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FEDERATION OF EURO-ASIAN STOCK EXCHANGES SEMI ANNUAL REPORT OCTOBER 2006
BAHRAIN STOCK EXCHANGE
ECONOMIC AND POLITICAL DEVELOPMENTS
Economic and Political Environment
Domestic tensions are increasing as the
parliamentary election, provisionally
scheduled for October 2006, approaches.
Additionally, the newly enacted Political
Societies Law has caused splits in the
opposition, radicalizing elements within it.
Bahrain's foreign policy has been dominated
by the need to maintain strong relations with
the region's larger and wealthier powers
–namely Kuwait, the UAE and Saudi
Arabia–which are its main financial backers.
Additionally, Bahrain's close ties with the US
guarantee the country's security in the face
of any potential external threat emerging,
particularly with the US Fifth Fleet based in
the kingdom.
The focus of Bahraini economic
policymaking over the forecast period will be
on economic and, most particularly, labor
market reform. The government is aware of
the country's vulnerability to the volatile
global oil market–over 70% 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 both
direct and indirect economic support.
The Bahraini government thus recognizes
that the country's continued prosperity rests
on its ability to diversify the economy and
provide a welcoming environment for foreign
investment, particularly in light of the
dynamic approach to attracting service
industries adopted by Dubai, Bahrain's main
competitor. Additionally, the authorities are
seeking to streamline their operations, both
through the restructuring of government
bodies and the privatization of a variety of
state services, as has already begun in
power provision.
Economic Performance
With oil prices set to remain historically high,
the government will have the leeway to
continue its attempts to address social
concerns. It will thus maintain above-trend
levels of growth in public expenditure,
although, more broadly, domestic demand
may ease on the back of higher interest
rates. Growth will be underpinned by
continued high levels of construction activity,
as work on large-scale projects such as the
Bahrain Financial Harbour continues.
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 (Bapco), which should
be completed in 2007, and the coming on
stream of new capacity at Aluminium Bahrain
(Alba). However, import volumes will remain
high in order to feed these projects and will
serve to restrain the impact of consumption
and investment on overall economic
expansion. Consequently, real GDP growth is
forecast to ease to 5.6% in 2006 from an
estimated 5.9% in 2005, before slipping
further to 5.3% in 2007.
Inflation is expected to average 2.5% in
2006, down slightly from an estimated
2.7% in 2005, as supply bottlenecks in
construction projects ease and growth in
domestic demand is curbed by rising interest
rates. These trends will continue into 2007.
A forecast decline in average prices for
international non-oil commodities will lower
import prices, resulting in a further easing
of the average rate of inflation, to 2.4%.
Although the government's aim of increasing
private-sector participation in utility provision
could theoretically have inflationary
implications–as the state subsidises a
range of services, such as electricity and
water–the authorities are highly unlikely to
allow the market to set utility prices.
The Bahrain Monetary Agency (the central
bank) will maintain the Bahraini dinar's peg to
the US dollar, in place since 1981, at the rate
of BD0.376:US$1. At the end of February
2005 (the most recent date for which figures
are available) foreign reserves stood at
US$1.85bn. Although providing only around
3.2 months of import cover, reserves are
largely in line with historical levels. It is highly
likely that Bahrain would be able to rely on
support from its wealthier neighbors in the
event of a crisis.*
* The Economist Intelligence Unit Ltd., June 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/
2003-MAIN ORIGINS OF GROSS DOMESTIC PRODUCT (%) (a)
1999-MAIN COMPONENTS OF GROSS DOMESTIC PRODUCT (%) (b)
Finance Crude oil & natural gas Trade
Manufacturing Public administration Real estate
Other
Private consumption Public consumption Gross fixed capital formation
Exports of goods & services Import of goods & services Stocks
12.8
11.9
80
60
55.4
74.0
15.7
9.6
40
20
0
20.8
13.6
1.2
9.1
-20
19.2
21.7
-40
-60
-80
-65.0
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