheaper, faster, and more widely accessible, and also a framework for supporting a faster rate of innovation in Bahrain industry.

-14-12-10-8-6-4-20246

Growth Rate of Multifactor Productivity


%

-10

-5

0

5

10

15

2003 2004 2005 2006 2007 2008

Growth Rates of Employment and Labour Productivity

Growth rate of labour productivityGrowth rate of employment

Source: LMRA, EDB analysis

%

16

SPECIAL ARTICLES

1. POPULATION, PARTICIPATION AND PRODUCTIVITY FOR BAHRAIN OVER THE COMING DECADE

1, which measures the ratio between those outside the labour force to the number of people in the labour force, is expected to decrease from 88% in 2008 to 76% in 2020.

workforce by 2020.

This article projects Bahrain’s population over the coming decades, and the likely distribution of that population between working age people and dependents. The projections show that Bahrain is entering a prolonged period in which the workforce will be growing quite rapidly, while the ratio of dependents to working age people declines.

Bahrain’s population has seen rapid growth in the past ten years. From the 2001 census to the latest 2008 numbers, the Central Informatics Organization estimates that Bahrain’s total population has grown by 67%;

population, during the same period, grew at an annual rate of 12.4%, whereas Bahraini population grew by 3.9%.

From the CIO baseline data for 2008, the EDB projects that Bahrain’s population will increase from 1.1 million in 2008 to over 2 million2 by 2030, with 44% of those being Bahrainis. The average annual growth rate expected over the next ten years is 2.8%.

workers are in Bahrain on a temporary basis and are not living with families. The massive growth

construction and trade, which have grown by 210% and 277% respectively from 2002 to 2009.

Bahraini population is projected to grow at rates which are closer to those in the nineties, at about 3%, which is much lower than the double digit growth experienced in recent years.

2 The key assumptions used in making these projections are:

with eventual growth rate of 1% at 2027.

0

0.5

1

1.5

2

2.5

Millionpeople Bahraini Population

Total pop. Bahrain pop. Non-Bahrain pop.


17

The number of Bahrainis in the age band

in 2008 to 404,000 in 2020, making a cumulative annual average increase of 2.9% over ten years. A somewhat higher proportion of men and particularly a higher proportion of women of working age are likely to have jobs or seek jobs. The increase in the working age population will thus be amplified by an increase in the proportion of those who wish to participate in paid employment.

In 2008, 49% of Bahrainis between the ages of 20 and 64 had jobs, and a further 4% were registered as unemployed – making a total workforce participation of 53%. Only 30% of women

Although female employment as a share of working age females is low, it is growing fast; from 27% in 2002 to 30% in 2009.

The current rate of participation is considered low by developed country standards, but it is expected to increase as more women join the workforce and rising aspirations encourage more males to also join the workforce.

The table below shows the number of nationals wishing to participate in the workforce under two scenarios. Both scenarios show how many additional jobs would be needed by 2020 assuming different rates of participation.

The first scenario assumes that there is no change in the participation rate for men or women. This results in over 41,000 additional jobs needed by 2020. The second scenario assumes that male participation increase by 5 percentage points to 70% while female participation increases to 45% by 2020. The second scenario shows over 77,000 jobs needed by 2020. Australia was used as a point of reference as an OECD sample. It has a male participation rate of 72% and a female participation rate of 58%3.

0100,000200,000300,000400,000500,000600,000

Bahraini Population by Age Group, 1981-2030

0-19 65+20-64Source: CIO, EDB analysis

People

3 Australian Bureau of Statistics.

SCENARIO 1 LOW WORKFORCE

SCENARIO 2

Total participation

rate

Male participation

rate

Female participation

rate

Additional Bahraini jobs

needed by 2020

18

sense of this productivity level. Therefore, assuming productivity remains unchanged, growth in

only made up 3% of total employment, of which 63% were Bahraini, a high proportion considering

As a result of the disproportionate

represent the difference in productivity

According to the LMRA, average Bahraini wages are around 3 times higher than

Bahraini workforce, and three times more productive, Bahrainis have an almost equal

quarter of the total workforce.

Using the above assumptions we project the two participation scenarios shown in the previous section. Each increase in Bahraini workforce will have three times the effect of

we show a case which would result from 0% productivity growth for total workforce and 2% productivity growth for Bahrainis, resulting in 4 outcomes shown in the above graph.

The scenarios above show annual growth of

productivity and 4.6% for high participation and productivity. These growth rates may seem less impressive than recent growth;

due to the even higher workforce growth, leading to lower productivity, as in the graph shown here.

02468

10121416

2003 2004 2005 2006 2007 2008 2009

Growth Rate of Workforce and GDP

Growth of total workforce

Growth of GDPSource: CIO, EDB analysis

%

3,0004,0005,0006,0007,0008,0009,000

BD Million

Constant GDP Growth Projections Under Workforce

Scenarios

Current participation 48% - 0% productivity growthCurrent participation 48% - 2% Bahraini productivity growthHigh participation 58% - 0% productivity growthHigh participation 58% - 2% Bahraini productivity growth


19

per capita over the coming decade.

