BEQ March 2014

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Bahrain Economic Quarterly

March 2014

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BAHRAIN ECONOMIC QUARTERLY | March 2014

Please refer to the disclaimer at the end of the document. Page 2 of 29

S U M M A R Y

THE NON-OIL ECONOMY COMES TO THE FORE

The global economic backdrop continues to provide grounds for growing optimism in

spite of a gradual tightening of the monetary policy stance in the US. Risks of

significant discontinuities seem to have abated somewhat and growth is resuming

even in some of the hardest hit economies. The regional backdrop is generally benign,

characterized by relative continuity as compared to last year.

► Bahrain’s non-oil growth likely to accelerate markedly. Following a year of

relatively subdued activity, the non-oil sector looks likely to regain momentum in

the coming months as a number of infrastructure projects are launched. Thisshould have a marked positive impact on the rest of the economy through

contractors, confidence, and increased bank credit growth.

► Bahrain’s oil sector is likely to see a year of relative stability. Following robust

normalization in 2013, production levels in the hydrocarbons sector are likely to

remain more or less flat this year. Abu Sa’afah should produce at close to full

capacity while efforts are underway to evaluate the results of new techniques

introduced in the Bahrain field.

► The GCC overall looks likely to be one of the bright spots of the global economy.

Growth in the region is likely to be solidly led by the non-oil sector as both price

and output gains in the oil sector are expected to be minimal or even negative.

This is going hand in hand with fairly measured government expenditure growth.

► The global backdrop is becoming more encouraging, led by the advanced

economies. In spite of continued volatility, the performance of advanced

economies is looking healthier. Even though the performance of emerging

economies is variable, the overall outlook is becoming somewhat more

encouraging. Countries with significant external deficits have struggled with the

effects of the US tightening.

Bahrain economic outlook

2011 2013e 2014e 2015e

Real GDP growth, % 3.4 4.8 3.7 3.6

Non-hydrocarbon sectors 6.7 3.1 4.6 3.9

Hydrocarbons sector -8.5 12.0 0.0 2.6

Nominal GDP growth, % 4.1 7.9 5.9 6.0

Inflation (CPI %) 2.8 3.0 3.0 3.0

Current account (% of GDP) 7.3 9.7 9.1 9.7

Fiscal balance (% of GDP) -2.0 -2.6 -3.1 -3.6

Oil price in USD (Arabian Medium) 106.8 105 105 105Source: Bahrain Economic Development Board

SUMMARY 2

GLOBAL ECONOMY 3

THE GCC REGION 12

BAHRAIN 22

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BAHRAIN ECONOMIC QUARTERLY| March 2014

Page 3 of 29Please refer to the disclaimer at the end of the document.

G L O B A L E C O N O M Y

SIGNS OF RECOVERY IN THE WEST

While the global economic situation remains fragile, the recovery observed last year has

generally continued across the advanced economies. The outlook is particularly benign for the US

even allowing for significant seasonal disruptions to economic activity. But even the Euro-zone

seems to be returning to very slow growth while some EU economies outside the single currency

area have seen even faster progress. This has been helped by a significant reduction in financial

market stress.

But significant risks still persist, not least the impact of the gradual retreat from quantitative

easing in the US which likely entails near-term risks of volatility in capital flows and exchangerates. The main worries in terms of the global outlook now seem to be linked to the emerging

markets, especially ones with current account vulnerabilities which the current volatility around

capital flows is accentuating. In some cases, there are doubts linked to the ability of structural

drivers to deliver the kind of growth rates made possible by stimulus policies during the crisis.

The International Monetary Fund (IMF) currently expects global growth of 3.75% this year and

4% in 2015. Overall growth in the advanced economies is due to accelerate from last year’s 1.9%

to 2.8% this year and 3.0% in 2015. Growth in the emerging markets should benefit from the

pick-up in the West, accelerating from 4.7% in 2013 to 5.1% this year and 5.4% next.

Real GDP growth, select countries (%)

Source: International Monetary Fund, World Economic Outlook, October 2013

Notwithstanding the increased optimism about the global outlook, there is acute awareness of

the need to accelerate growth so as to boost job creation at a time when productive resources in

are underutilized, especially the West. At their February summit in Australia, Finance ministers

and central bank governors of the G20 counties agreed on a goal of generating more than

USD2tn of additional output over the coming five-year period. The group, which makes up some

85% of the global economy, agreed on steps to boost investment and employment. The overall

effect of such measures, the group announced, would be to lift the trend growth rate of these

economies by more than 2%. G20 members countries are expected to present national growth

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strategies for the November G20 summit in Brisbane. The G20 central banks made a

commitment to careful monetary policy calibration.

Tapering gets underway

Having embraced an ultra-loose monetary stance during the global crisis, the US Federal Reserve

has begun to change course. The decision to launch a gradual withdrawal of the Quantitative

Easing program of bond purchases was agreed on 18 December. The initial step was a USD10bn

reduction in the monthly volume of bond purchases to USD75bn a month. The bank accounted in

late January another USD10bn cut in the program. On current projections, the Quantitative

Easing program could be phased out altogether by the end of the year, although further steps

have been explicitly linked to the performance of the economy. The policy shift follows growing

signs of resilience in the US economy, including a pronounced recovery in the real estate market,

which has had positive repercussions across other sectors. Also, the HSBC/Markit Purchasing

Managers’ Index reading for the US rose from 54.7 to 56.3 in February, the highest level

recorded since May 2010.

MSCI global stock market indices (Base January 2012 = 100)

Source: MSCI

Even as the fundamentals are clearly strengthening, the recovery is still proceeding at a

measured pace, subject to several discontinuities. The latest revision to 4Q13 GDP data pointed

to another patch of unexpected weakness as the annual rate of growth was revised from an

initial estimate of 3.2% to 2.4%. This represented a sharp deceleration from the 4.1% pace

recorded in Q3. The weaker estimate reflected evidence of subdued retail spending, inventory

adjustments, and weaker net exports, as well as continued reductions in federal government

spending. Budget cuts are estimated to have reduced growth by 1.05 percentage points. The IMF

expects US growth to reach 2.8% in 2014 in a clear rebound from 1.9% in 2013. Growth is

expected to accelerate further to 3% in 2015, slightly held back by the recent budget deal which

will keep the so-called sequester in place into the 2015 fiscal year.

Also recent job data has generally failed to live up to expectations with only 113,000 new jobs

added in January and most analysts expect growth to remain below 2% in 1Q14. Several bouts of

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The US Federal

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monetary policy at a

time when the

economy is gradually

strengthening.

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extreme weather conditions in recent months have been a significant drag on growth. Even the

housing recovery has spluttered somewhat of late, possibly in part due to an increase in

mortgage rates, but above all due to bad weather. Housing starts in January fell by 16% MoMwhile buidling permits contracted by 5.4%. Durable orders in January fell by 1.0% MoM, probably

mainly due to seasonal factors and volatility in aircraft orders.

The labor market remains a source of concern even though open unemployment has declined

fairly consistently – to 6.7% on the most recent reading in February. However, labor force

participation remains at a historically low level, reflecting significant spare capacity in the

economy and potenitally depressing consumption growth. A significant improvement in this

regard is likely a necessary precondition for a sustainable recovery in view of the improtance of

consumer spending in the US economy. At the same time, however, the fact that the open

unemployment rate is nearing the 6.5% mark will complicate the task of monetary policy makerswho had earlier suggested that this rate would be the threshold for revising their interest rate

stance. Recent indications suggest that rates will likely remain unchanged at least for as long as

inflation remains clearly below 2%.

