Bahrain Economic & Strategic Outlook

Building for the future March 2009

Summary
Bahraini economy continued its trend of double-digit nominal GDP growth in 2007 by growing at a healthy pace of 16.4% to reach BD6.94bn (US$18.45bn) while real GDP grew by 8.1% and reached BD4.44bn (US$11.81bn). The robust economic performance in 2007 was owed to the higher oil prices in major part of the year and boost provided by sectors like manufacturing and insurance which grew handsomely by 28.8% and 40.8% respectively.

Compared to its regional peers, Bahrain is the least oil dependent nation but even then oil & gas contributed a substantial 24.6% to the total GDP of the country in 2007. Among non-oil components of Bahrain’s GDP, we see an increasing share of manufacturing sector, which grew from 11.5% in 2003 to 15.3% in 2007. On the other hand, decrease in share is observed in government services and other sectors which include transportations & communications, real estate, etc.

The government projected a deficit of BD194mn for 2007. However, the country recorded a surplus of BD218.6mn due to robust revenues from oil sector. The budget of 2007 and 2008 was prepared on a conservative oil price estimate of US$40/barrel each while the oil prices have remained relatively high in 2007 and 2008 with an average price of US$69.1/barrel and US$94.5/barrel respectively. This eventually resulted in higher budget surplus for 2007 and we expect similar outcome for 2008. As a percentage of GDP, the budget surplus has decreased from its high of 7.6% in 2005 to 3.2% in 2007. We estimate that in 2008, the country is still likely to witness surplus but on a reduced scale of BD202mn. However, for 2009, we expect the government to report a deficit due to substantial fall in oil prices which is hovering at around US$40/barrel compared to government’s assumption of US$60/barrel.

Bahrain’s total exports recorded robust growth in recent years. The exports grew by 11.8% in 2007 to BD5.13bn in 2007 as compared to BD4.59bn in 2006. During the first nine months of 2008, the total exports amounted to BD5.37bn reporting an increase of 4.7% over 2007- end. Oil is a major contributor to the total exports of the country with its share increasing substantially from 66% in 2001 to 79.2% in 2007. The total oil export amounted to BD4.01bn in 2007, an increase of 17.1% over the previous year. During the first nine months of 2008, oil exports amounted to BD4.49bn, reporting an increase of 10.6% over 2007-end. Despite the diversification efforts of the government, oil continued to be the mainstay of the economy.

The Central Bank of Bahrain has reduced its benchmark one-week deposit rate to 0.75% from 1.75% and its overnight deposit rate to 0.25% from 1.25% in the fourth quarter of 2008. With the inflation concerns abating, we believe there might be another round of cuts in the offering to boost economic activity in the country. Money supply in Bahrain has grown consistently since 2002. M1, M2 and M3 grew from BD647.2mn, BD2.60bn and BD3.04bn in 2002 to BD1.90bn, BD6.73bn and BD7.98bn respectively at the end of 2008. The broad money supply, as measured by M2, has exhibited consistent positive growth trend. M2 has grown at a moderate rate in 2007, but recorded robust growth during 2008. The currency in circulation grew by 20.5% in 2008 and stood at BD370.8mn at the end of 2008.


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