The definition of dependency ratio used in

the definition previously used in publications

been changed to conform to international

remains the same and shows a decreasing

The Bahraini dependency ratio reached its peak in the late eighties and early nineties at 118%. In 1990, 51% of the population were under 20 and 3% were 65 and older. The dependency ratio decreased steadily, reaching 88% in 2008, with 44% of the population under 20 and 4% over 64 years.

The Bahraini dependency ratio is expected to continue to decrease until 2018, when it is estimated to reach 75%. After 2018, we expect the dependency ratio to increase slightly, despite a

We expect that by 2030, the 65+ population will have reached almost 10% of the total population,

in 2010, 2020 and 2030.

decreased dramatically from 20% in 2000 to 13% in 2008, due to the large increase of foreign workers over the past decade, who normally come to Bahrain without their families.

3,6003,8004,0004,2004,4004,6004,8005,0005,2005,400

BD/personGDP Per Capita

Current participation 48% - 0% productivity growthCurrent participation 48% - 2% productivity growthHigh participation 58% - 0% productivity growth

High participation 58% - 2% productivity growth


020406080

100120140

Dependency Ratio

Bahraini dependency ratioNon-Bahraini dependency ratio


%

2010 562,491 41% 55% 4% 83.5%

2020 712,012 38% 57% 6% 76.2%

2030 880,524 36% 55% 9% 82.4%

20

2. MEASURING BAHRAIN’S PROGRESS

One of the main targets of the Bahrain Economic Vision 2030 is to double Bahraini household income by year 2030. As the vision states:

“ The ultimate aim is to ensure that every Bahraini household has at least twice as much disposable income – in real terms – by 2030.” Bahrain Economic Vision 2030

of society’s standard of living, based on the rationale that all citizens would benefit from their

personal income because it fails to take into account how a country’s wealth is divided.

In this article, we look at alternative measures of income for Bahraini households like median Bahraini household income, the value of free education, healthcare, infrastructure and other governmental public goods and services per Bahraini citizen and growth of real wages.

Income per capita decreased by 3% and 1% respectively in the past decade, Bahraini median household income increased by 30% between 1995 and 2006, and the value of government services per Bahraini citizen increased by 26% between 2001 and 2009. Likewise, real wages in Bahrain increased from a total of BD 1.13 billion in 2002 to BD 1.71 billion in 2008, making an

measuring Bahrain’s progress, has its shortcomings. Alternative indicators for welfare that could be

power parity.

divide the total into equal portions. In effect, we take the value of all goods and services produced within a country’s borders, adjust for inflation, and divide by the total population. If average real

available to consumers, and (ii) consumers are in a better position to buy them.

annual average negative growth of 1%. This negative growth rate is due to an increase in the total population by an average of 6% per year .

is sent abroad, and some residents receive income from abroad. During the period between 2003

due to a larger constant population growth of about 7% per year over the period.

-2

0

2

4

6

8

2004 2005 2006 2007 2008 2009

Growth Rates of GDP and GDP Per Capita in Constant Prices

Growth rate of GDP per capitaGrowth rate of GDPGrowth of population

Source: CIO

%

-10

-5

0

5

10

15

2004 2005 2006 2007 2008 2009

Growth Rates of GNDI and GNDI Per Capita in Constant Prices

Real growth of GNDI per capitaGrowth rate of GNDIGrowth of population

Source: CIO

%

21

Survey published in 1995 and 2006, shed some light on the distribution of Bahraini household income and the average size of Bahraini households. We find that median real Bahraini household annual income increased from BD 6,428 in 1995 to BD 9,506 in 2006; an increase of 47% in real terms. Median income is the amount which divides the income distribution into two equal groups, half having income above that amount, and half having income below that amount. The median income is considered by many statisticians to be a better indicator than the average household income as it is not dramatically affected by unusually high or low values.

The average annual income for Bahraini households also increase from BD 10,811 in 1995 to BD 14,502 in 2006; an increase of 34 percent.

Like in other oil exporting countries, the Bahraini government provides public goods and services such as healthcare, education, infrastructure and defence to Bahraini households, mainly from

for these public goods and services. The value of these goods and services can be calculated by dividing oil revenues received by the Bahraini government by the total size of Bahraini population. In 2001, oil revenues per Bahraini citizen was BD 1,778 and in 2009 it increased to BD 2,310, an increase of 26% in real terms over the period.

02,0004,0006,0008,000

10,00012,00014,00016,000

1994 2006

BD

Bahraini Median Household Annual Median and Average

(2006 Prices)

Source: CIO

Median annual household incomeAverage annual household income

0

5,000

10,000

15,000

20,000

25,000BD

Oil Revenues Per Bahraini Household

Source: MOF, CIO, EDB analysis

0500

1,0001,5002,0002,5003,0003,5004,0004,500

BD

Oil Revenues Per Bahraini Citizen

Source: MOF, CIO, EDB analysis

22

The figure below shows that average wages earned by privately employed Bahraini males around BD 414 in 2003 and increased by 30% in 2009 to BD 542 in real terms. The median wage for Bahraini males in the private sector increased from BD 214 in 2003 to BD 319 in 2009: an increase of 49%.

Wage data from the LMRA reveal that the median Bahraini wage in 2008 is around BD 450 per month and total Bahraini wage income is approximately 78 million Dinars per month or 938 million Dinars per year. The distribution of Bahraini wages is shown in the figure above.