S&P/Case-Shiller US National Home Price Index

Source: Standard & Poor’s

Europe emerges from the crisis

Growth in Europe has shown fairly consistent signs of accelerating in recent months, even if the

pace of recovery remains very slow, especially in the single currency area. Reversing a 0.4%

contraction last year, Euro-zone growth is expected to reach 1% this year and 1.5% in 2015. The

Economic Sentiment Indicator of the European Commission has been increasing for ten

consecutive months and now points to GDP growth of up to 1.5%. This compares to a pace of

0.5% in Q4. Growth should prove faster in the UK where looser credit has fuelled a housing

market pick-up and boosted confidence. The IMF foresees growth of 2.25% in 2014-2015.

The erstwhile fears of a Euro-zone break-up have now largely dissipated and the peripheraleconomies have seen a significant improvement in their borrowing conditions. Ireland has exited

from the bail-out mechanism and there is a good chance that Portugal might follow suit. This

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European growth

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reflects in part considerable success in the area of fiscal consolidation. Greece looks on track for

a small primary budget surplus of 0.4% of GDP. The Portuguese deficit looks likely to be 5.0% of

GDP, down on 6.6% in 2012.

But there are positive signs also elsewhere in the Euro-zone. The Euro-zone composite PMI

compiled by Markit/HSBC fell slightly from 52.9 to 52.7 in February but points to continued

expansion. Germany’s Ifo survey in February reached its highest reading since July 2011, rising

from 110.6 in January to 111.3 while the German PMI rose from 55.5 to 56.1. By contrast, the

French PMI points to renewed weakness with a drop from 48.9 to 47.6.

In spite of the growing optimism, the ability of the European economies to create significant new

employment remains limited with the Euro-zone unemployment rate flat at 12%. At the same

time, significant structural risks continue to confront especially the Euro-zone economies:

►

Even though recent inflation data has defied expectations of deflation, risks in this regard

still persist, not least because of the strength of the Euro. At the same time, liquidity in the

banking system has been declining. February inflation unchanged at 0.8% in February.

Greece is currently in the midst of deflation and producer prices in Germany are in the

negative territory. This still seems to point to continued monetary easing by the European

Central Bank. The ECB is officially committed to keeping interest rates at their present or

lower levels for an extended period of time.

►

Reform fatigue has emerged as an increasingly real challenge in Europe and there is some

concern that this year's European Parliament elections in May will produce a significantlymore euro-sceptic chamber than its predecessor. The new parliament will have

unprecedented powers in terms of the EU budget and Single Market rules. It will also have a

key role in bringing into being key landmark pieces of institutional reform such as Fiscal

Compact and the banking union. Delays in implementing these projects may delay the much

needed return to a sustainable growth trajectory.

Shifting fortunes of emerging markets

Having been the primary engine of global growth since the onset of the current crisis, the

emerging economies seem to have embarked on a period of transition with increased

uncertainty and far less even growth than was the case until recently. The annual pace of

emerging market growth has been hovering around 4.5%. Whereas the leading emerging

markets sustained growth rates up around 8% during the first decade of the century, this has

fallen to around 5% of late. Asian emerging economies are leading the growth but have

experienced some renewed weakness of late. Growth has been particularly slow in Latin America

where it has been stuck at 2.5%. Uncertainties are particularly obvious in two areas:

► One of the main risks associated with the US policy of tapering has been the possibility of a

reversal in global capital flow. Former Fed Chairman Ben Bernanke's announcement of the

possibility of such a policy change in May triggered a large-scale emerging markets sell-off as

the policy seemed to imply an increase in the relative cost of capital in the US. The actual

onset of tapering seems to have led to greater market differentiation among emerging

Risk perceptions of

emerging economies

have been elevated in

recent months and

growth outlook has

become increasingly

differentiated.

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economies with the most pronounced vulnerabilities evident in countries with substantial

external deficits. Latin American currencies have been especially hit by the sell-off which has

also affected economies such as Russia and Turkey. The Argentinean Peso has been thehardest hit currency due to a 20% devaluation of the official exchange rate.

►

The heightened investor anxiety about emerging markets has been amplified in recent

weeks by political risk considerations, notably in markets such as Ukraine, Thailand, and

Venezuela. Investor sentiment has been especially tested by the stand-off between Ukraine's

interim government and pro-Russian separatist forces in Crimea and the east of the country.

This has had significant downward pressures on the Russian and Ukrainian stock markets and

currencies, among other things pushing the Rouble to a new record low vis-à-vis the US

Dollar. Anxiety in the broader European economy has been driven by the fact that much of

the natural gas supplied by Russia to Europe passes through the Ukrainian territory.

The riskier global environment has forced a number of leading emerging market central banks to

tighten their monetary stance. The Central Bank of Turkey most notably raised its one-week

report rate from 4.5% to 10.0%. Tightening steps have been taken also in India, South Africa, and

Brazil. Brazil has seen rates go up by 350 basis points since April 2013. The People’s Bank of

China has once again focused its efforts on countering asset price bubbles by containing credit

growth. At the same time, however, the bank has also sought to put downward pressure on the

Renminbi, apparently in an attempt to counter speculative inflows based on expectations of

Renminbi appreciation. Recent selling pressure on the Rouble prompted the Central Bank of

Russia to announce a temporary 1.5 percentage point increase in its benchmark rate to 7%.

The outlook within the emerging market universe has become increasingly differentiated. The

main concern is associated with the largest emerging markets. Although Chinese Q4 growth

slowed slightly to 7.7%, recent trade data has been more positive. Chinese exports and imports

rose by 10.6% and 10.0% YoY, respectively, in January, although this pick-up may have been due

to seasonal factors. The HSBC/Markit Purchasing Managers’ index for China has remained below

the critical 50-mark in recent month, falling from 49.5 in January to 48.3 in February. Growth is

expected to hover around 7.5% in 2014-2015. India has benefited from renewed economic

reform impetus. Having reached 4.4% last year, Indian growth should accelerate to 5.4% this

year and 6.4% in 2015.

Relative stability for oil prices

Global oil prices have continued to face a persistent tug-of-war between signs of growing supply

at a time when the consolidation of the global recovery is countering the erstwhile demand

erosion concerns. The outcome has continued to be one of some volatility around a generally flat

trend. The OPEC reference basket price increased somewhat from an average of USD104.71 per

barrel in January to USD105.38 in February. Uncertainties linked to the Russian-Ukrainian stand-

off have since pushed this up further. According to the current projections of the US Energy

Information Administration (EIA), Brent and WTI will average USD105.42 and USD93.33 perbarrel, respectively, by the end of this year.

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Global oil demand is expected to continue to increase over the coming year, even though a

number of emerging markets have experienced increases in their energy costs due to currency

depreciation. The current International Energy Agency (IEA) projection is for a 1.3% or a 1.4 mbdgain to a total of 92.5 mbd. Global oil demand growth has accelerated over the past 18 months

due to a recovery in the Western world. China’s crude imports alone rose by 11.9% YoY to an all -

time record of 28.2mn tn in January.

Even though demand and supply for oil remain fairly finely balanced, a number of important

structural shifts are taking place on the supply side. Firstly, the unconventional oil story is

gathering momentum both in terms of output gains in the US and by expanding into new

jurisdictions. The US oil output has risen by an unexpected 39% since 2011 – 15% last year alone

– and is expected to reach 8.26 mbd this year. The country could now become the world’s largest

oil producer by next year. The EIA expects US crude production to rise to 9.5 mbd by 2016, whichwould be the highest level since 1970 peak. Canada’s oil output is expected to reach 4.85 mbd by

2020, according to local projections. In a potential complication, although the US authorities

have authorized some oil export deals, the current legislation banning exports of oil constitutes a

potential limitation on new investment.

