bahrain economy

Global Research

March 2009

Economic

Bahrain Economic & Strategic OutlookBahr

ain

Building for the future

Global Investment House KSCCGlobal Tower,P.O. Box 28807 Safat13149 KuwaitTel: (965) 22951000Fax: (965) 22951299Email: [email protected]://www.globalinv.net

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Faisal Hasan, CFAHead of [email protected] No:(965) 2295 1270

Digvijay TanwarFinancial [email protected] No:(965) 2295 1275

Mohammed Ali ShahFinancial [email protected] No:(965) 2295 1283

Table of Contents

Summary 1

Annual Indicators 4

Economic News Flow 5

Macroeconomic Profile 8

Gross Domestic Product (GDP) 10

Public Finance 16

Current Account 18

Monetary Policy 24

Inflation 28

Population & Labor Force 30

Sector Performance

Oil & Gas 33

Banking 35

Insurance 42

Manufacturing 45

Infrastructure 47

Real Estate and Construction 50

Bahrain Stock Exchange Performance 59

Bond Market 63

Global Research - Bahrain Global Investment House

Economic & Strategic OutlookMarch 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 Bahrains 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 governments assumption of US$60/barrel.

Bahrains 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.

The latest preliminary inflation figures from Central Informatics Organization indicate that the annual inflation in Bahrain rose to 5.1% in December from 4.3% in November, 2008. According to the data, Bahrains, consumer price index rose to 109.4 points on December 31st


2 Economic & Strategic Outlook March 2009

2008 compared with 104.1 points a year earlier. The strengthening of dollar and consequent moderating inflationary pressures across the Gulf region have allowed regional central banks to slash interest rates as they seek to defrost credit markets during a global financial crisis.

Oil is the major revenue driver of Bahrains revenue though its dependence on oil has never been above 26% during the past five years. Oil contributed 24.6% to the GDP of Bahrain in 2007 as compared to 26% in 2006. In 2008, Bahrain produced 66.9mn barrels of oil, a marginal decline of 0.6% from the levels of 2007. Bahrain oilfield contributed 18.0% or 12.0mn barrels of oil to the total crude oil production while Abu Saafa oilfield produced 54.8mn barrels of oil or 82.0% of the total crude production in the country. During 2007, Bahrain produced 67.3mn barrels of oil. The production of refined oil in 2008 stood at 96.4mn barrels, a decline of 1.6% over 97.9mn produced in 2007. The production of petrochemicals jumped 12.5% in 2008 to 1.55mn metric tonnes. Bahrain gas production increased substantially in 2008 and stood at 538.2bn cubic feet, which was the highest in the past five years.

Bahrain has developed dynamic banking sector over the past few years. In view of the supportive government regulations number of banking institutions in the country has been growing continuously since the past few years. The total number of financial institutions operating in the country stood at 415 at the end of December 2008 with 124 banking institutions, 167 insurance firms, 48 investment business firms, 14 capital market brokers and 34 specialized licensees firms. The number of retail banks were 24 of which 9 were locally incorporated banking institutions and 15 branches of foreign banks. Besides this, there were a total of 64 Wholesale banks and 36 representative offices. The number of Islamic banks in the Kingdom stood at 26.

The consolidated assets of the banking sector grew at a CAGR of 27.4% during the period 2004-07 and stood at US$245.8bn at the end of 2007, thus recording a growth of 31.2% over 2006. However during 2008, the consolidated asset base increased by a meager 2.7% and reached US$252.4bn. The asset growth in 2008 is very modest when compared with the growth of 31.2% in 2007 and 33.5% in 2006. The global economic slowdown, quite understandably has taken its toll of the banking sector growth in Bahrain as well.

The awareness about insurance is growing rapidly in Bahrain which can be gauged from the fact that the number of life insurance policies issued in 2007 increased by 169.5% to 37,780 as compared to 14,020 in 2006. As a percentage of total number of policies issued the share of life insurance increased to 4.3% in 2007 as compared to 1.8% in 2006. The number of general insurance policies issued also witnessed sharp growth as it increased from 755,347 in 2006 to 842,244 in 2007, representing a jump of 11.5%. The bulk of the general insurance policies were issued for the Motor segment comprising 92.1% of the total followed by marine segment with a share of 3.26%.