Report. It is based on three components: income, education and life expectancy. In 2009, Bahrain was among the “high human development” countries and among the top 5 Arab countries in UN’s

which is a weighted average of four components of perceived economic well being: consumption flows, stocks of wealth, inequality, and indicators of economic insecurity like unemployment and poverty in old age.

414

542

214319

0100200300400500600

2003 2009

BD

Average and Median Monthly Wage of Privately Employed

Bahrainis

Average monthly wageMedian monthly wage

Source: GOSI, EDB analysis

02,0004,0006,0008,000

10,00012,00014,00016,00018,00020,000

Distribution of Bahraini Labour by Wage Group in 2009

Male

People

Source: LMRA

23

3. JOBS

Despite the economic growth slowdown in 2009, employment in Bahrain increased. Almost all of

year average terms.

though worker employment far outpaced Bahraini employment.

Bahrain total employment grew by 10% in 2009 compared to 2008, in year average terms.

Total employment (including public and private sector) grew by 4% compared to 2008.

grew by 6% over the same period.

048

1216

2003 2004 2005 2006 2007 2008 2009

%Year Average Total Employment


0100200300400500600700

2002 2003 2004 2005 2006 2007 2008 2009

ThousandPeople

Total Employment

Total EmploymentBahraini Non-Bahraini

Source: LMRA

048

121620

2003 2004 2005 2006 2007 2008 2009

%

Year Average Total Employment Growth by

Citizenship

Bahraini Non Bahraini

Source: LMRA, EDB anaylsis

0

4

8

12

16

2003 2004 2005 2006 2007 2008 2009

%

YoY Change in Total Employment


24

Overall public sector employment grew by 2% compared to 2008 whereas overall private sector employment grew by 4% over the same period.

employment grew by 3% over the same period.

Bahraini employment grew by 6% over the same period.

CONSTRUCTION:

employment grew by 8% in 2009 compared to 2008.

Broken down by gender, overall male employment grew by 6% whereas female employment dropped by 8% over the same period.

FINANCE:

Overall finance employment rose by 6% in 2009 compared to 2008.


Broken down by gender, overall male employment grew by 5% whereas female employment grew by 7% over the same period.

TRADE:

Overall trade employment rose by 2% in 2009 compared to 2008.


Broken down by gender, overall male employment and female employment grew by 2%.

0100,000200,000300,000400,000500,000

2002 2003 2004 2005 2006 2007 2008 2009

PeopleTotal Employment by Sector

Public Sector Private SectorSource: LMRA

-5

0

5

10

15

20

2003 2004 2005 2006 2007 2008 2009

%

YoY Change in Employment by Sector

Public Sector Private SectorSource: LMRA, EDB analysis

25

Over the last 8 years total employment in Bahrain grew by 96%. Bahraini employment grew by

employment grew by 131% over the same period.

employment grew by 160% in the last 8 years.

Over the past 8 years overall Finance employment grew by 76%.



Over the past 8 years overall trade employment grew by 218%.



010,00020,00030,00040,00050,00060,00070,00080,00090,000

Jobs

Jobs Created between 2002-2009

Bahraini Non-Bahraini

Source: LMRA

26

4. EXPORT PERFORMANCE AND EXPORT STRUCTURE

Data from the International Monetary Fund show that Bahrain’s exports have seen steady growth

higher than the average growth rate of 2% seen in the three prior years to this period. The value of exports reached 25 billion Dollars in December 2008, before dropping in January 2009 to 19.66 billion Dollars, most likely due to a decrease in oil prices. As oil prices and global growth recovered so too did Bahrain’s exports, reaching 20.35 billion Dollars by the end of 2009.

Due to the absence of exports details for 2009, we focus on 2008 data.

Bahrain’s export growth fluctuated between the years 2003 and 2008. The average growth rate in volumes was about 14% annually.

Bahrain’s exports have seen tremendous growth between 2002 and 2008, increasing by a total of 116% over the period despite

oil commodities, and services exports significantly increased their share of total

to register strong growth up to 2008, with an increase of 50% from 2000 as well as the services exports which grew 6% in the same period. In 2008, oil exports represented only 33% of total exports, a decrease of 50% from the year 2000.

05

1015202530

$Billion

Bahrain Exports

Source: IMF

020406080

100120140160

$/bbl Oil Price (Brent)

Source: US Energy Information Administration

8%

22%

9%

18%

10%

16%

0

5

10

15

20

25

2003 2004 2005 2006 2007 2008

Change Growth of Exports (GDP: 2001)

Source: CIO

%

14% 14% 13% 16% 26% 28% 24% 21% 22%

26% 26% 20% 19%26% 29% 40% 46% 51%

60% 60% 67% 67%49% 49% 36% 36% 33%

2000 2001 2002 2003 2004 2005 2006 2007 2008

Percentage Share of Exports by Sector 2000-2008

(GDP:2001 BD Million)

Services Non Oil Oil


27

Between the year 2000 and 2008, oil exports represented an average of 60% of the total exports. Non oil exports in the same time period made up 22% of the total, with services constituting the remaining 18% of the share. Oil exports continued to contribute at similar levels for a few years later, up until 2004 when the services exports showed a dramatic increase by 112% from the

services exports grew noticeably between 2000 and 2008, by 137% and 301% respectively.