Crude oil prices (USD/barrel)

Source: US Energy Information Administration

Efforts to encourage fracking are underway in a number of countries ranging from the UK to

China. Among other things, test drilling is starting on the Bazhenov layer in western Siberia which

envelopes the region’s mature conventional oil fields and shares a number of geological

similarities with the Bakken shale field in the US.

The second major uncertainty on the supply side has to do with the availability of conventional

oil supplies, with most of the attention focused on the future output and export capacity of Iran,

Iraq, and Libya.

►

The Libyan output has been highly variable in recent months due to internal political

instability. Having risen to 1.6 mbd in July 2012, Libyan output troughed at 210,000 b/d in

December 2013. It once again rose from 230,000 in December to 500,000 in January after

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WTI spot Europe brent spot

Significant new

developments are

underway on the

supply side with

particularly significant

output gains in North

America.

Global oil prices have

demonstrated

considerable resilience

at a time when both

the demand andsupply sides of the

market are

demonstrating

greater dynamism.

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the Sharara field resumed operations. However, this figure relapsed to 231,000 b/d in late

February after renewed disruptions.

►

Iraq is understood to be planning to triple its crude production capacity to some 9 mbd by

2020. Iraq’s production in December stood at 3 mbd and the country has boosted its exports

to China through lower prices and better export terms. However, output gains are being

limited, among other things, by limited storage capacity at the Faw terminal. Iraq’s output

rose some 400,000 b/d in February to 3.4 mbd, the highest since 1980.

► Norway expects its crude output to increase by 0.7% this year after 13 straight years of

declines. Although most fields are very mature, new potential exists, especially in the

Barents Sea. The new Johan Sverdrup field may eventually yield more than 650,000 b/d. The

field was discovered in 2010 and could supply up to a quarter of Norway’s oil within a

decade. Statoil estimates the total reserves of Sverdrup at 2.9bn barrels of oil equivalent.

► Mexico is also eyeing output gains and Pemex expects exploration and production

agreements with foreign companies before the end of the year. Pemex’s output has declined

from 3.3 mbd in 2004 to 2.52 mbd in 2013. However, the country now expects to boost this

to as much as 4 mbd by 2025.

Bank of America recently estimated that global supplies could grow by 1.5-3 mbd if Libyan and

Iranian supplies were to normalize. However, a 1 mbd production cut by OPEC could contain any

price decrease to USD5-8 a barrel. Even on a more pessimistic scenario, a fall below USD90 per

barrel is seen as highly unlikely due to limited spare capacity.

This is partly because some more established suppliers are struggling to maintain output levels:

► Indonesia’s output is due to reach 804,000 b/d this year, significantly below the

government’s target of 870,000.

► Venezuela is experiencing an economic crisis with more than 50% inflation. Venezuelan

production dropped to 2.45 mbd in December from a 2012 average of 2.9 mbd. Oil sales to

the US have declined to their lowest level in 28 years and the planned Keystone pipeline

from Canada would almost certainly depress them significantly further

►

The large Kashagan field in Kazakhstan has been beset by delays after a pipeline fault.

Production is unlikely to resume before the second half of the year. Kazakhstan is targeting

2.2 mbd production by 2018, a n increase by roughly about a third over current levels.

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Global oil demand and supply dynamics (mbd)

IEA OPEC EIA

2013 Global oil demand 91.3 90.0 90.4Advanced Economies 46.1 45.9 46.0

Emerging Economies 45.2 44.1 44.4

China 10.1 10.1 10.7

2014 Global oil demand (mbd) 92.6 91.1 91.3

Advanced Economies 46.0 45.8 46.0

Emerging Economies 46.6 45.3 45.3

China 10.4 10.4 11.1

2013 Global oil supply (mbd) 91.5 90.1 90.0

OPEC 36.8 36.0 35.9

Non-OPEC 54.7 54.2 54.12014 Global oil supply (mbd) 91.0 91.7

OPEC 35.5 35.7

Non-OPEC 56.4 55.5 56.0

Source: International Energy Agency, Organization of the Petroleum Exporting Countries, US Energy Information

Administration

Implications for Bahrain

The improving global economic outlook is generally supportive of sentiment and growth in

Bahrain and the broader region. However, worries about the outlook for some emerging markets

constitute a potential complication.

► The prospect of relative oil price stability should underpin confidence, an effect that may be

amplified in the event of mounting supply concerns from Russia

► The US tapering effort has the potential to push up the cost of capital but the process is

likely to be gradual. The Federal Reserve remains committed to a very low interest rate

stance for now

►

The growth prospects of emerging markets are improving and should be supportive of

Bahraini exports which are increasingly directed eastward. However, the pace of growth is

likely to be fairly measured by historical standards

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T H E G C C R E G I O N

NON-OIL ACTIVITY TO DRIVE GROWTH

Economic growth in the GCC region decelerated markedly last year, with the IMF estimating 3.7%

expansion in 2013 as compared to 5.2% in 2012. The loss of momentum was due to a diminished

contribution from both the hydrocarbons and the government sectors. This represented a sharp

departure from the post-2009 growth patterns when economic activity was primarily

underpinned by the global oil price recovery and government spending which typically involved a

substantial countercyclical element. Encouragingly, however, as oil sector has lost momentum,

activity in non-oil sectors of the regional economies has remained robust, supported by strong

growth in bank lending.

This pattern of private and non-oil-led growth is likely to persist this year as well. While the

economic cycle has shown some signs of turning again – with evidence of a loss of momentum in

the growth of bank credit, for instance – other developments have served to consolidate or even

strengthen the rebound in parts of the region. Preparations for landmark events such as the

2020 World Expo in Dubai or the 2022 FIFA World Cup in Qatar are key cases in point. Also, the

concomitant real estate market recovery has boosted activity, in part by reversing the asset price

declines that had weakened some financial sector institutions.

Projected GCC real growth (%)

Source: International Monetary Fund, World Economic Outlook Database, October 2013

An outlook of continuity for non-oil growth

The performance of the Gulf economies was characterized by resilience in 2013. The largest

regional economy, Saudi Arabia, grew by an estimated 3.8%, led by a 5.5% gain in the non-oil

sector. Other recent data has been largely consistent with these figures. The combined profits of

Saudi listed companies in 2013 reached SAR103.3bn (USD27.5bn) in a 6.6% increase over 2012.

The petrochemicals sector accounted for 33% of the total profits, followed by commercial banks

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Deceleration in

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hydrocarbons-

government nexus to

the non-oil private

sector.

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at 28%, and telecommunications at 14%. Cement sales rose by 4% to 55.6mn tn while car sales

rose to 570,000 in a 10% YoY increase. Saudi exports totaled SAR1.456trn, up 6.5% YoY.

The performance of the other regional economies has been broadly comparable. UAE growth has

benefited from an improving real estate sector as well as high tourist arrivals. Also bank lending

has resumed at an accelerating pace. While Qatar has seen minimal oil growth, non-oil growth in

Qatar has been fairly steady in the neighborhood of 10% YoY. Kuwaiti growth has been above all

led by the oil sector and is vulnerable to lower production, although there are signs of project

spending finally picking up at a time when bank lending has also accelerated.

The latest HSBC/Markit Purchasing Managers’ Index points to continued optimism among

businesses. Non-oil business activity in Saudi Arabia accelerated for the third consecutive month

in January, reaching its highest level since October 2012. The Saudi headline reading rose from

56.7 in October 2013 to 59.7 in January 2014. It subsequently retreated somewhat to 58.6 in

February. The UAE headline reading rose from 56.3 in October 2013 to 57.1 in January 2014 and

further to 57.3 in February.

In general, analyst expectations point to relative continuity in regional growth this year and next.