Though Bahrain has developed its manufacturing sector in the last few years the dwindling oil scenario has made it urgent for the government to push for further development in its manufacturing sector. Oil resources have helped Bahrain to develop its other industries especially manufacturing sector. Bahrains labor costs, energy costs, taxes and transport infrastructure make a compelling case for manufacturing businesses in a number of areas. The government has established many industries such as aluminum and petrochemical plants, ship repair and light engineering facilities, etc.


March 2009 Economic & Strategic Outlook

Although the Kingdom oil windfall had been smaller than most of its neighbors, Bahrain has embarked on a number of infrastructure projects which has the potential to change the economic scenario of the country. Despite the crunch, the Kingdom is moving ahead with building, upgrading and expanding several key transportation hubs. However, we believe the sharp fall in oil prices will constrain the governments ability to increase spending may lead to some delays in these projects coming online.

The Bahraini real estate market witnessed increased activity in the past few years. The government of Bahrain has enacted various laws that boosted the real estate market in the country. Laws have been passed allowing foreigners to own property in Bahrain. However, the prices are showing signs of moderation now amidst the financial crisis. With tight liquidity, market sentiment towards property investment had declined which has led to lower transaction volumes in the residential sales market.

GCC markets experienced jolts from the global financial shakeup in 2008 and Bahrain was no exception. Bahrain posted a decline of 33.5% in 2008 compared to a rise of 26.5% in 2007. The representative Global Bahrain Index declined by 29% in 2008 and stood at 151.9 points as compared to 213.99 points in 2007. The decline in Bahrain All Share Index was even more pronounced at 34.5% and stood at 1,804.07 points compared to 2,755.27 witnessed in 2007.

The global financial crisis has brought an end to a prolonged oil boom in the Gulf including Bahrain and has reversed years of strong economic performance and massive fiscal surpluses. Consequently, we expect economic growth of Bahrain in 2009 to slow down to around 3.0% mainly due to lower oil prices and global slowdown. The growth could be lower than forecasted in case of a sharper and more prolonged slowdown in advanced economies, and if the effects from the financial turmoil become more pronounced it may take a while before the economies recover.


Economic & Strategic Outlook March 2009

Annual Indicators

2004 2005 2006 2007* 2008*

Economic Performance

Nominal GDP (BD bn) 4.22 5.06 5.96 6.94 7.98^

Nominal GDP (US$ bn) 11.21 13.42 15.81 18.40 21.16^

Nominal GDP growth (%) 15.3 19.8 17.8 16.4 15.0^

Real GDP (BD bn) 3.57 3.85 4.11 4.44 4.73^

Nominal GDP (US$ bn) 9.48 10.22 10.90 11.78 12.54^

Real GDP growth (%) 5.65 7.85 6.65 8.07 6.44^

GDP per capita (BD) 5,128.4 5,693.6 6,205.9 6,673.7 7,173.4^

Consumption / GDP (%) 55.9 52.4 49.7 48.1 N/A

Investment / GDP (%) 24.2 23.1 25.8 25.1 N/A

Population (thousand) 823.7 888.8 960.4 1,039.3 1,112.0^

Government Finance

Government Revenue / GDP (%) 31.4 33.0 30.9 29.4 N/A

Domestic Public Debt / GDP (%) 13.9 12.2 11.4 8.9 8.8

Budget Surplus (Deficit) / GDP (%) 1.4 5.1 2.4 0.6 N/A

External Payments & Debt

Current Account Balance (BD mn) 156.1 592.2 822.5 1,092.9 N/A

Current Account Balance/ GDP (%) 3.7 11.8 13.8 15.8 N/A

Overall Balance of Payments (BD mn) 59.4 110.6 309.1 531.9 N/A

Official Reserves (BD mn) 637.0 749.4 1,057.2 1,590.6 1,413.7

Official Reserves / GDP (%) 15.1 14.9 17.7 22.9 17.7

Government Finance (BD mn)