Next, we explore oil exports for the years 2000 – 2009 and its components. (Due to the lack of data, references to exports for the coming sections use current prices, not constant.)

from 2001, making an average annual growth rate of 22%, and peaking in value in 2008. The value of oil exports in 2009 dipped by 35% due to significant decreases in global oil prices. Although these oil prices started to decrease in 2008, they were not reflected in Bahrain’s total exports of 2008 because they saw both peaks and dips in 2008 that masked their effect. Oil exports in 2009 have shown signs of a slight increase, with a monthly average growth of 8%.

13% 14% 15% 16% 26% 23% 21% 20% 18%

22% 26% 28% 26%20% 19% 20% 17% 17%

65% 59% 57% 59% 54% 58% 59% 62% 65%

2000 2001 2002 2003 2004 2005 2006 2007 2008

Percentage Share of Exports by Sector 2000 - 2008

(Current Prices)

Services Non-Oil Goods OilSource: CIO, EDB analysis

0

1,000

2,000

3,000

4,000

5,000

6,000

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

BD Million

Oil Exports 2000-2009

Source: NOGA

351 357 402 474 1,006 1,146 1,249 1,325 1,406585 652 726 767793 965 1,174 1,126 1,3851,763 1,475 1,488 1,760

2,0872,927

3,466 4,059

5,185

01,0002,0003,0004,0005,0006,0007,0008,0009,000

BD Million

Exports by Sector(Current Prices)

Services Non-Oil Goods OilSource: CIO

0100200300400500600700

BD Million

Oil Exports 2007-2009 (Monthly)

Source: NOGA

28

In 2008 and 2009, the average share of crude oil to total oil and gas exports reached 37%. The share of manufactured oil products, on the other hand, represented

only 2%.

The value of crude oil exports varied significantly between 2008 and 2009, which was a reflection of world oil prices. The value of the crude oil exports was much higher in 2008 than in 2009 and reached its peak in July 2008 before dropping dramatically in the fourth quarter of the same year. Then, in 2009, oil prices began to rise again, slowly, with small fluctuations until the end of the year.

higher in 2008 than 2009. The increment was obvious in the five main products that

Diesel and Fuel Oil. These five products have similar shares of total petroleum products exports in both years. Diesel represented about 40% of total exports in 2008 and 2009, followed by Jet Fuel with a share of 22%. Naphtha and Fuel Oil have close percentage

other hand, represents only 3% of total petroleum exports.

Total liquid gas exports in 2008 were 1.5 times higher in value than in 2009. The main liquid gas products that are offered are:

0500

1,0001,5002,0002,5003,0003,500

Crude Oil Exports Petroleum Products Exports

Liquid Gas Exports

BD Million

Oil and Gas Industry Exports 2008 - 2009

2008 2009

Source: NOGA

050

100150200250

BD Million

Crude Oil Exports

2009 2008Source: NOGA

0200400600800

1,0001,2001,4001,600

BD Million

Petroleum Products Exports

2008 2009

Source: NOGA

02468

101214

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

BD Million

Liquid Gas Exports

2008 2009

Source: NOGA, BANAGAS

29

5. MICRO, SMALL AND MEDIUM ENTERPRISES IN THE BAHRAIN ECONOMY

Bahrain is focusing on developing a competitive SME sector, delivering international quality products and services and contributing to quality employment opportunities. Statistics show that micro, small and medium enterprises represent a significant part of the Bahraini economy. As the Central Informatics Organization estimates, these enterprises contribute nearly 28% of total nominal GDP. Construction, manufacturing and trading are the three main industries within this sector.

Micro, small and medium enterprises also provide jobs for nearly 73% of private sector employees, only 14% of which are Bahraini employees, however, and 86% are non-Bahrainis. Broken down by gender, 90% of these employees are male, and only 10% are female. These male employees tend to have higher wages than their female counterparts.

DEFINITION OF MICRO, SMALL AND MEDIUM ENTERPRISES

The following definition is approved by the SME committee headed by the minister of Industry and Commerce.4

Micro enterprises are defined as those businesses that hire up to 10 employees, and have capital investment of up to: BD 20,000 for the manufacturing sector, and annual turnover of up to BD 100,000 for all other sectors.

Small enterprises, on the other hand, are defined as those with 11 to 50 employees (and up to 100 for the construction sector), and have a capital investment between BD 20,001 and BD 500,000 for the manufacturing sector, or alternatively an annual turnover between BD 100,001 and BD 1 million for all other sectors.

Medium enterprises are those with 51 and 250 employees (and up to 400 for the construction sector), and have a capital investment between BD 500,001 and BD 3 million for the manufacturing sector, or alternatively an annual turnover between BD 1,000,001 and BD 5 million for all other sectors.

MICRO, SMALL AND MEDIUM ENTERPRISES IN BAHRAIN5

NUMBER OF MICRO, SMALL AND MEDIUM ENTERPRISES6:

Micro enterprises today represent around 87.7% (41,033 establishments) of the total SME and micro enterprises sector. Small enterprises make up around 10% (4,760 establishments), while medium enterprises constitute the final 1.7% (808 establishments).

