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FEDERATION OF EURO-ASIAN STOCK EXCHANGES SEMI ANNUAL REPORT APRIL 2007 BAHRAIN STOCK EXCHANGE ECONOMIC AND POLITICAL DEVELOPMENTS Economic and Political Environment The year 2006 has witnessed remarkable changes whereby new political reforms were launched. One of the most significant forms of political reform was that parliamentary elections were held. In February 2002, the first poll took place where, for the first time in the Gulf, women were allowed to vote and stand for elections. After their opposition to join the elections in 2002 and before the second parliamentary election took place, an open debate was held between all political societies in the Kingdom of Bahrain which finally led to their participation in the elections. In 2006, the elections gained greater support and acceptance where the majority of people (73%) participated. Accordingly, more cooperation between the government and political opposition is likely to generate better future prospects. The first female women in the Gulf was elected to join the parliament from the 221 candidates vying for seats in the Assembly consisting of 40 members. Bahrain's foreign policy is dominated by the need to maintain strong relations with all GCC countries and neighboring countries in the Gulf. In addition, Bahrain's close ties with the US have been underlined by a bilateral free-trade agreement (FTA), which came into effect in 2005 and was the first signed between the US and a Gulf state. Bahraini policymaking will focus on diversifying the economy away from oil and strengthening the role of the private sector. As a small non-OPEC oil producer with little leeway to increase production, the government is aware of the country's vulnerability to swings in global oil prices –given that some 80% of export and government income comes from oil earnings– as well as to the whims of Saudi Arabia, which remains a strong political force as well as an important provider of economic support. Economic Performance Bahraini real GDP growth is expected to be supported by favorable local and regional economic conditions, in part a result of historically high oil prices. These are expected to give the government sufficient leeway to maintain above-trend levels of growth in public expenditure, as it seeks to address social concerns. In addition, high oil prices will also continue to benefit the Bahraini financial sector–the largest component of the country's economy–as the resulting strong local and regional liquidity has led to rising bank deposits and greater financing opportunities. High levels of construction activity, as work on large-scale projects such as the Bahrain Financial Harbor continues, will also underpin growth. The government is also expected to press ahead with the liberalization of utilities, which should promote more rapid inflows of foreign investment. Although oil output is forecast to remain stable, export growth will be buoyed by the upgrade of the state-owned Bahrain Petroleum Company, which should be completed in 2007. Import volumes will remain high as Bahrain sources inputs for these projects from abroad, which will serve to restrain overall economic expansion. Nevertheless, real GDP growth of 6.7% is expected in 2007, which will slow slightly, to 6%, in 2008 as the regional boom begins to soften amid lower oil prices. Consumer price inflation is expected to average 3% in 2007, similar to the estimated rate in 2006, and then to fall slightly, to 2.1%, in 2008 as growth begins to slow. Both figures are well above the 2001-05 average of 1%, reflecting the impact of strong domestic demand growth combined with supply bottlenecks (particularly in construction). However, inflation remains relatively low by world standards, reflecting both extensive government subsidies and the inflows of expatriate labor that help to alleviate upward pressure on wages. Nonetheless, anecdotal evidence would seem to imply considerably higher inflation levels than data from recent years indicate, suggesting that the present consumer price index basket does not fully capture price pressures in the economy. Should government plans to introduce a levy on the employment of expatriate workers be implemented, this would add to wage costs with knock-on effects for consumer prices.* * The Economist Intelligence Unit Ltd., October 2006 Key Information Contacts Bahrain Monetary Agency http://www.bma.gov.bh/cmsrule/bmaindex.jsp Ministry of Finance http://www.mofne.gov.bh/English/eindex.asp Bahrain Government http://www.bahrain.gov.bh/ Economic Development Board http://www.bahrainedb.com/ 2005-MAIN ORIGINS OF GROSS DOMESTIC PRODUCT (%) (a) 2004-MAIN COMPONENTS OF GROSS DOMESTIC PRODUCT (%) (b) Crude oil & natural gas Finance Public administration Transport & communications Private consumption Public consumption Gross fixed capital formation Manufacturing Trade Other Exports of goods & services Import of goods & services Stocks 12.5 13.0 90 80 70 60 82.4 64.2 24.6 10.0 50 40 42.0 25.2 6.2 8.5 30 20 10 0 17.0 21.6 1.1 PAGE 38
FEDERATION OF EURO-ASIAN STOCK EXCHANGES SEMI ANNUAL REPORT APRIL 2007 BAHRAIN STOCK EXCHANGE BAHRAIN ECONOMIC CHARTS AND TABLES 2001 (a) 2002 (a) 2003 (a) 2004 (a) 2005 (b) GDP at market prices (BD billions) 3.0 3.2 3.6 4.2 5.0 GDP (US$ billions) 7.9 8.4 9.7 11.2 13.4 Real GDP growth (%) 4.6 5.2 7.2 5.6 7.8 Consumer price inflation (av; %) -1.2 -0.5 1.6 2.3 2.6 (a) Population (millions) 0.7 0.7 0.7 0.7 (b) 0.7 Exports of goods (FOB) (US$ millions) 5,657.2 5,794.4 6,631.7 7,518.6 10,024.5 Imports of goods (CIF) (US$ millions) 4,047.1 5,012.5 5,657.2 6,484.6 7,946.3 Current-account balance (US$ millions) 227.1 -50.5 200.8 415.2 1,575.0 Foreign-exchange reserves excl gold (US$ millions) 1,352.1 1,385.1 1,427.4 1,583.8 1,875.8 Total external debt (US$ billions) 3.0 (b) 3.8 (b) 4.6 (b) 6.1 (b) 6.8 Debt-service ratio, paid (%) 4.4 (b) 5.5 (b) 5.4 (b) 5.6 (b) 6.3 Exchange rate (av) BD:US$ 0.376 0.376 0.376 0.376 0.376 (a) (a) Actual. (b) Economist Intelligence Unit estimates. ECONOMIC FORECAST SUMMARY 2006 2007 2008 2009 2010 2011 Real GDP growth (%) 7.6 6.7 6.0 5.7 4.7 4.4 Consumer price inflation (av; %) 3.3 2.5 1.8 1.5 1.3 1.0 Budget balance (% of GDP) 9.6 6.7 4.6 1.9 -0.1 -1.0 Current-account balance (% of GDP) 12.5 10.2 8.4 3.3 1.5 1.1 Exchange rate BD:US$ (av) 0.4 0.4 0.4 0.4 0.4 0.4 Exchange rate BD:[euro] (av) 0.5 0.5 0.5 0.5 0.5 0.5 Central Bank of Bahrain The Economic Intelligence Unit Ltd., September 2006 2005-PRINCIPAL EXPORTS (a) (US$ millions) Mineral products (incl oil) 7,960.4 Base metals 1,296.8 Textiles 113.8 2005-PRINCIPAL IMPORTS (CIF) (US$ millions) Mineral products (incl oil) 4,543.6 Machinery & appliances 425.26 Transport equipment 165.95 2005-MAIN DESTINATIONS OF EXPORTS (%) 2005-MAIN ORIGINS OF IMPORTS (%) Saudi Arabia South Korea USA Japan UAE Other Japan Germany Saudi Arabia USA UK Other 27.5 10.7 10.0 60.6 9.3 7.2 47.9 6.5 4.6 6.7 3.5 5.5 (a) Central Bank of Bahrain (Bahrain Monetary Authority previously). (b) IMF, International Financial Statistics. (c) IMF, Direction of Trade Statistics. PAGE 39
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