According to the latest Reuters poll of analysts, Saudi growth is expected to accelerate somewhat

this year with at 4.2% followed by 4.3% in 2015. Growth in the UAE is projected to remain flat at

4.3%. Qatari growth is expected at 5.5% in 2014 and 6.0% in 2015. The IMF expects GCC growth

to reach 4.1% this year in a slight acceleration over 2013.

HSBC/Markit purchasing manager’s index

Source: HSBC, SABB

The non-oil sectors will continue to drive growth

Continuing the pattern established last year, growth in the GCC region looks likely to remain

primarily dependent on non-oil activity. Positive developments are evident across the broad

spectrum of non-oil activity but a cyclical recovery is becoming particularly pronounced in the

real estate sector, albeit with marked intra-regional variations. Pinsent Masons’ sixth annual GCC

Construction Survey found that 90% of companies were more optimistic than before while 77%

reported a better order book. 53% reported an increase in the cost of capital.

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50 =no change on previous month

Deceleration in

regional growth rates

has gone hand in hand

with a shift from the

hydrocarbons-

government nexus to

the non-oil private

sector.

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Optimism is most pronounced in the UAE, partly thanks to the confidence effect of the decision

to award World Expo 2020 to Dubai. Following a sharp price correction by more than 50% during

the global crisis, property prices in Dubai are estimated to have rebounded by more than 20% in2013. According to Jones Lang LaSalle estimates, a pronounced recovery materialized also in Abu

Dhabi where prime real estate prices rose 25% while rentals rose 17%. The rebound in the capital

was partly due to efforts to attract public sector employees living outside the emirate as well as a

decision to scrap rent controls.

Real estate activity is strong also in Saudi Arabia, although new supply of commercial real estate

is containing prices in some of the main markets. An estimated USD94.1bn of construction

projects are reportedly confirmed for Saudi Arabia in 2014. Although some industry reports have

suggested delays in as many as 36% of construction projects due to the recent crackdown against

illegal workers, recruitment companies have started providing workers on a temporary basis torelieve shortages.

Regional tourism continues to be an important growth driver. According to the International Air

Transport Association (IATA), Middle East airlines saw 12.1% YoY growth in passenger traffic in

2013 in a slight slowdown from the 15.4% figure recorded in 2011. Capacity grew slightly faster –

by 12.8%. The global increase in passenger demand in 2013 was 5.2% while capacity rose by

4.8%. The main exception to the broad picture at present is Saudi Arabia where the number of

visas issued by Saudi embassies reached 10.36mn last year in a 3.8% drop compared to 2012.

There was a 20.4% drop in pilgrimage visas while the number of visit visas rose by 7.2% to

1.13mn. The government has announced plans to continue to impose a 20% cut in foreign

pilgrims and a 50% reduction in domestic pilgrims also during the coming Hajj season due to

construction work in Makkah. The growth potential remains considerable, however. According to

recent independent estimates, the Saudi tourism sector could reach annual growth of 4% to

SAR30.9bn over the decade to 2023. The number of visitors is expected to rise to 21.3mn,

generating revenues of SAR60.9bn by 2023. The government is planning to invest more than

USD30bn in its airports by 2020 while 34,800 new hotel rooms are planned over the coming five

years. A new local carrier, SaudiGulf Airlines, was launched recently. A USD2bn deal for

Bombardier aircraft was signed at the Bahrain International Air Show.

Large-scale infrastructure projects will continue to account for a significant element of non-oil

activity in several areas:

► Diversification. Saudi Arabia recently signed contracts worth SAR36bn in connection with

the establishment of a new mineral industrial city in Waad al Shamal which will have one of

the world’s largest phosphate plants costing USD6.9bn. In a boost to the regional primary

sector, Saudi Arabia in December announced plans to inject USD10.6bn into aquaculture

projects to produce 1mn tn of fish over the coming 17 years. Oman is planning investments

of USD1.3bn in fisheries development up to 2020 and the UAE is understood to be planning

several large projects. Diversification will be a key element in pursuing the goal announced

by UAE Prime Minister Sheikh Mohammed bin Rashid Al Maktoum of increasing the

country’s GDP per capital by 65% -- to around USD80,000 in current prices -- over the next

seven years.

A real estate rebound

in much of the region

has become anincreasingly important

driver of positive

sentiment in the non-

oil economy.

7/23/2019 BEQ March 2014




► Power generation. Following the launch of its nuclear program in 2008, the UAE has signed

cooperation deals with the US, the UK and Russia. Saudi Arabia plans to construct 16 nuclear

reactors over the next 20 years at an estimated cost of USD80bn. The first reactor is due tobe on line by 2022 and total capacity should reach 17GWe by 2032 – some 15% of the

projected energy requirements of the Kingdom. Saudi Arabia has concluded treaties with

France and China.

►

Health care. The rising population is increasingly the urgency of building health care capacity

which, moreover, lags below global averages in many areas. Bahrain and Saudi Arabia spent

3.8 and 3.7% of their GDP, respectively, on health care followed by 3.3% in the UAE and 2.7%

in Kuwait. The figure in Qatar is 1.9% and in Oman 2.3%. The US devotes 17.9% of its GDP to

health care. The corresponding proportion in the Netherlands, France, Canada, and Germany

in 11-12% and in the UK 9.3%. For instance, the number of hospital beds in Saudi Arabia is2.2 per 1,000 residents, below the global average of 3 and the advanced economy average of

5.5. Health care spending has risen from USD8bn in 2008 to USD27bn in 2012, a figure that is

expected to reach USD46bn by 2017. The government is offering private operators loans to

cover up to one-half of the cost of the hospitals. A new law required polyclinics to be

renamed special medical complexes and to appoint consultant physicians and specialists.

Private sector participation in health care is estimated at 44% in Saudi Arabia. The largest

health care projects currently underway in the region include the USD5.3bn King Abdullah

Medical City in Saudi Arabia, the USD4bn Sheikh Khalifa Medical City in the UAE, the

USD2.3bn Sidra Medical and Research Center of the Qatar Foundation, and the USD1.6bn

Jaber Ahmed Al Jaber Al Sabah Hospital in Kuwait.

► Railway. Work on the emerging GCC rail network has begun. 266 km of the Etihad Rail in the

UAE from Shah and Habshan to Ruwais is due to be operational by the end of this year and

will be used for freight traffic. Work on the link between the Saudi border, Al Ain, and Dubai

is due to start this year. The second phase of the 1,200 km line with an estimated total cost

of AED40bn is due to be completed by 2016 while the third stage is expected to be

completed by 2017. Oman is due to start construction of a line between Sohar and Al Ain this

year.

►

Local transportation. A number of efforts are underway to develop public transportation

solutions for urban areas. For instance, the SAR25.5bn Makkah Integrated Transport System

is getting set up. The first phase will include two metro lines with a total length of 46 km,

40% of it underground. The eventual plan is a 114 km network of four lines integrated with

the bus network.

► Seaports. Highlighting the growing trade volumes passing through the GCC, several key

projects are in progress. In Saudi Arabia, the primarily focus is on the King Fahd Industrial

Port and Yanbu Commercial Port with projects of SAR1.2bn pending. Saudi seaports

currently have a capacity of 520mn tn and 12 mn containers.

7/23/2019 BEQ March 2014




► Water. The Saudi Ministry of Water and Electricity plans to expand sewage networks to 70%

of all urban areas by the end of 2019. The current coverage is 49%, which is due to rise to

52% by the end of the year. A new processed water initiative is designed to seek commercialuses for processed waste water. The National Water Company is currently implementing 453

water projects worth SAR26bn.