4 Threshold limits of both employment and capital investment/annual turnover will have to be complied with.

5 This information has been collected recently for the first time in Bahrain and therefore cannot be compared with previous years. The financial services sector is excluded.

6 Due to data restrictions, these estimations are based on the employment criteria only. The financial services sector is excluded.

Micro 87.76%

Small 10.18%

Medium 1.73%

Others 0.33%

Number of MSMEs in Bahrian Q1 2010


30

SECTOR BREAKDOWN:

Bahrain’s micro, small and medium enterprises are focused mostly in three main industries, based on the number of commercial registration certificates (both companies and individuals). These industries are: trading, which represents 42% of total micro and SME industry, followed by manufacturing and then construction, which represent 14.48% and 13.73% respectively.

The total micro, small and medium

of 28%. Nearly 6.4% come from those companies within the trade industry, 5.6% within the manufacturing industry and finally 4% within the construction industry.

This is followed by real estate (3%), transportation (1.6%), mining (1.5%) and private education services (1%).

Total micro, small and medium enterprises employees represent 73% of total private sector employees (328,880 employees).

Data shows that 28% of employees in the private sector work in micro companies (124,777 employees), 25% in small companies (109,551 employees) and 21% in medium companies (94,552 employees).

MSMEs GDP Contributions Q1 2010

SMEs andMicro ent.

GDP

Trade Manufacturing Construction Others

Source: CIO, EDb analysis

28%25%

21%26%

020,00040,00060,00080,000

100,000120,000140,000

Micro Small Medium Others

Employees in the MSMEs Q1 2010


People

Trading

42%

Manufacturing

14%

Constructions

14%

Others

30%

MSMEs Sector Breakdown 2009

Source: MOIC

31

The majority of people working in the micro, small and medium enterprises sector are

(14% of total employees in the sector),

employees (or 86% of total employment).

Bahrainis make up the majority employment in industries like construction, wholesale and retail, transportation, manufacturing, fishing, hotels and restaurants (except the financial services industry which recorded 5,139

Male employees in micro, small and medium enterprises are10 times greater than females. The number of men in this field is 297,416 (or 90% of total employment), compared to 31,464 women (or 10% of total employment). The nature of the industries that make up the most of these enterprises (construction, manufacturing, transportation, agriculture, wholesale and retail) tend to attract more men than women. The female workforce is more prominent in education, health and social work.

7,175

117,602

18,443

91,108

21,160

73,392




Micro Small Medium

Bahraini vs Non-Bahraini Q1 2010


9,246

115,531

11,594

97,957

10,624

83,928

Females Males Females Males Females Males

Micro Small Medium


010,00020,00030,00040,00050,00060,00070,00080,00090,000

100,000No.

Male vs Female by Industry Q1 2010

Male Female


32

salaries compared to micro and small enterprises. Employees in medium enterprises receive an average salary of BD 529 per month, compared to BD 473 in small enterprises, and BD 328 in micro enterprises.

The following graph shows the salary details for the employees in micro, small and medium enterprises. As shown, males are paid more than females, the most probable reason is the nature of the industries that micro, small and medium enterprises are mostly focused on.

CONCLUSION:

SMEs are the engine of growth, and they are essential to sustaining competitive and diverse markets. They play a particularly important role in developing countries, especially since they tend to be the largest providers of employment opportunities and new jobs. They can also be a major source of innovation.

348 467

254 244

382

702

369441 473

575481

589

F M F M F M F M F M F M

Bahraini Non- Bahraini



Micro Small Medium

Average Salaries in MSMEs Q1 2010


33

6. REAL ESTATE DOWNTURN

construction growth between the years 2003 and 2008. Following the rise in oil prices and the growth of financial services activity, asset prices, and particularly those related to real estate and property development, increased noticeably. Investment banks, both conventional and Islamic, showed much interest in this area. Average real growth in credit to the private sector as a whole was well above 20% per year during those 5 years, compared to around 17% growth in Kuwait and around 26% for the UAE.7 The share of this credit to real estate and construction sectors in

Arabia and the UAE, and below only Kuwait).8

On the ground, the number of construction permits9 rose by nearly 21% in two years (between 2003 and 2005), when it peaked at 11,500 permits in 2005 and remained at a similar level in 2006. Specific types of permits saw higher increases than others during this boom period, particularly additions to existing construction permits, demolitions, new construction and finally demolitions combined with new construction permits.

Commercial Registrations (CRs)10 issued

saw high growth around the same time period, peaking in 2006 with 1,500 total

biggest percentage growth came a year earlier, in 2005, when total CRs rose from a total of 222 in 2004 to around 1,100 in 2005, representing a 400% growth. Commercial registration for real estate, rentals and associated activities also peaked in 2006, nearly doubling in a matter of 3 years.