Revenue 1,300.4 1,671.4 1,839.6 2,036.7 N/A

Of which: Oil 943.8 565.3 1,416.7 1,633.3 N/A

Expenditure 1,104.6 589.2 1,558.4 1,818.1 N/A

Balance 60.0 257.3 141.6 42.9 N/A

Monetary Supply and Inflation

M1 (end-period; BD mn) 861.1 1,062.5 585.8 1,572.6 1,898.7

M2 (end-period; BD mn) 2,879.6 355.8 4,035.9 5,682.6 6,728.4

Bank Deposit Rate (3-5 months) (%) 2.0 3.7 4.4 3.5 1.3

Consumer Price Inflation (%) (2006=100) 2.3 2.6 2.1 3.3 3.5

Foreign Trade (BD mn)

Total Exports 2,827.0 3,769.2 4,587.2 5,126.2 5,367.2

Oil 2,087.3 2,926.6 3,465.8 4,059.3 4,490.1

Total Imports 2,776.6 3,531.8 3,953.7 4,319.4 3,361.3

Trade Balance 65.2 319.2 633.5 806.8 2,005.9

Trade Balance as a % of GDP 1.5 6.3 10.6 11.6 N/A

Economic Indicators

Crude Oil Production (000 US barrels) 76,337 68,096 66,908 67,262 66,864.0

Gas (mn Cubic Feet) 428,375 470,413 487,932 507,671 538,233

Aluminium (Metric Tonnes) 531,626 750,710 860,435 865,048 871,658

Exchange Rate BD:US$ (av) 0.377 0.377 0.377 0.377 0.377

Stock Market Index (Points) 140.6 172.4 169.2 214.0 151.9

Market capitalization (US$ bn) 13.7 17.4 21.1 27.0 19.9 Source: Central Bank of Bahrain; Central Informatics Organization, Bahrain^Global Estimates *Provisional Data Data till Q3-2008



Economic News Flow (Mar 2008 Feb 2009)

According to the "Doing Business 2009" report, which was released by the IFC and the World Bank in mid-September, Bahrain's economy has been ranked 18th out of 181 economies in the world and second best after Saudi Arabia in its region in regards to ease of doing business. However the rank has slipped one place in comparison to the previous year. (Source: Bahrain Tribune)

Bahrain's annual inflation rate rose to 5.1% at the end of 2008 compared with 4.0% in 2007 due to rising food prices and housing costs. The price index of food, beverages and tobacco jumped to 1,189 points at the end of 2008 from 1,089 points a year earlier. (Source: Dow Jones Newswires)

In Dec 2008, Fitch Ratings affirmed Bahrain's Long-term foreign currency Issuer Default Rating (IDR) at 'A' and Long-term local currency IDR at 'A+', both with Stable Outlooks. The Country Ceiling is also affirmed at 'A+'. The Short-term foreign currency IDR is affirmed at 'F1'. (Dow Jones newswires)

Bahrain has been ranked as the 16th freest economy in the world and most free in the Middle East and North Africa region in the annual Index of Economic Freedom, published by the Heritage Foundation and Wall Street Journal. Bahrain was the only Middle Eastern country to be ranked amongst the top 20 freest economies in the world and has been ranked No.1 in the GCC for 15 years, since the launch of the Index in 1995. Bahrains ranking of 16th was an improvement on its 2008 ranking of 19th. With an average total score of 74.8%, Bahrains position in the top 20 puts it alongside Switzerland (9th), United Kingdom (10th) and Japan (19th) and ahead of Germany (25th), Spain (29th) and France (64th). Bahrain scored highly in the business freedom, trade freedom and fiscal freedom categories and made a significant improvement in the area of labor freedom, improving its score from 40 in 2008 to 85.1 in 2009. (Source: Gulf News)

