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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$1.85bn. Although providing only around 3.2 months of import cover, reserves are largely in line with historical levels. It is highly likely that Bahrain would be able to rely on support from its wealthier neighbors in the event of a crisis.* * The Economist Intelligence Unit Ltd., June 2006 Key Information Contacts Bahrain Monetary Agency http://www.bma.gov.bh/cmsrule/bmaindex.jsp Ministry of Finance http://www.mofne.gov.bh/English/eindex.asp Bahrain Government http://www.bahrain.gov.bh/ Economic Development Board http://www.bahrainedb.com/ 2003-MAIN ORIGINS OF GROSS DOMESTIC PRODUCT (%) (a) 1999-MAIN COMPONENTS OF GROSS DOMESTIC PRODUCT (%) (b) Finance Crude oil & natural gas Trade Manufacturing Public administration Real estate Other Private consumption Public consumption Gross fixed capital formation Exports of goods & services Import of goods & services Stocks 12.8 11.9 80 60 55.4 74.0 15.7 9.6 40 20 0 20.8 13.6 1.2 9.1 -20 19.2 21.7 -40 -60 -80 -65.0 PAGE 44
FEDERATION OF EURO-ASIAN STOCK EXCHANGES SEMI ANNUAL REPORT OCTOBER 2006 BAHRAIN STOCK EXCHANGE BAHRAIN ECONOMIC CHARTS AND TABLES 2000 (a) 2001 (a) 2002 (a) 2003 (a) 2004 (b) GDP at market prices (BD billions) 3.0 3.0 3.2 3.6 (b) 3.8 GDP (US$ billions) 8.0 7.9 8.4 9.6 (b) 10.2 Real GDP growth (%) 5.3 4.6 5.2 6.8 5.3 Consumer price inflation (av; %) -0.7 (b) -1.2 -0.5 1.6 4.9 Population (millions) 0.7 0.7 0.7 0.7 0.7 Exports of goods (FOB) (US$ millions) 6,242.6 5,657.2 5,887.3 6,720.9 7,620.7 (a) Imports of goods (FOB) (US$ millions) 4,393.6 4,047.1 4,697.3 5,319.2 6,135.4 (a) Current account balance (US$ millions) 830.1 227.4 -50.3 200.9 415.2 (a) Foreign exchange reserves excl gold (US$ millions) 1,564.1 1,684.0 1,725.8 1,778.4 1,940.5 (a) Total external debt (US$ billions) 2.8 (b) 3.0 (b) 3.8 (b) 4.6 (b) 6.1 Debt-service ratio, paid (%) 3.9 (b) 4.4 (b) 5.5 (b) 5.4 (b) 5.6 Exchange rate (av) BD:US$ 0.376 0.376 0.376 0.376 0.376 (a) 2003-PRINCIPAL EXPORTS (a) (US$ millions) Mineral products (incl oil) 4,924 Base metals 912 Textiles 283 2003-PRINCIPAL IMPORTS (CIF) (c) (US$ millions) Mineral products (incl oil) 2,257 Machinery & appliances 647 Transport equipment 568 2004-MAIN DESTINATIONS OF EXPORTS (%) 2004-MAIN ORIGINS OF IMPORTS (%) USA Japan South Korea Saudi Arabia UAE Other Saudi Arabia Japan Germany USA UK Other 89.3 3.0 2.3 1.9 1.9 1.6 32.5 7.3 5.9 5.6 5.5 43.2 Source: Economist Intelligence Unit ViewsWire (a) Bahrain Monetary Authority. (b) IMF, International Financial Statistics. (c) IMF, Direction of Trade Statistics PAGE 45
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