Continued moves toward fiscal consolidation

The growing importance of non-oil private sector activity in the region has gone hand in hand

with a much more moderate pace of government as compared to recent years. For instance, the

2014 Saudi budget sees an expenditure increase of only 4% over the 2013 plan, in the smallest

relative increment since 2003. This compares to expenditure hikes of 19% in 2012 and 2013.

Public sector expenditure in the UAE is projected to grow by some 3.2%. The UAE federal budget

for the 2013-2016 session is set to increase by 15% from the preceding period to AED140bn. The

general budget for 2014 is set at around AED46.2bn, an increase of AED1.6bn over last year.

Oman is expected to see expenditure growth decelerate from 15% to 5%.

The draft Kuwaiti budget for the 2014/15 fiscal year, which is due to start in April, fits the same

pattern. Following an annual average rate of spending increases of 15% over the past decade,

the budget foresees a relatively modest 4% gain in expenditure. Total government expenditure is

expected to reach KWD21.9bn (USD57.7bn). Moreover, the Kuwaiti government is reportedly

undertaking a review of subsidies this year. The objective is to target subsidies for those in need.

The more moderate pace of spending is partly reflective of the reduced need for countercyclical

spending at a time when the global recovery looks set to strengthen. But it is also driven by the

lack of obvious upward momentum in the global oil markets which risks significantly containing

revenues growth at a time when the regional fiscal systems remain primarily hydrocarbons-

driven.

Hydrocarbons production under renewed downward pressure

The relatively finely balanced global oil market is likely to translate into relative stability in GCC

oil production with especially Saudi Arabia likely to continue the established pattern of fine-tuning the market through short-term variations in production. The combined output of the

regional OPEC producers has moderated somewhat since the turn of the year. Following an

approximately 170,000 b/d drop in February, the combined regional output reached 15.96 mbd.

This drop reportedly followed a 119,00 b/d drop in January. This was the first time the regional

OPEC total fell below 16 mbd since June 2013. According to Bloomberg estimates, Saudi Arabia’s

output fell by 110,00 b/d. The UAE cut its production by an estimated 40,000 b/d and Kuwait by

20,000 b/d. On current projections, the growth contribution of the hydrocarbons section is likely

to be slightly negative in most of the region.

The fiscal stance of

the GCC governments

is likely to be fairly

conservative by recent

standards.

Regional oil

production has beenunder renewed

downward pressures

in recent months and

the sector may make a

small negative

contribution to

regional growth this

year.

7/23/2019 BEQ March 2014




Monthly oil production by the leading GCC producers (‘000 b/d)

Source: Joint Organisations Data Initiative

Relative price stability set to continue

Inflationary pressures in the GCC have remained fairly measured in recent months, reflecting

global trends. The reduction in price pressures has been particular pronounced in Saudi Arabia

where the annual pace of inflation in January was 2.9%, the lowest reading since August 2013.

The negative momentum has been above all driven by food prices which are now rising at

around 5% YoY, down from a peak of some 7% last summer. Housing costs have been relatively

flat in recent months and are now rising at around 3.5% a year.

Price pressures area generally fairly subdued also elsewhere in the region with Qatar the main

outlier due to the brisk non-oil activity supported in part by the FIFA World Cup preparations.

Qatari inflation is expected to rise to 3.9% this year and 4.2% next. Also Kuwait is likely to see a

slight increase in inflation from last year’s 2.7% to the neighborhood of 3%. Housing costs in

particular have shown some renewed momentum in recent weeks.

Consumer price inflation in GCC countries (% YoY)

Source: National statistical offices

0

2,000

4,000

6,000

8,000

10,000

12,000

J a n

M a r

M a y J u l

S e p

N o v J a n

M a r

M a y J u l

S e p

N o v J a n

M a r

M a y J u l

S e p

N o v J a n

M a r

M a y J u l

S e p

N o v

2010 2011 2012 2013

Bahrain Kuwait Saudi Arabia Oman Qatar UAE

-3%-2%-1%0%1%2%3%4%5%6%

J a n

M a r

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N o v J a n

2011 2012 2013 2014

Bahrain Kuwait Oman Qatar Saudi Arabia UAE

Price pressures are

likely to remain fairly

subdued across the

region.

7/23/2019 BEQ March 2014




Bank credit cycle showing signs of turning

Bank credit continues to be an important driver of economic activity as the private sector leads

the way. In a marked departure from the sharp dichotomy that characterized the GCC data

during much of the global downturn, the pattern of bank lending is becoming increasingly

uniform across the region. The countries that have seen the fastest growth in bank lending – led

by Qatar and Saudi Arabia – are experiencing a gradual moderation even if growth remains brisk.

By contrast, Kuwait and the UAE, have seen a fairly marked increase in lending due to a stronger

deposit base but also an improvement in the provisioning cycle. The reversal of the negative

housing market dynamics have had a significant positive impact of financial sector health and

general optimism.

Saudi Arabia has seen the pace fall from peaks of more than 16% in the first half of last year to

12.3% in January. Lending in Qatar slowed to 13.4% as of November 2013. Lending in Kuwait

grew by 8.1% as in 2013 while the UAE figure rose to 7.1%, the fastest pace since 4Q09.

However, the monthly absolute increments in Kuwait have been declining in recent months.

Oman has seen a fairly pronounced deceleration in bank credit growth to 6.3% as of November.

The liquidity situation in the regional banking system is generally strong and deposit growth

remains robust. For instance, Saudi Arabia has seen YoY deposit growth in the range of 10-15% in

recent months. Deposits at Saudi banks rose to a record USD344bn in 2013. The UAE’s aggregate

bank deposits rose by 9.5% YoY in December 2013 to a total of USD348.2bn. Qatar, Saudi Arabia,

and the UAE are all seing low double-digit growth in bank assets. The banking sector is highly

profitable. Loan-to-deposit ratios are highest in Qatar and Oman, at or just above 100%. The

figure for the UAE has declined to just over 90%. The figures for Kuwait and Saudi Arabia are in

the low 80s.

YoY growth of domestic bank credit (%)

Source: National central banks

-10%

0%

10%

20%

30%

40%

50%

J a n F e b

M a r

A p r

M a y J u n J u l

A u g

S e p O c t

N o v

D e c J a n F e b

M a r

A p r

M a y J u n J u l

A u g

S e p O c t

N o v

D e c J a n F e b

M a r

A p r

M a y J u n J u l

A u g

S e p O c t

N o v

D e c

2011 2012 2013

Kuwait KSA UAE Oman Qatar Bahrain

Credit growth rates

have converged

significantly across

the region and remain

generally robust.

7/23/2019 BEQ March 2014




Equity markets continue their strong run

The overall performance of the GCC equity markets remains very strong with significant gains

seen across the region throughout the past year. 2013 proved a particularly strong year from the

UAE markets with the Dubai index more than doubling in a 107.7% gain and Abu Dhabi rising by

63.1%. The gains elsewhere in the region were far less strong but still robust by historical

standards. The Kuwai index rose by 27.2%, Saudi Arabia’s Tadawul by 25.5%, Qatar by 24.2%, and

Oman by 18.6%.

GCC equity market indices (Jan 2011=100)

Source: Bahrain Bourse, Kuwait Stock Exchange, Muscat Securities Market, Qatar Exchange, Tadawul, Abu Dhabi

Securities Exchange, Dubai Financial Market

Continuing the trends, 2014 has opened with a generally positive note for the regional indices.

The UAE bourses have once again led the way with Dubai posting a 24.6% gain as of the end of

February. Abu Dhabi gained 16.2%. Qatar rose by 14.1%. The gains elsewhere in the region have

been more muted. Saudi Arabia advanced by 6.1% and Oman by 3.9%. Kuwait held the rear with

a 1.9% gain following a 0.8% drop in February.

