Bahrain's financial sector has been hit by civil unrest that has dented business confidence in the Gulf Arab state, but renewed construction activity could boost otherwise muted growth in the banking sector.
The government has earmarked USD 2 billion to build low-cost housing over the next five years, as part of a pledge to stimulate more inclusive growth for Bahraini citizens.
"Bahrain's construction sector is on the path to recovery, supported by elevated government spending," Manama-based Securities & Investment Company (SICO) said in a report. "We expect to see pent-up funding demand from the construction sector, as Bahraini banks had shied away from lending to this segment in 2013."
SICO expected banking sector growth to increase moderately to 7-8% in 2014-2015. "However, recovery in the construction sector could surprise positively."
Ahli United Bank, Al Salam Bank, Bahrain Islamic Bank and Kuwait Finance House will be providing affordable loans to help stimulate the sector.
"We understand from our sources that the borrowers would have to pay a modest 2% interest rate on these loans, while the rest would be borne by the government," said SICO. "The likelihood of default is low, as the borrowing limit is determined such that the debt servicing does not exceed 25% of a borrower's salary."
PRESSURE ON PUBLIC FINANCES
Bahrain has a small economy with modest oil production, which makes it more vulnerable to political and economic shocks. The kingdom has witnessed unrest since protests led by Shi'ite Muslims erupted in 2011 and talks between the Sunni-led government and the opposition have failed to end the standoff.
Standard & Poor's forecast GDP growth of 0.9% annually over the next three years due to domestic political tensions and Bahrain's dependence on sustained high oil prices. "Given that headline real GDP growth will average about 4% over the same period, wealth creation is accruing only modestly for the average Bahraini," , S&P said in a May note.
In addition, the government's overall debt burden is rising as it seeks to refinance debt by borrowing. The country's fiscal deficit is likely to expand to 5.4% of GDP this year, compared to 2% in 2012.
"Meanwhile, the financial sector will suffer because of the ongoing unrest that has undermined Bahrain's long-cultivated business-friendly image," the Economist Intelligence Unit (EIU) commented. "Foreign businesses may be less interested in investing in Bahrain given the small size of the market and the insecure domestic political scene."
PRIVATE SECTOR LENDING
The EIU said it expects Bahrain to make use of private-sector involvement to help alleviate some pressure on public finances, including through a public-private-partnership affordable housing program.
Housing is part of greater spending pool of USD 4.43 billion to invest in infrastructure, transportation and power, and is part of the USD 10 billion GCC Development Fund.
"However, given the high cost of land, such projects are likely to be feasible only if they are built on heavily discounted government land," the EIU said in its monthly outlook.
Global Investment House said volatility in land prices has forced buyers to give more preference to projects with completed infrastructure and services
There are signs of investor interest that bodes well for the real estate sector, with real estate trading volume rising 6% last year compared with 2012.
"We believe a pick-up in real estate prices will be positive for the banks, as it would boost the value of the collateral held," SICO said.
Private sector lending has risen to USD 18.5 billion at the end of Q4 2013, compared to USD 17.6 billion during the same period in 2012.
Manara Developments sold more than 80% of the second phase of its 'Wahat Al Muharraq' villas project.
VKL Holding Company and Ansal Buildwell signed a memorandum of understanding to build housing, real estate, and infrastructure projects in Bahrain, while Dadabhai Development and Properties Management Co. said they plan to build twin towers in the country by mid-2016.
The feature was produced by alifarabia.com exclusively for zawya.com.
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