Between the years 2004 and 2008 (our data years), Bahrain also saw noticeable growth

in retail loans for construction and real estate activity, climbing by 91% (nearly doubling) in value

11 We suspect, however, that this growth has slowed down in 2009. The growth in loans during this period corresponds to rapid credit growth to the private sector, which in Bahrain reached approximately 26% from 2003 to 2008. Such high rates of credit growth during a boom often leads to high levels of default after the boom, which could then increase the likelihood of an economic downturn.12

9 Issued by the Ministry of Municipalities Affairs and Agriculture.

10 Issued by the Ministry of Industry and Commerce.

11 Central Bank of Bahrain data.

-0.1

-0.05

0

0.05

0.1

0.15

02,0004,0006,0008,00010,00012,00014,000

Growth Rate

No. of Permits

Annual Construction Permits by Type

Growth PermitsSource: MOMAA

0

500

1,000

1,500

2,000

2004 2005 2006 2007 2008 2009

No. of CRs

Annual Commercial Registration by Type

ConstructionReal Estate, Rentals and Associated ActivitiesFinancial Services

Source: MOIC, EDB analysis

34

Overall, the retail banking portfolio in Bahrain is highly exposed to construction and real estate,

contained in the construction and real estate sector through September 2009, increasing slightly to 3.7% for retail banks and 4.1% for wholesale banks, still nowhere near the double digits which were seen in Bahrain in 2003.13 In the IMF’s view, provisioning to

standards, and therefore the impact on the financial sector of defaults due to the decline in asset prices will be limited.

Employment in the construction sector has also seen high growth in Bahrain. Over the past few years, this growth rate has varied from year to year but it kept a positive trend, even in 2009.

Bahrain, however, was not immune to the effects of the global financial crisis. These

to US subprime mortgages.14 By the end of 2008 and into 2009, the real estate and property development sector began to show signs of weakness, especially with the beginning of the Dubai’s property bust in 2008.15

of a total of $2.5 trillion at the end of 2008. Of these projects, which were in different stages of planning and implementation, Bahrain saw a total of $13 billion worth being halted at the end of 2009, from the $64 billion worth that was estimated for the country at the end of 2008.16

After years of positive growth in construction and real estate, Bahrain began to see a decline in construction, commercial registration and permit issuance; declining the most in

noticeable growth.

and Statement by the Executive Director for the United Arab Emirates”, p. 8.

0

500

1,000

1,500

2,000

BD Million

Personal Property Mortgage, Construction & Real

Estate, and Personal Retail loans

Personal Property mortgage loans (BD millions)

Outstanding Loans: Retail Banks: NR: Business: Construction and Real Estate

Source: CBB

0%

5%

10%

15%

20%

25%

0

20,000

40,000

60,000

80,000

100,000

120,000

140,000

160,000

Growth rate Total Employment

Source: LMRA

35

Construction spending experienced negative growth in 2009 for the first time in the last 5 years.

Evidence also shows that Bahrain’s office property has seen moderating demand in 2009 compared to previous years.

These properties’ rental rates have decreased by nearly 20% over the year.17 In fact, office rent prices seemed to have dropped significantly between the first and third quarter of 2009, especially as the banking sector continues to resolve its financial problems. Residential property also seemed to have shown signs of moderating demand, with fewer announced projects in 2009 than the previous boom years.18 There seems to be more focus on finishing the projects that have already begun than on building new ones.

seen in 2009, nor were its financial sector troubles as alarming. The region and Bahrain, however, should expect the downturn to continue in 2010.

-15-10

-505

1015202530

2003 2004 2005 2006 2007 2008 2009

Growth of Construction Spending


%20151050

-5-10-15

Construction Contribution to GDP

Construction Contribution to GDP Growth of contribution


2004 2005 2006 2007 2008 2009

%

36

7. PERFORMANCE OF THE FINANCE SECTOR

The finance sector is crucially important to the economy of Bahrain. It now accounts for

volume. The sector has contributed nearly

six years. It employs over 14,000 people, two thirds of them Bahraini. Jobs in the industry are generally well paid and highly skilled. The sector has grown by an average of 13% per year over most of the past decade.

sector experienced negative growth in 2009.

In recent years its growth has been

institutions that are not permitted to seek retail deposits but may seek wholesale funds directly from

Most of this sector is engaged in offshore transactions, predominantly, though not only, within the

is similar. Nine tenths of wholesale bank assets and liabilities originate offshore. Over the last five years offshore business has accounted for half of the growth of the finance sector as a whole.

The finance sector also includes a vigorous insurance sector. It has doubled in size over the last five years.

The global financial crisis has presented a considerable challenge to the finance sector.

In many major developed economies bank lending growth continues to contract, the risk premium

funded sectors such as property development are well down. All these trends are evident in the

After five years of vigorous expansion the property sector in Bahrain is now contracting. Though

continue to impact the wholesale banking sector through next year and into 2011.

On the most recent numbers the contraction in the finance sector in Bahrain is much less evident than elsewhere, and especially than the UK and the US. Overall sector output contracted by 1% through 2009. Credit growth has slowed from an average rate of 28% per cent over the five years to the end of 2007 to 5% from the third quarter of 2008 to the third quarter of 2009. Money supply (M3)19 grew by 4% in 2009.

Despite the downturn in the financial sector, total employment grew by 215 jobs in 2009.

19 M3 is a broad measure of the money supply and includes currency, bank deposits and highly liquid instruments such as institutional money market funds.

-20-10

01020304050

Financial Sector Growth Rate


%

37

Within the finance sector there will be big changes in the pattern of expansion. Over the last five years more than half of the total growth in the sector has been contributed by foreign banking, almost all of it wholesale banking. Within wholesale banking, a small but significant part of the growth has been provided by Islamic banking.