In spite of the strong performance of the secondary equity markets, new issuance activity

remains fairly subdued. Q4 saw five regional primary issues, two of them on international

exchanges. The international offerings were by Damac Real Estate Development and Action

Hotels of Kuwait. Damac raised USD400mn in a London IPO while Action Hotels listed on LondonStock Exchange’s AIM platform following a USD50mn offering. By contrast, the three offerings on

regional exchanges raised a fairly modest USD178.8mn. Fund raising was dominated by Bawan’s

USD143.9mn IPO in Saudi Arabia. Takaful Oman Insurance and Al Madina Takaful raised

USD10.6mn and USD24.2mn, respectively. Overall, 2013 saw nine IPOs, the same number as

2012. The proceeds declined 58% YoY. However, the three international offerings by GCC

companies raised 9% more capital than the regional IPOs. Mesaeed Petrochemical Holding Co.

began a USD905.3mn offering on Qatar Exchange in but completed it only in January.

The improved performance of the regional bourses has helped contribute to a significant IPO

pipeline for the coming months. Saudi Arabia’s Construction Products Holding is planning to floata 30% stake in the coming months. The company is part of the Saudi Binladin Group and has

annual sales of some SAR10bn. The Sulaiman Al-Habib Medical Group and Almana General

Hospitals are planning list this year or in early 2015. Recent listings include Dallah Healthcare and

60%

110%

160%

210%

260%

310%

J a n

M a r

M a y J u l

S e p

N o v J a n

M a r

M a y J u l

S e p

N o v J a n

M a r

M a y J u l

S e p N o v J a n

2011 2012 2013 2014

Bahrain All-Share

Index

Kuwait Market Index

MSM 30

Qatar Exchange Index

Tadawul All-Share

Index (TASI)

ADX Index

DFM Index

Regional stock

markets have

continued their strong

performance this year

led by the UAE and

Qatar exchanges.

After a subdued 2013,

primary issuance by

regional companies

looks likely to

accelerate this year.

7/23/2019 BEQ March 2014




National Medical Care Co. Saudi Airlines is expected to IPO its cargo units this year with the

maintenance units due to be listed in 2015. Saudi Arabia’s National Commercial Bank is floating a

15% stake.

GCC IPO activity (regional exchanges)

Source: Zawya

Fixed income market continue their strong performance

The regional fixed income markets have become an increasingly important element of the

financial sector architecture. Continuing the expansion of regional sovereign markets, UAE

Minister of Finance Sheikh Hamdan bin Rashid Al Maktoum recently announced that the

government had established a vision to develop the government bond market. Overall

conventional bond issuance by GCC names reached USD29.7bn last year through 87 offerings.

Total GCC bond issuance in 2012 reached USD25.6bn, raised through 62 issues. UAE names

dominated the market in both years, although their share declined from 57.1% in 2012 to 35.1%

last year.

Q4 saw a marked acceleration in the regional issuance activity. A total of 20 primary issues worthUSD8.1bn compared to 15 offerings worth USD6.1bn in Q3. The main offerings in the commercial

space were by USD2bn worth of issuance by Saudi Arabia’s SABIC, offerings by three UAE banks

and a maritime company.

Activity since the turn of the year has been dominated by sovereign issuance, most notably

QAR13bn issued by Qatar for tenors of three and five years. Kuwait Projects Company (Holding)

was the largest corporate name with a USD500mn issue.

Regional sukuk issuance continued its steady rise last year with a total of 69 offerings worth

USD26.4bn. This compared to 63 issues worth USD24.9bn in 2012. Saudi Arabia is the dominant

regional jurisdiction in terms of sukuk issuance. Saudi names accounted for 57.5% of all regional

issuance in 2013, up from 44.8% in 2012.

0

1

2

3

4

5

-

200

400

600

800

1,000

1,200

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4

2011 2012 2013

IPO Value in USD mn (LHS) Number of IPOs (RHS)

The GCC fixed income

markets continue to perform strongly with

a steady stream of

landmark issues.

7/23/2019 BEQ March 2014




In terms of its recent dynamics, the GCC sukuk market closed 2013 with a clear pick-up in

activity. 19 new issues worth USD10.5bn were placed in Q4, which marked a sharp improvement

on the USD1.3bn raised through ten issues in Q3.

Saudi banks have come to the market to boost their capital resources. Riyad Bank issued a

SAR4bn (USD1.1bn) sukuk in November followed by a SAR2.5bn (USD0.7bn) offering by Saudi

Hollandi Bank in December. SABB, similarly, raised SAR1.5bn (USD0.4bn) in December. Qatar’s

Ooredoo raised USD1.25bn through a five-year note in December.

2014 has opened on an even stronger note for the regional sukuk markets. Key offerings have

included a SAR4.5bn (USD1.2bn) sukuk by Saudi Electricity Co., a SAR5bn (USD1.3bn) offering by

the National Commercial Bank, and a USD1.5bn note by the Islamic Development Bank. Qatar

raised some USD3bn through two sovereign sukuk.

GCC bond and sukuk issuance (USD mn)

Source: Zawya

Implications for Bahrain

The regional backdrop for growth remains very benign.

►

Investor confidence levels are high which has driven strong private sector activity and should

fuel an ongoing search for regional growth opportunities.

►

The regional financial market conditions are favourable with strong liquidity and ample

issuance activity in the capital markets. This should translate into good availability of regional

capital for attractive investment opportunities.

►

The development of the region as an international tourism destination is continuing apace

and offers opportunities for Bahrain to capitalize on the positive trend.

-

2,000

4,000

6,000

8,000

10,000

12,000

Sukuk Bonds Sukuk Bonds Sukuk Bonds Sukuk Bonds

Q1 Q2 Q3 Q4

2013 2013 2013 2013

Qatar

Kuwait

UAE

Oman

Bahrain

Saudi Arabia

7/23/2019 BEQ March 2014




B A H R A I N

THE NON-OIL SECTOR POSITIONED FOR A PICK-UP

After a slowdown in its growth last year, the Bahraini non-oil sector is well positioned for a clear

acceleration this year. The approval of the two-year budget half way through 2013 put new

growth drivers in motion and significant capital investments – many of them funded from

regional sources – are expected to be launched shortly. The liquidity situation of the local

banking sector is favourable. These trends potentially offer the makings of a virtuous circle

which, with positive knock-on effects on confidence, could fuel an acceleration in non-oil growth

to well over 4%. With relative stability expected in the hydrocarbons sector, headline growth for

the year as a whole now look likely to end up between 3.5 and 4% in a slight deceleration from

the pace seen in 2013 thanks to the oil sector rebound. This is broadly in line with what looks

likely to be the regional norm.

GDP growth composition and current projections

Source: Central Informatics Organization, Economic Development Board estimates

The oil sector set to stabilize after an impressive rebound

The performance of the Bahraini oil sector during the last quarter of 2013 was strong. The output

of the offshore Abu Sa’afah field remained above capacity with a monthly average of 161,043

b/d. The average for the Bahrain field was 48,973 b/d. During the year as a whole, Abu Sa’afah

produced at an average rate of 149,708 b/d – in other words, at 99.8% of its full capacity. The

average rate of onshore production was 47,881 b/d. Bahrain’s natural gas production in 2013

was approximately 2,500mn cu ft per day, which compared to 1,970 mn cu ft in 2009.

Following an impressive rebound last year, the hydrocarbons sector looks likely to experience a

year of stability in 2014 as the main offshore Abu Sa’afah oil field looks likely to remain at full

capacity with the exception of scheduled maintenance in May. Production from the onshoreBahrain field is expected to remain more or less at current levels this year as the results of

various pilot projects are being evaluated. In contrast to last year, this is likely to mean at best a

modest contribution from the hydrocarbons sector to GDP growth this year.