Moody's Investors Service downgraded the credit outlook for Bahrain in Jan 2009, marking the first sovereign-rating hit to the oil-rich Gulf region amid tumbling crude prices and the global financial crisis. Moody's, citing the effect of falling oil prices on the kingdom's ability to maintain spending, changed the rating outlook on Bahrain's local and foreign-currency bonds to negative from stable. Moody's, however, didn't lower any of the ratings of the country's bonds or bank deposits. The reassessment by Moody's, which may make it more difficult for Bahrain to raise fresh capital in the international market, underscores the extent to which the current financial and economic crisis is affecting countries that just a few months ago seemed poised to ride out the turbulence. (Source: Wall Street Journal)

Bahrains Telecommunications Regulatory Authority extended a bidding deadline for the countrys third mobile-phone license because of the global financial crisis. The bids submission date has been extended to Jan. 11. The regulator had on Nov. 4 extended a deadline to Nov. 30 from Nov. 13 after requests from telecommunications companies. (Source: Dow Jones Newswires)



Tight international credit market conditions have delayed a US$2.2bn power and water project in Bahrain. The Al Dur project is 50% owned by GIC, with France's GDF Suez owning the other 50%. Al Dur was due for completion in 2011. The plant would have power generation capacity of 1,234 megawatts, and will be able to desalinate 218,000 cubic meters of water per day. (Source: Reuters)

Bahrain's has been ranked number one in the GCC for inward foreign direct investment in the World Investment Report. The Kingdom has been rated above fellow GCC states by the 2008 World Investment Report, which ranks countries by the Foreign Direct Investment they receive relative to their economic size. (Source: Khaleej Times)

Cumulative direct capital of local and foreign companies operating in Bahrain has increased to BD12.5bn (US$33.2bn) in 2007, up 29% from a year earlier. The number of new registered companies and their branches increased 22% during the period compared with 2006 while the number of new registered sole trader entities and their branches rose 9% (Source: Al Qaqt Daily)

According to UNCTAD 'World Investment Report' Bahrain ranked second after UAE among the GCC countries in the number of cross-border mergers and acquisitions deals in the first half of 2008. The Kingdom completed as many as 21 cross-border M&A deals worth US$3.7bn during the period. Of this, 16 were purchase deals valued at US$2.2bn while five sales deals netted a total value of US$1.4bn.

Bahrain and Spain signed an MOU agreement for promotion of reciprocal protection of investments between the nations besides enhancing economic, trade and technical cooperation. As per the agreement on reciprocal protection of investments, both Bahrain and Spain would promote two-way investments, including the grant of necessary permits and carrying out licensing agreements and contracts for technical, commercial or administrative assistance. (Source: Bahrain tribune).

The World Economic Forum's Enabling Trade Index has ranked Bahrain's economy as the second most open in the Gulf. The index, which rates a total of 118 countries worldwide on how well they facilitate the free flow of goods across borders, placed Bahrain's economy 37th in the worldwide rankings. (Source: Bahrain Tribune)

Bahrains industrial sector grew by a robust 250% during the period 2004-2007. Such was the pace that it grew by an impressive 87% in 2007 alone with the number of registered companies in Bahrain rising to 75,303 by the end of 2007. The value of accumulated local and foreign direct capital reaching the Kingdom touched US$32bn in 2007. (Source: Bahrain Tribune)

Bahrain has decided to abolish the sponsorship system for its expatriate workforce. The authorities have now introduced plans to abolish the sponsorship system by the end of the year and to allow expatriate workers to transfer jobs without the consent of their employers (Source: Gulf News)

Bahrain and Saudi Arabia plan to replace and expand a 114-km oil pipeline connecting the two countries by 2011, with costs expected to reach US$350mn. The new pipeline



will increase the flow of crude oil to Bapco. The front end engineering for this project is expected to be completed by the end of this year. (Source: Trade Arabia)

Bahrain is set to become the first country in the Gulf to upgrade and standardize the level of information communication technology in all government buildings. The Enterprise Architecture Project aims to streamline governmental procedures and improve access. Due to the scale and complexity, the project will be conducted in two stages. (Source: Bahrain Tribune)