Both Islamic banking and wholesale banking more broadly are heavily dependent on real

some time, and Islamic banking will be more constrained than expected.

While wholesale banking continues to contract, retail banking within Bahrain has been much steadier. So too, insurance. The insurance sector grew by 6% from BD 312.5 million in 2008 to BD 332 million for 2009.

The US, Europe and the UK have responded to the turbulence in their finance sectors by reaching broad agreement on regulatory changes to diminish the risks of a recurrence. These changes, still being

Stability Board and the Bank of International Settlement (BIS), are likely to involve additional capital requirements for banks, limits on bank leverage, and limits on maturity mismatches. All these changes are likely to reduce bank profits.

The Bahrain finance sector has survived relatively well despite the biggest financial

Credit growth is down, but not nearly as severely as in many major developed economies. The sector has contracted, but again not as severely as in some major OECD economies. This is a major achievement for which the CBB deserves

evident that the development model for the Bahrain finance sector, which has depended heavily on the rapid growth of offshore wholesale banking, will change.

11

24

3 6

3

32

Banks Liabilities to GDP 2008

Bahrain Hong Kong Lebanon

Switzerland Singapore Luxembourg

Source: CBB, Hong Kong Monetary Authority, Swiss National Bank,

Central Bank of Lebanon, Monetary Authority of Singapore, Central

Bank of Luxumburg

-20-10

01020304050

2004 2005 2006 2007 2008 2009

Growth of the Finance Sector

Local Foreign Insurance


%

38

8. TOURISM SECTOR PERFORMANCE

OVERVIEW 2009

The tourism sector in Bahrain contributed positively to the country’s economic growth in 2009.

20, which dropped to 7 million visitors compared to 8.6 million in 2008.

Jobs in this same industry also increased in 2009 compared to the previous year.

statistical report the number of people employed by hotels and restaurants totalled 30,739 in 2009, which is up by 5% compared to 2008 (29,285 people). This accounts for a share of 7% of the total insured employees in the private sector.

VISITOR ARRIVALS

According to the Ministry of Culture and Information, nearly 54% of the total number of visitors to the Kingdom were tourists in 2009.

Overall arrivals in Bahrain fell by 19% in 2009 compared to the previous year. The

number of visitors from all nationalities decreased, except for those from Central America and the Mediterranean.

Arabs dominated the visitors market and were the top three in terms of number of visitors in 2009. In more detail, these numbers can be broken up as the following:

total visitors to the Kingdom compared to 61.9% in 2008.

visitors compared to 15% in 2008.

journalism.

-25-20-15-10-505

101520

% Change

Total Number of Visitors

Source: MOCI,CIO,EDB anaylsis

0

20

40

60

80

% Of Total Visitors

GCC Nationals

Source: MOCI

0

3

6

9

12

Million People

Mill

ions

Non-Bahraini Visitor Arrivals

Source: MOCI, CIO

20 Tourist includes visitors for leisure and business purposes.

39

TOURISM REVENUE FROM FEES COLLECTION

Tourism revenue from fees collection, such as issuance and renewal of tourism licenses and the mandatory 5% hotel services tax, amounted to BD 8.4 million in 2009.

Statistics show that the majority of visitors to Bahrain came for business activities and leisure.

Total number of business arrivals rose by 47% in 2009 compared to the previous

year. The number of people visiting for leisure rose by 31%, and for journalism by 18%, whereas number of visitors rose by 26%.

Considering the limitations of our 2009 data regarding hotel performances in general (only 4 and 5 star hotels information were available), the numbers show that the biggest hit in terms of occupancy rate and number of hotel residents was experienced by the 5 star hotels. Their room revenues have decreased, especially as their charges decreased by an average of 14% in this past year.

Occupancy rates in 5 star hotels for 2009 went down by 14%, the number of hotel residents went up by 9%, the number of rooms sold went down by 13% and the number of nights went down by 8%. At the same time, the average rate of the hotel rooms fell by 14% and revenue from these rooms decreased by 12% over 2009.

Occupancy rates in 4 star hotels for 2009 also went down, by 9%. The number of hotel residents dropped by 7% compared to 2008, the number of rooms sold went down by 1% and the number of nights went down by 4%. At the same time, the average rate of these hotel rooms increased by 8% and revenue from the rooms increased by 6% compared to 2008.

0

2

4

6

8

10

2003 2004 2005 2006 2007 2008 2009

BD Million

Tourism Revenue FromFee Collection

Source: MOCI

0123456

Million People

Purpose of Visit

Lesiure Business Transit JournalismSource: MOCI

40

CRUISE STATISTICS

In Bahrain, the cruise season starts in October and ends in March.

Between 2007 and 2009, Bahrain saw an increase in the number of cruise ships and cruise passengers landing in the country, The increase in the number of cruise ships was noticeable when comparing the cruise

season, where the rate of increase is 67%. There has also been an increase in the number of cruise passengers coming to Bahrain, reaching 109% over the same period.

The new port of Sheikh Khalifa bin Salman which began operation in April 2009 is expected to help increase the number of cruise ships docking in Bahrain given its capacity to accommodate large cruise ships.

The following table shows the change in the number of cruise ships and the number of tourist arrivals by these cruise ships to the Kingdom from 2007 to 2010.