-3%

-2%

-1%

0%

1%

2%

3%

4%

5%

6%

2010 2011 2012 2013f 2014f 2015f

Non-oil GDP

Hydrocarbons

A number of emerging

drivers should deliver

a significant pick-up in

non-oil growth this

year.

Following an

impressive rebound

last year, the oil sector

looks likely remain at

current capacity this

year.

7/23/2019 BEQ March 2014




Average daily output of oil, barrels

Source: National Oil and Gas Authority

The non-oil sector likely to return to the forefront

In a likely reversal of the pattern observed last year, economic growth in the Kingdom looks likely

to be driven by the non-oil economy which should contribute virtually all of the increment in

GDP in 2014. Encouragingly, a number of factors are potentially paving the way for a significant

rebound in non-oil growth. Three of them are of particular importance:

►

Following a delay in incremental government spending due to the fact that the 2013-14 state

budget was only approved half way through the year, government expenditure should

remain more robust than during much of last year. The annual growth rate of the

government services sector in the national accounts slowed down to 2.7% YoY in Q2-3 of last

year in a sharp reversal of the pace seen in 2012.

► A number of infrastructure projects approved by the GCC Development Fund are due to be

launched in the coming months. According to recent Ministry of Finance statements, Bahrain

is due to implement projects worth USD4.43bn in the coming years.

►

The Bahraini banking sector is characterized by high levels of liquidity and low loan-to-deposit ratios. This should enable it to boost lending once the project flow accelerates and

confidence levels improve.

A number of significant infrastructure projects are due to start during the year. Some 49% of the

spending envisaged under the umbrella of the Gulf Development Fund are due to be allocated to

the construction of 2,548 housing units in 2013, 1,443 in 2016, and 5,241 in 2017. The remainder

will mainly go into the water and power sector.

Another key project is the modernization and expansion of the Bahrain International Airport.

Following approval in October, the venture is being managed by Aéroports de Paris Ingérierie

(ADPI). The BHD13mn agreement includes designing and supervising the construction of a new

passenger terminal. This project is expected to increase the airport’s capacity from 9mn to

13.5mn passengers per year. Construction of the new passenger terminal of more than 150,000

-

50,000

100,000

150,000

200,000

250,000

Bahrain Field Abu Sa'afah Field Total

A significant rebound

in project spending

this year should boost

confidence in the

economy.

7/23/2019 BEQ March 2014




sq m is expected to begin in late 2014 and is scheduled to be completed in late 2018. In addition,

ADPI will devise a plan for the development of the airport over the next 20 years. In the

meantime, the restructuring program of the national carrier, Gulf Air, has continued and thecarrier signed a USD100mn agreement with Rolls-Royce for its Airbus A330 fleet.

YoY real growth of key sectors, 2010-3Q13

2010 2011 2012 2013

YoY growth Annual Annual Annual Q1 Q2 Q3 Q4 Q1 Q2 Q3

Crude Petroleum & Natural Gas 0.1% 3.6% -8.5% -4.7% -14.6% -6.8% -8.0% 8.0% 18.6% 11.2%

Manufacturing 3.8% 3.1% 4.7% 8.7% 8.8% 2.4% -1.1% 2.0% -1.9% 5.6%

Construction 2.4% -7.9% 4.1% 1.4% 5.8% 2.8% 6.6% 2.8% 5.6% 0.6%

Trade 2.6% -1.7% 5.9% 5.8% 8.1% 7.9% 1.7% 1.6% 1.8% 0.3%

Hotels & Restaurants 11.1% -17.2% 13.6% 13.5% 20.7% 13.5% 7.7% 13.5% 8.9% 4.6%

Transport and Communication 3.9% 6.1% 4.4% 6.1% 3.1% 5.4% 3.2% 4.8% 1.7% 2.1%

Social & Personal Services 13.9% 11.2% 12.5% 13.6% 11.6% 15.1% 10.0% 6.2% 7.8% 8.2%

Real Estate & Business Activities 4.3% -6.6% 3.6% 1.2% 3.4% 3.8% 6.2% 1.7% 1.8% 0.9%

Financial Corporations 7.3% -0.4% 4.0% 4.3% 3.7% 4.2% 3.9% 3.0% 2.8% 1.7%

Government Services 5.1% 14.4% 12.0% 13.3% 12.5% 11.3% 11.1% 4.2% 2.7% 2.7%

Other 7.3% 1.2% 11.6% 10.5% 11.8% 7.5% 17.0% 0.4% 3.4% 3.5%

GDP 4.3% 2.1% 3.4% 4.8% 3.0% 3.4% 2.5% 4.2% 5.3% 4.6%

Source: Central Informatics Organisation

Foreign direct investment inflows strengthen

In 2013, the EDB attracted USD114mn of foreign investment into the country from North

America, Europe and Asia – a 12% increase on the level of investment secured in 2012. The new

arrivals included 35 companies. This boost will help create more than 800 jobs in the Kingdom

over the course of 3 years across a range of sectors including financial services, logistics,

manufacturing, healthcare, and ICT. Key investors included:

► Kintetsu World Express, a Japanese logistics service provider, which established its regional

office at the Bahrain International Investment Park

► Chinamex Bahrain is a co-developer (with Diyar Al Muharraq) and operator of the landmark

development Bahrain Dragon City, a large scale trade platform with functions of productexhibition, retail, and wholesale

►

Takaud, a specialist savings and pension provider for the MENA region has chosen Bahrain

for its regional headquarters to serve the financial planning and savings needs to both

individual and corporate customers. Takaud is a member of the KIPCO Group

►

The Swiss private banking group Julius Bär established a subsidiary in Bahrain to provide

private banking and wealth management services

►

CIGNA, one of the world’s largest health services companies, and Saudi Arabian insurance

Company (SAICO) launched the regional headquarters for their new third party claims

management and processing operations

Foreign direct

investment into the

Kingdom has

continued to grow

with a broad sectoral

footprint.

7/23/2019 BEQ March 2014




The Bahrain International Investment Park has been one of the leading lights of the Kingdom’s

efforts to attract new investment. As of Q1 2014, total number of approvals for investment

projects in the park reached 105. The total value of investments attained BHD687mn and some10,000 jobs have been created thanks to them.

Money supply growth continues apace

The monetary environment in the Kingdom has remained benign with high liquidity levels and

generally declining interest rates. The broadest measure of money supply, M3, which includes

currency in circulation and all types of deposits, increased by 8.9% between September 2012 and

September 2013 to a total of BHD11.2bn. At the same time, the interest rate environment has

gradually improved. The average interest rate on personal loans charged by conventional retail

banks fell from a peak of 6.13% in March 2013 to 5.84% in September 2013. The average rate on

commercial loans (excluding overdraft facilities) declined even more sharply from a peak of

5.29% in February 2013 to 3.78% in September.

Money supply (BHD mn)

Source: Central Bank of Bahrain

The results of Bahraini banks have shown continued improvement over the past year. The

combined net profits of the three leading conventional retail banks in the Kingdom rose by 45.5%

to BHD315.1mn.

Bahrain Development Bank (BDB) has played a particular role in supporting economic

diversification through loans to small and medium-sized enterprises. The combined value of BDB

loans in 2013 reached BHD44.6mn with SMEs receiving some two-thirds of them. The recipients

included 1,323 companies which created 3,396 new job opportunities with a combined value

added of BHD25mn. Total SME beneficiaries of BDB funding reached 3,861 by December 2013 –

a total value of BHD111.5mn.

