19/01/2012

Looking to better times in 2012 after a challenging 12 months that saw Bahrain’s economy lose some of its momentum, the Kingdom is seeing signs that several key sectors are moving quickly to recover lost ground in the New Year.

For Bahrain, 2011 will likely be remembered for the protests that broke out in mid-February and resurfaced at times throughout the year. The demonstrations weakened business sentiment and investor confidence, both crucial to the island Kingdom’s economic success. The government has launched a package of reforms and increased spending on housing and social measures in response.

While final figures have yet to be compiled, Bahrain’s economic performance may fall short of expectations held at the beginning of 2011, when hopes were that GDP would top the 4% increase from the previous year.

Though some of the momentum lost in the early months of 2011 was regained, with GDP increasing by 2.4% year-on-year in the third quarter (well up on the 1.1% posted in the second three-month term), Bahrain’s economy will likely post modest growth for 2011 overall, having contracted by 1.3% in the opening quarter of the year, at the height of the protests. In late November, the Ministry of Finance predicted GDP would expand by between 1.6 and 1.7% in 2011, building to 4.5% in 2012.

Other state officials are even more confident that this year will see a strong performance, with the heads of the Economic Development Board and the Bahrain Development Bank both predicting GDP will expand by 5% in 2012. While not all analysts are as upbeat over prospects for the Kingdom’s economy in 2012, most do expect a return to solid growth, as long as oil prices remain steady.

Bahrain’s push is being helped by oil’s strong performance, with international prices hovering around the $100 per barrel mark as 2011 ended, up some 8% from trading prices at the beginning of last year. Better still, after years of gradual production decline, the Kingdom is again raising output, thanks to enhanced extraction methods and a stepping up of the programme to drill new wells.

According Abdul Hussain bin Ali Mirza, the minister of energy, at the end of December, production hit 271,300 barrels per day (bpd) in November, well in excess of projected flow. With this increased output set to flow into 2012, Bahrain will be better placed to fund planned capital works projects and social development schemes.

The government’s cause will also be helped by low inflation. Throughout 2011, inflation remained in check, coming in at less than 1% for much of the year – less than half the 2010 total – though it peaked at 0.9% in October. While consumer inflation may edge up in 2012, partly as a result of wage increases and higher payments to families granted by the state, it is expected that any rise in the cost of living will be moderate in 2012.

Indicators that the economy is gaining momentum include bank lending again on the up, helping to support local businesses and boost growth. Lending increased by 12.9% over the first 10 months of 2011, after rising by a modest 3.5% between January and June.

Data issued by the central bank shows that the flow of business loans increased by 11% to $10.9bn up to the end of October, while there was a 21% lift in personal loans, which totalled $5.6bn. Higher personal spending should boost consumption in the coming year, while higher borrowing by the business community reflects improved sentiment and a perceived need to fund expansion.

One challenge that Bahrain faces is the possible loss of business to rival Gulf states, especially Dubai, which has long sought to replace the Kingdom as the region’s financial hub. Key to Bahrain’s economic performance in 2012 will be how swiftly investor and business confidence can be fully restored.

Oxford Business Group