Batelco's ambitious project to deliver internet access to all residents of the Kingdom of Bahrain took a huge leap when the final migration from the legacy network to the new NGN (Next Generation Network) was completed. The completion of the US$57mn project gives Bahrain the honor of being the first country in the world with complete countrywide broadband. (Source: Gulf News)



Macroeconomic Profile

Bahrain has recorded exceptionally high growth during the past few years. Since 2003, the nominal growth rate has been consistently in high double digits. Higher oil prices and huge liquidity in the region helped Bahrain to record robust performance over the past five years. During 2008, we expect that the real GDP to have grown at 6% as the region remained largely unaffected by the economic crisis during the first half of 2008. However, global economic slowdown coupled with substantially lower oil prices, reduced oil production and lower consumer spending has severely marred the economies in the region and this will impact Bahrain as well with the economic growth rate expected to come down to around 3.0% for 2009 with more of a downside risk.

In 2007, the economy in nominal terms surged by an impressive 16.4% to reach BD6.94bn (US$18.45bn) while real GDP grew by 8.1% to BD4.44bn (US$11.81bn). The sound economic performance in 2007 was owed to the higher oil prices in major part of the year and consequent boost provided by sectors like construction, insurance and hospitality which recorded handsome growth of 16.8%, 16.4% and 13.5% respectively.

Though Bahrain is the least oil dependent nation among its regional peers, oil & gas in nominal terms still contributed almost a quarter (24.6%) of the total GDP of the country in 2007. In the past, the Kingdom has put its oil windfall to good use by enhancing the infrastructure and promoting economic diversification to reduce the economys reliance on hydrocarbons and to create jobs for the rapidly expanding labor force. Among non-oil components, financial services, manufacturing and construction sectors contribution to GDP has increased from 17.4%, 11.5% and 3.8% in 2003 to 22.7%, 15.3% and 5.0% respectively in 2007.

In real terms, the financial sector was the largest contributor to the total GDP of the country in 2007. In fact, the contribution of financial sector to the total GDP of the country has increased from 19.4% in 2003 to 26.7% in 2007. Financial sector is undoubtedly the most significant segment of the economy with the Kingdom continuously reforming its banking sector so as to keep abreast with latest world developments.

The Kingdom has long been an open economy that has attracted foreign investment. Whether it is the financial sector, telecom sector or the real estate, Bahrain had been witnessing strong private/foreign participation over the past few years. The main reason that the foreign companies have looked Bahrain as the place to enter the region is primarily for its geographical environment, well-regulated authorities and low cost factor in setting up operations. The recent diversification and privatization initiatives of the Government have helped things further. As a result, Heritage Foundation has ranked Bahrain as the 16th freest economy in the world and most free in the MENA region in its economic freedom index for 2009 while the World Bank has placed the Kingdom 18th in its Ease of Doing Business Rankings 2009.

However, the global financial shakeup in the second half of 2008 jolted GCC markets and Bahrain was no exception. Bahrain market declined by 33.5% in 2008 compared to a rise of 26.5% in 2007. The major impact was felt in the second half of 2008 when commodity prices started to fall as recession fears loomed over the developed economies thereby forcing the high-growth GCC economies including Bahrain to slow down.


March 2009 Economic & Strategic Outlook 9

The Kingdom, with least oil reserves and the highest government debt as a percentage of GDP has long been seen as more vulnerable than others in the gulf region. While its oil production is small compared with that of neighbors such as Saudi Arabia and the United Arab Emirates, Bahrains economy is still dependent on hydrocarbon revenues. The Kingdom holds fewer liquid assets such as foreign exchange reserves or investments by government controlled funds as compared to other regional oil exporters. Consequently, the global and regional economic downturn is likely to have a significant impact on Bahrains non-hydrocarbon sectors as well.

Financial services sector currently is facing the heat and is likely to be negatively impacted. The slump in the regional property markets is adding to the woes of the sector as Bahrains banks has significant exposure to regional property investments. However, the growth in Islamic banking and the expansion of the insurance sector is likely to negate some of the negative impact.