The improving results of the banking sector have coincided with efforts at restructuring through

mergers. 2013 saw four deals, most notably the creation of Ibdar Bank from a merger of three

shariah-compliant investment houses. Al Salam Bank and BMI Bank merged in February to create

0.00

2,000.00

4,000.00

6,000.00

8,000.00

10,000.00

12,000.00

J a n - 1 1

M a r - 1 1

M a y - 1 1

J u l - 1 1

S e p - 1 1

N o v - 1 1

J a n - 1 2

M a r - 1 2

M a y - 1 2

J u l - 1 2

S e p - 1 2

N o v - 1 2

J a n - 1 3

M a r - 1 3

M a y - 1 3

J u l - 1 3

S e p - 1 3

M3

M2

M1

The monetary

conditions in Bahrain

are benign with

steady money supply

growth and a slight

downward tendencyin the cost of capital.

The results of Bahraini

banks have improved

fairly markedly and

consistently in recent

months.

7/23/2019 BEQ March 2014




the fourth-largest commercial lender in the Kingdom. A merger is also being discussed between

Khaleeji Commercial Bank and Bank Al Khair.

Average rate of interest on credit facilities (conventional retail banks)


A slight pick-up in inflation

Consumer price dynamics in the Kingdom have been relatively flat in recent months. December’s

reading of the Consumer Price Index saw a slight acceleration to 4.0%, which represented the

fastest rate since July 2012. The pick-up was above all driven by the two main components of the

index – food and housing costs. Food prices increased by 5.5% but significant additional

pressures are not expected right now. Housing costs rose at an annual pace of 7%. This has been

the case since September and reflects the ongoing revival of the real estate market. However,

significant additional acceleration is not expected, partly because of spare capacity and new

supply coming on-line. Transportation has of late been one of the sources of deflation but the

negative contribution has diminished to -1.3% from the July reading of -4.8%.

Sector-specific consumer price inflation indicators (YoY %)

Source: Central Informatics Organisation

0

1

2

3

4

5

6

7

8

Total Business Loans (Excluding overdraft approvals) Total Personal Loans

-30%

-20%

-10%

0%

10%

20%

J a n

M a r

M a y J u l

S e p

N o v J a n

M a r

M a y J u l

S e p

N o v J a n

M a r

M a y J u l

S e p

N o v

2011 2012 2013Consumer Price Index (CPI)

Food and non alcoholic beverages

Housing, water, electricity, gas and other fuels

Transport

Inflation pressures in

recent months have

been driven by

housing and food. The

headline rate is,

however, expected to

remain fairly stable.

7/23/2019 BEQ March 2014




Increased capital market activity

The Bahraini stock market saw a clear improvement in its performance last year with the main

index advancing by 17.2% during the year as a whole. In terms of market capitalization, the

Bahrain Bourse experienced a 16.6% growth during 2013. This positive growth came as a result

of strong performance across most sectors, with commercial banks making a 40.3% gain in 2013.

The positive momentum has carried over into this year with the market up by 10.3% as of the

end of February.

In a welcome sign of renewed primary activity, Zain Bahrain is expected to launch an IPO by

3Q14. The company is expected to divest 15% of its shares.

Bahrain all-share index (Jan 2012 = 100)

Source: Bahrain Bourse

The best performers of Bahrain Bourse during the past year were financial service companies, led

by the Commercial Banks sector index and followed by Investment and Insurance. Also the

Industrial sector has reached double-digit growth. The services sector posted a small decline

while the Hotels and Tourism sub-index was flat.

Sectoral stock market indices

Source: Bahrain Bourse

60

70

80

90

100

110

120

130

J a n F e b

M a r

A p r

M a y J u n J u l

A u g

S e p O c t

N o v

D e c J a n F e b

M a r

A p r

M a y J u n J u l

A u g

S e p O c t

N o v

D e c J a n F e b

2012 2013 2014

-10% 0% 10% 20% 30% 40% 50%

Commercial Banks

Investment

Insurance

Services

Industrial

Hotels & Tourism

Jan-Feb 2013

2013

Bahrain Bourse has

seen a steady recovery

in recent months, led

above all by the

financial sector.

7/23/2019 BEQ March 2014




Bond market activity since the beginning of the year has been dominated by the regular flow of

short-term sovereign issuance. Oversubscription levels have been high while the average interest

rate has slightly trended down. In addition, the Bahrain Commercial Facilities Company issued aUSD53.3mn five-year bond in January.

Bahrain short-term bond and sukuk issuance

Date IssueAmount,

BHD mn

Maturity,

days

Average interest/

profit rate, %

Average

price, %

Over-

subscription, %

12 March 2014 Treasury bill No 1486 45 91 0.74 99.812 182



26 February 2014 Sukuk al salam No 154 36 91 0.80 325

19 February 2014 Treasury bill No 1483 45 91 0.77 99.805 318

13 February 2014 Sukuk al ijarah No 102 20 182 1.10 449

12 February Treasury bill No 1482 45 91 0.80 99.799 248



27 January 2014 Treasury bill No 1479 45 91 0.91 99.770 240

22 January 2014 Sukuk al salam No 153 36 91 1.00 266

16 January 2014 Sukuk al ijarah No 101 20 182 1.25 124






Unemployment declines

Even though the overall pace of job creation in the economy has diminished in recent months,

the labor market continues to be characterized by a positive momentum. Total private sector

employment grew at an annual pace of 5.2% in Q3. This reflects above all the ongoing rebound in

a number of labor-intensive sectors in the economy.

Total private sector employment growth (excl. domestic workers)

Source: Social Insurance Organization

-4%

-2%

0%

2%

4%

6%

8%

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3

2011 2012 2013

YoY Growth QoQ Growth

The labor market

conditions have

continued their

gradual improvement

in recent months with

brisk job creation and

a reduction in the

unemployment rate.

7/23/2019 BEQ March 2014




Reflecting a cyclical improvement in labor market conditions, the official unemployment rate has

continued its downtrend with a decline from 4.5% in November to 4.3% in December.

Unemployment rate (%)

Source: Ministry of Labor

The number of vacancies in the Ministry of Labor’s vacancy bank has generally trended down in

recent months, although the latest data points to some stabilization.

Number of vacancies reported by the Ministry of Labor

Source: Ministry of Labor

Favorable external assessments

Bahrain’s favourable business conditions and strong economic fundamentals have been

endorsed by the Heritage Foundation’s 2014 Index of Economic Freedom, which saw the

Kingdom ranked first in the Middle East and North Africa.

The ICD-Thomson Reuters Islamic Finance Development Indicator (IFDI) highlighted Bahrain’s

developed Islamic finance sector, ranking first in the Middle East and North African (MENA)

region, with total assets worth USD 47bn.

2.0%

2.5%

3.0%

3.5%

4.0%

4.5%

5.0%

J a n M a r M a y J u l

S e p N o v J a n M

a r M a y J u l

S e p N o v J a n M

a r M a y J u l

S e p N o v

2011 2012 2013

0

2,000

4,000

6,000

8,000

10,000

12,000

J a n - 1 1

M a r - 1 1

M a y - 1 1

J u l - 1 1

S e p - 1 1

N o v - 1 1

J a n - 1 2

M a r - 1 2

M a y - 1 2

J u l - 1 2

S e p - 1 2

N o v - 1 2

J a n - 1 3

M a r - 1 3

M a y - 1 3

J u l - 1 3

S e p - 1 3

N o v - 1 3

2011 2012 2013

7/23/2019 BEQ March 2014



DISCLAIMER

Copyright © 2014 by the Bahrain Economic Development Board.

All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or

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without the prior permission of the Bahrain Economic Development Board.

CONTACT

Bahrain Economic Development Board

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Seef Tower

P.O. Box 11299

Manama

Bahrain

T: +973 17589962

Email: [email protected]

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BEQ March 2014