Thursday, Apr 19, 2012
By Leila Hatoum and Alex Delmar-Morgan
Of ZAWYA DOW JONES
DUBAI (Zawya Dow Jones)--Bahrain's government is counting on hosting a successful Formula One race this weekend to restore its reputation as a tourism destination and help revive its economy after the sharp blow to business confidence caused by last year's bloody crackdown on mostly Shiite protesters.
Formula One's governing body the Federation Internationale de l'Automobile said last week the race will go ahead, ending weeks of speculation it would be called off over safety fears and concerns political protests could interrupt the event.
As well as bringing a short term boost in terms of tourist arrivals and for Bahraini businesses supplying the event, the government hopes the Formula One event will improve its image and help it overcome the long term damage to the financial sector and other parts of the economy that were damaged by recent unrest.
According to Bahrain's Economic Development Board, the tourism and hospitality sector of the economy shrank by 17.4% last year as foreigners shunned the country during the unrest. Tourism makes up about 4% of Bahrain's GDP, while the related retail sector makes up another 7%.
"The Formula One is important for restoring confidence in Bahrain's economy and its reputation as a tourism destination," said Bahrain government spokesman Abdul Aziz Bin Mubarak Al Khalifa.
However, if the event is disrupted by protesters, that could backfire on Bahrain and reignite fears about the island's political stability. More protests are planned to coincide with the event, which risks underlining the continuing deep divisions within Bahraini society, the International Crisis Group said in a report this week.
Bahrainis took to the streets in mass protests in 2011, leaving the country's economic activity paralyzed at certain times. The country, which was once considered the financial hub of the region, has seen several businesses close, and foreign investors leaving on the back of a year of political and security turbulence, according to economists, with foreign investors opting for safer havens in nearby places as Dubai and Qatar.
Though no official figures have been provided so far on the scale of financial losses sustained by the country in terms of flight of capital and foreign investments, the country's Economic Development Board said it managed to attract over $300 million worth of new foreign investment to the country in 2011, primarily in the banking and manufacturing sectors. Economists expect Bahrain's real gross domestic product to grow by 3.4% to 3.8% in 2012, up from 2.2% growth last year and helped by higher government spending on infrastructure projects, though they caution that further outbreaks of unrest could knock the country off track.
"Any renewed violence on the back of political disputes could disrupt the economic recovery process in Bahrain," said Daniel Kaye, senior economist at National Bank of Kuwait.
The Formula One race, due to held on Sunday, brings $200-$300 million directly into Bahrain's economy and over $500 million in indirect benefits, said Abdul Aziz Al Khalifa, the government spokesman.
More than 100,000 people visited the circuit during the three-day race in 2010. "It pumps money into the economy from hospitality to advertising and from businesses to businesses," the government spokesman said.
The race is part of the government's plan to diversify the economy and create new jobs, Transportation minister Kamal bin Ahmed said. In 2010, more than 100,000 people visited the circuit during the three-day race. It will also help create more than 3000 temporary jobs and in past years has pushed hotel occupancy across the country to around 100%, the government says.
That would help reverse the decline in tourist arrivals since the unrest. Total arrivals and departures fell 7.3% to 1.79 million in January 2012 from 1.93 million in January 2011, before the uprising began.
Bahrain's banking sector, which makes up a larger proportion of the economy than tourism, is also vulnerable to political unrest and the perception of outside investors. Standard Chartered says the island's financial industry continues to be disproportionately large in relation to the size of the economy, making Bahrain "particularly vulnerable" to external shocks. "This vulnerability became apparent in 2011 when the wholesale banking system's assets contracted by $27 billion," the bank said in a recent research report.
Bahrain's banking industry is already under pressure as European banks have pulled back from the region due to problems within the euro zone, according to Giyas Gokkent, chief economist for National Bank of Abu Dhabi.
But the problems in the offshore banking sector have been somewhat offset by steady growth in retail banking, which has been helped by large government investment in infrastructure and the effect of higher wages. Bahrain's Central Bank governor Rasheed Al Maraj says the financial sector as a whole, which accounts for 24.7% of the total real GDP, registered an overall growth rate of 2.6% in 2011.
Bahrain's government had approved an additional budget spending last August of 325 million Bahraini dinars, ($862 billion), to cover an increase in public sector wages. And fellow Arab Gulf states have promised a $1 billion financial aid package for Bahrain and Oman over the next 10 years to fund infrastructure development and job creation .
But opposition figures say the economy has been affected by job losses in banking, one of the highest-paying sectors. Jasim Husain, a senior member of Al Wefaq, Bahrain's largest opposition group, said the economy needs growth of 5%-6% a year to generate enough jobs to meet the needs of a rapidly-expanding population.
-By Leila Hatoum and Alex Delmar-Morgan, Dow Jones Newswires; +971-4-446-1686; leila.hatoum@dowjones.com
Copyright (c) 2012 Dow Jones & Co.
(END) Dow Jones Newswires
19-04-12 0634GMT