The real estate and construction sector will be negatively affected in the short-term with possible delays in the start of building activities. Nonetheless, in the long term we see increasing importance of these two sectors in the overall GDP composition. Manufacturing would provide some succor as the government is expanding the capacities of many companies in basic industries like Alba, Bapco, and Balexco etc. Consequently, the contribution from the manufacturing sector to the GDP is likely to improve in the long run.

Bahrain has decided to go ahead with its key government backed development projects in its draft 2009-10 budget. During 2008, Bahrain stepped up efforts to bolster the countrys infrastructure, launching an upgrade of the existing port of Mina Salman, putting the finishing touches on the new US$137mn Sheikh Khalifa bin Salman Port, due to open in March 2009, and expanding the Bahrain International Airport to increase its cargo handling capacity to 1mn tonnes annually. However, we believe the sharp fall in oil prices will significantly constrain the governments ability to increase spending and in effect the ongoing infrastructural development projects currently underway as oil exports provide the majority of government revenue.

Among other Government efforts have been the interest rate cuts to unfreeze the credit markets and provide momentum to the economy. The Central Bank has cut its key policy interest rate thrice since October. It cut the interest rates for the third time, when in December it reduced its key rates by 75 basis points. The one-week deposit facility was reduced to 0.75%, overnight deposit facility to 0.25 %, and repo lending rates to 2.75%. This would help ease the liquidity in the markets and would have a positive impact in the longer term.

The global financial crisis has brought an end to a prolonged oil boom in the Gulf including Bahrain and has reversed years of strong economic performance and massive fiscal surpluses. Consequently, we expect economic growth of Bahrain in 2009 to slow down to around 3.0% mainly due to lower oil prices and global slowdown. The growth could be lower than forecasted in case of a sharper and more prolonged slowdown in advanced economies, and if the effects from the financial turmoil become more pronounced it may take a while before the economies recover.



Gross Domestic Product

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.

Chart 01: Bahrains GDP trend

Source: Ministry of Finance & National Economy, *Provisional Data, Global Research

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 Bahrains 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.

Table 01: Gross Domestic Product 2003 2004 2005 2006 2007*

GDP at current market prices (BD bn) 3.7 4.2 5.1 6.0 6.9

GDP at current market prices (US$ bn) 9.7 11.2 13.5 15.9 18.4

- (% change) 14.8 15.3 19.8 17.8 16.4

GDP at constant market prices (BD bn) 3.4 3.6 3.9 4.1 4.4

GDP at constant market prices (US$ bn) 9.0 9.5 10.2 10.9 11.8

- (% change) 7.2 5.6 7.9 6.7 8.1

Crude oil production (US Barrels



the economy in 2009 particularly the development projects undertaken by the government. We believe low demand for oil coupled with lower oil prices will impact the overall oil & gas GDP growth significantly in 2009. The impact might be magnified by dependence of non-oil sectors on oil sector as seen in the last couple of years which were benefited by immense liquidity from oil revenues.

Robust growth in GDP per capita: Bahrains GDP per capita reported a CAGR of 5% during the period 2000 and 2007. GDP per capita increased by 7.5% to BD6,674 in 2007 as compared to BD6,206 in 2006 on account of increased economic activity in the Kingdom. High liquidity due to higher oil prices also boosted the economic activity in 2007. We believe economic activity in Bahrain to have moderated in later part of the year 2008 leading to uncertainty and delays in important infrastructure projects. Overall the per capita GDP growth in 2009 and going forward will be muted compared to what was observed in previous years.

Sectoral contribution to the GDP (current prices): Higher crude oil prices enabled the oil & gas segment to garner a share of 26% to the total GDP of the Kingdom in 2006, which was the highest contribution in the past five years. However, on the back of robust growth in segments like insurance, construction, etc. coupled with not so significant growth in oil segment led to fall in oil & gas sectors contribution to the total GDP to 24.6% in 2007. Oil & gas contributed BD1.71bn in 2007 as compared to BD1.55bn in 2006, an increase of 10.3% as the country produced 67.3mn barrels of oil, an increase of a meager 0.5% over 66.9mn in 2006.

