Shaikh Mohammed bin Essa al Khalifa, chief executive of the Bahrain Economic Development Board tells The Gulf that unrest could prompt longer term changes in the economy, including a renewed push for reform
Selling Dominic Dudley Bahrain as a regional financial hub is not as easy as it used to be. The political demonstrations which began in February this year and the violence which followed a month later have made investors more wary of the country while making quieter alternatives such as Dubai and Qatar appear more attractive.
To date only one major financial institution, France's Crédit Agricole, is known to have pulled out of Bahrain completely, but others are thought to have moved at least some of their staff and operations to other centres.
The person in charge of reasserting the country's credentials as a centre for business in the region is Shaikh Mohammed bin Essa al Khalifa, chief executive of the Bahrain Economic Development Board (EDB) - the government agency most closely associated with the reform initiatives of recent years. He insists that, despite the unrest this year, the country still has much to offer bankers and other international investors.
"The impact on the financial services sector has been limited," he tells The Gulf. "Businesses that are based here came to Bahrain because of the strength of regulation, the highly-skilled local workforce and the transparency with which we do business. These business fundamentals have not changed. Conversations have been held with the key international institutions with a presence in Bahrain and they have reiterated their commitment to Bahrain."
He also insists that the local banking sector and indeed the wider economy remain in a healthy position.
"As a result of prudent, high-quality regulation, banks in Bahrain are well capitalised and have always managed to secure additional capital from external shareholders when needed," he says. "The positive recent moves in the stabilisation of Bahrain's sovereign bond yields and borrowing costs suggest strong market confidence in the country's long-term fiscal and monetary position. Indeed [credit ratings agency] Standard & Poor's has recently removed Bahrain from creditwatch negative."
Central to the EDB's argument is Bahrain's position as an open economy which can be used as an entry point to the rest of the GCC region. That position is bolstered by the fact that the economies of the Gulf countries have, in recent years, been performing better on average than the developed world, where the US, Europe and Japan are all struggling with low levels of growth and the threat of a return to recession.
"In the short term, the Gulf continues to provide a relative haven for investors as growth begins to stall in most developed markets and some emerging economies see growth slowing," he says. "In the long term, the Gulf and the wider MENA region remain one of the world's most important emerging markets. The GCC economy, worth $1 trillion and expected to double by 2020, will continue to expand as the world's energy hub and through increasing investment in infrastructure and economic diversification."
The problem for Bahrain is that growth among GCC countries has been far from uniform this year. HSBC is predicting an average growth rate of 5.4 per cent in gross domestic product (GDP) for the GCC region, with Qatar leading the way with another year of double-digit growth. For Bahrain the predictions are less rosy, however. While the overall impact of the unrest is still hard to quantify and the extent of the provisions that banks will have to make for loans that have gone sour is still not clear, most economists expect Bahrain's economy to slow down severely this year, or even decline.
Despite this, Shaikh Mohammed insists that Bahrain can benefit from the growth across the region, saying "What benefits one country in the GCC benefits all. Excluding oil, over 40 per cent of Bahrain's exports go to our fellow GCC countries so economic and trade links with our neighbours are very important. As our neighbours grow wealthier, so do some of our best customers."
He adds that the unrest could prompt longer term changes in the economy, including a renewed push for reform.
"In March, Bahrain experienced a social order breakdown," he says. "Restoring peace and stability had to be the priority, but lessons are now being learnt to bring harmony and stability in the long term. We will hopefully look back on the recent period of unrest as having somehow served as a positive catalyst for accelerated reform and development, and from which Bahrain will emerge stronger. There is a renewed commitment to political and economic reform that benefits all Bahrainis."
The economy is receiving a boost in the shape of the $10 billion assistance fund set up by the GCC, which will be offered up over the coming decade. The details of the arrangement have yet to be finalised, but it will enable the government to invest more heavily in programmes which, if carried out correctly, could help to address at least some of the social and economic issues highlighted by the protests, if not the political ones.
"The GCC Development Fund is concrete proof that the support of our neighbours is an economic reality, not mere platitudes," adds Shaikh Mohammed. "The Ministry of Finance is finalising the technical arrangements of the programme with the other GCC countries. The fund will help us to increase investment. Government spending is focused on key infrastructure and social development projects and details and timings of the key projects are being finalised."
Some assistance is also being planned for small and medium-sized businesses, with up to BD10 million ($26.5 million) set aside to support around 2,000 companies through the Tamkeen labour fund.
"As well as increased spending, there will be some measures designed to reduce costs for businesses in Bahrain," Shaikh Mohammed says. "Labour fees have been suspended for a six month period, which will help with short-term momentum for the economy and the five per cent training levy for the hospitality industry has also been suspended. All of these factors are designed to drive economic growth and job creation for all Bahrainis."
A combination of the current high oil price and the GCC assistance makes it easier for the government to afford such aid. Indeed, Bahrain may yet emerge from this year with a small budget surplus, although a deficit of some sort appears more likely.
However, for its longer term economic health the country needs to be able to convince businesses that it is politically as well as economically stable. Many international bankers remain sceptical about the attractiveness of Bahrain in the wake of the violence this year. Convincing them otherwise may be the toughest task the EDB and Shaikh Mohammed have had to face.
© The Gulf 2011