030,00060,00090,000

120,000150,000180,000

2007-2008 2008-2009 2009-2010

PassengersCruise Passengers

Source: MOCI

0

2

4

6

8

Bahrain International

Airport

King Fahd Causeway

Mina Salman Port

Million People

Arrivals by Port of Entry

Source: MOCI

In 2008 the highest number of arrivals,

excluding Bahrainis, was through

the King Fahd causeway followed by

Bahrain International airport, with the

at 80,340 persons only.

41

01122334%

Hotels and Restaurants Contribution to GDP

Source: CIO

0

5

10

15

20

25

%

Output Growth for Hotels & Restaurants

Source: CIO

0123456789

10

Million People

Mill

ions

Non Bahraini Visitor Arrivals

Source: MOCI, CIO

0306090

120

Number of Hotels

Source: CIO

Hotels

Over the last decade, the tourism sector (proxied by hotels and restaurants) grew by 156% in real prices. The sector’s

to 3.2% in 2009 at real prices.

The number of hotels in 2008 has increased by 29% compared to 8 years previously, in 2000. The length of stay has increased by 34% over the same period.

Over these last 10 years, the number of

by 47% as well.

In the last 7 years government revenue from tourism fees collection (issuance and renewal of tourism licenses and 5% hotel services tax) has also increased, by 161%, between the years 2003 and 2009.

42

9. ADDITIONAL INDIGENOUS OIL – FROM BAHRAIN FIELD

Bahrain has been able to benefit from an average oil production of 180,000 barrels/day over the past years. Of the total production, an average of 30,000 barrels/day come from the Bahrain Oil Field, while 150,000 barrels/day come from the offshore Abu Saafa Field (Table 2 on the following page).

potential oil and gas output of the Bahrain Oil Field.

$15 billion over 20 years. The field’s oil production is expected to triple within 6 years and grow to a peak level of 100,000 barrels/day thereafter. Tatweer also aims to double the field’s gas

a 48% stake in the venture, while Mubadala holds 32%, followed by Nogaholding with 20%.21

oil extraction from the Bahrain Field based on these field developments. Estimates until 2028 are shown in Table 3 on the following page.

Assuming that the Bahrain Field production would gradually decline after 2028, reaching 20,000 barrels/day in 2050, Tatweer’s explorations would enable the Kingdom to tap into an additional 890 million barrels over what was originally thought to be recoverable from the field. New technological advancements in oil drilling and production, however, may enhance the quantity that the Kingdom can extract in the future from the estimated oil in

place, therefore changing extraction projections for the field.

It should be noted, however, that government oil revenue is less affected by changes in Bahrain

from this field and retains the rest of the profit for purpose of investments. Therefore, oil revenue related to the government budget (as handled by the Ministry of Finance), comes mainly from Abu Saafa field revenues.

0

20,000

40,000

60,000

80,000

100,000

120,000

NOGA's Estimates

EDB'sEstimate

Source: NOGA, EDB analysis

43

TABLE 2

(thousands of barrels) 2003 2004 2005 2006 2007 2008 2009

Total Crude Oil 68,866 68,585 68,096 66,908 67,262 66,865 66,510

Bahrain Field 13,720 13,647 13,348 13,085 12,552 12,027 11,750

Abu Saafa Field 55,146 54,938 54,748 53,823 54,710 54,838 54,760

TABLE 3

(bbl/day) 35,508 47,528 62,136 81,137 90,268

(bbl/day) 95,511 102,321 106,750 112,307 112,631

(bbl/day) 109,167 108,643 108,856 106,741 106,221

(bbl/day) 107,470 106,804 106,632 106,076

45

APPENDIX SOURCES Australian Bureau of Statistics

Central Bank of Bahrain Central Bank of Lebanon Central Bank of LuxemburgCentral Informatics OrganizationChina’s National Bureau of Statistics

Energy Information Administration

International Monetary FundIndia Central Statistics Organization

KSA’s Central Department of Statistics Labour Market Regulatory Authority

Ministry of Culture and InformationMinistry of LabourMinistry of FinanceMinistry of Industry and CommerceMinistry of Municipalities and Agriculture AffairsMonitory Authority of Singapore

Saudi Central Dept of StatisticsSwiss National BankUAE Ministry of EconomyUS Bureau of Economic AnalysisUS Energy Information AdministrationUS Office of National StatisticsWorld Investment Report 2008, 2009, UNCTAD 2nd FDI survey, Central Informatics Organization

ABBREVIATION

CBB: Central Bank of BahrainCIO: Central Informatics OrganizationEDB: Economic Development BoardFDI: Foreign Direct Investment

IMF: International Monetary FundLMRA: Labour Market Regulatory AuthorityMOCI: Ministry of Culture and InformationMOIC: Ministry of Industry and CommerceMOMAA: Ministry of Municipalities Affairs and Agriculture MOL: Ministry of LabourMOF: Ministry of Finance

OECD: Organization for Economic Cooperation and Development

CONTACTS

or email [email protected]

Business hours are Sunday through Wednesday 8am to 5pm, and Thursday from 8am to 2pm

For more information on the Bahrain Economic Development Board and how we can help you please visit www.bahrainedb.com

Bahrain Annual Economic Review, 2010

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