Chart 02: Bahrain GDP component trend (current prices)

Source: Central Informatics Organization, Bahrain *provisional data

The robust growth in non-oil sectors of the economy enabled Bahrains GDP to grow by 16.4% in 2007 as compared to 17.8% in 2006. Historically, oil & gas segment contributed heavily to the overall growth of the economy. However, increasing share of non-oil and high growth sectors has prevented a deceleration of growth momentum in 2007. The non-oil sector supported the total GDP growth by delivering 18.5% growth compared to the oil sectors growth of 10.3%.

24.5% 22.8% 25.0% 26.0% 24.6%

11.5% 10.8% 12.1% 13.8% 15.3%21.1% 24.1% 23.9%

22.8% 22.7%

14.9% 13.8% 12.8%11.8% 11.7%

28.0% 28.5% 26.2% 25.5% 25.6%

0.0%

20.0%

40.0%

60.0%

80.0%

100.0%

2003 2004 2005 2006 2007*Oil & Gas Manufacturing FinancialsGovernment Services Others



Chart 03: Contribution to total GDP growth

Source: Central Informatics Organization, Bahrain *Provisional Data

The major sectors such as construction, manufacturing and financials recorded sound growth of 22.2%, 28.8% and 15.8% respectively in 2007, boosting the overall GDP growth of the economy. Construction sector contributed 5%, manufacturing 15.3% while financial sector contributed 22.7% to the total GDP of Bahrain in 2007. Table 02: GDP by Economic Activity (current prices)in BD mn 2004 2005 2006 2007*

Crude Petroleum & Natural Gas 963.1 1,267.4 1,550.3 1,709.7

Quarrying 16.8 18.1 25.7 30.8

Agriculture & Fishing 19.6 19.7 19.8 25.3

Manufacturing 457.0 612.0 825.3 1,062.8

Construction 173.1 232.0 284.5 347.6

Electricity & Water 49.7 51.6 53.0 85.6

Trade 410.0 493.6 571.3 631.8

Restaurants & Hotels 92.5 107.9 124.6 141.8

Transport, Storage & Communications 294.7 315.3 369.9 413.9

Consolidated Financial Institutions 1,018.5 1,207.2 1,361.0 1,576.4

Financial Institutions 224.9 265.3 326.4 399.7

Offshore Financial Institution 612.0 738.1 820.5 875.2

Insurance 181.6 203.8 214.2 301.5

Real Estate & Business Services 358.1 413.1 470.5 516.1

Community, Social & Personal services 68.2 73.2 80.5 90.4

Government Services 371.8 422.0 452.2 533.9

Education Services 193.1 209.3 239.3 268.7

Health Services 90.6 103.4 121.7 137.5

Private Non-profit institutions serving households 4.6 4.7 5.1 5.3

Households with employed persons 20.8 21.4 30.0 34.6

Financial Intermediation Services Indirectly Measured (434.6) (570.6) (692.8) (756.3)

GDP at producers price 4,167.3 5,001.3 5,891.7 6,855.9

Import duties 57.1 59.4 68.6 80.1

GDP at purchasers prices 4,224.5 5,060.6 5,960.3 6,936.0 Source: Central Informatics Organization, Bahrain *Provisional Data

Sectoral contribution to the GDP (constant prices): The importance of GDP components when observed from constant price perspective is different from GDP measured in current price.

7.1%

31.6%

22.3%

10.3%17.9% 16.3% 16.3% 18.5%

15.3%

19.8%17.8% 16.4%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

2004 2005 2006 2007*Oil & Gas growth Non-Oil growth Total GDP growth



Oil & gas which stood as the largest component of nominal GDP, slips to fourth position in terms of real GDP. Oil & gas sectors contribution comes after financial, manufacturing and government services sector. Oil & gas sector contributed BD602.6mn in 2007, an increase of 1.1% over 2006 with its contribution to the real GDP declining from 22.2% in 2003 to 13.6% in 2007.

The financial sector was the largest contributor to the total GDP of the country in 2007. The sector has grown at a CAGR of 15.9% from year 2003 to 2007 which is more than double the CAGR of 7.1% witnessed by the economy. As a result, the contribution of financial sector has been increasing consistently. In 2003, the financial sector contributed 19.4% to the total GDP which has increased to 26.7% in 2007. Financial sector is undoubtedly the most important segment of the economy with its importance growing in the long term on the back of reforms undertaken by the government and lower oil prices that we are witnessing in current market.

Table 03: GDP by Economic Activity (constant prices)In BD mn 2003 2004 2005 2006 2007*

Crude Petroleum & Natural Gas 750.1 660.5 602.2 595.9 602.6

Quarrying 9.9 14.9 15.8 22.0 25.7

Agriculture & Fishing 21.9 23.3 23.3 21.6 27.8

Manufacturing 419.3 461.1 575.8 663.3 706.5

Electricity & Water 49.1 52.0 55.9 61.0 66.7

Construction 145.6 174.2 208.5 253.6 296.3

Trade 286.7 292.1 326.5 342.1 356.8

Restaurants & Hotels 70.8 85.2 98.3 115.8 131.5

Transport, Storage & Communications 251.6 283.2 314.9 354.5 376.4

Consolidated Financial Institutions 657.1 884.0 968.1 1091.2 1,184.3

- Financial Institutions 199.8 233.2 257.0 332.1 369.6

- Offshore Financial Institution 307.9 446.9 497.5 518.6 534.9

- Insurance 149.4 203.9 213.6 240.5 279.8

Real Estate & Business Services 311.9 331.3 354.2 407.1 434.0

Community, Social & Personal services 67.0 73.0 82.3 95.9 109.1

Government Services 335.3 343.6 358.5 366.9 395.3

Education Services 161.9 179.7 195.1 208.2 223.4

Health Services 77.5 83.4 94.3 107.1 117.8

Private Non-profit institutions serving households 4.7 5.0 5.1 5.7 5.7

Households with employed persons 20.7 21.2 21.9 30.9 35.9

Financial Intermediation Services Indirectly Measured (309.4) (449.3) (501.0) (694.1) (721.3)

GDP at producers price 3,331.8 3,518.3 3,799.4 4,048.7 4,374.5

Import duties 49.5 54.0 53.4 60.4 66.2

GDP at purchasers prices 3,381.4 3,572.3 3,852.8 4,109.1 4,440.7 Source: Central Informatics Organization, Bahrain *Provisional Data

During 2007, construction sector has been the highest growth driver, continuing its trend of high growth over the last four years. Construction sector grew at a CAGR of 19.4% from the period 2003 to 2007 and stood at BD296.3mn, an increase of 16.8% over the previous year. This was possible due to governments initiatives to further develop the infrastructure base in the country. In 2007, robust growth was also observed in agriculture, hotels & restaurants and social & personal services sectors which grew by 28.8%, 13.5% and 12.5% respectively.



Chart 04: CAGR of major sectors (2003-2007)

Source: Central Informatics Organization, Bahrain

On the back of current financial turmoil in the global and GCC markets, we believe the real estate and construction sectors will be hit hard. Nonetheless, we see increasing importance of these two sectors in the overall GDP composition in the long term keeping note of the increasing number of projects in the pipeline. Along with the above, manufacturing sector too would play an important role. In order to raise domestic production and boost exports, the government is now set to expand the capacities of many companies in basic industries like Alba, Bapco, and Balexco etc. Consequently, the contribution from the manufacturing sector too is likely to improve in the long run.

GDP by expenditure: The government consumption grew by 17.4% in 2007 as compared to 6.4% in 2006, whereas private consumption increased by 10.8% in 2007 compared with a growth of 14% in 2006. We believe the trend of higher growth in government consumption is likely to continue in the near term, whereas the private consumption is likely to remain modest. Private consumption will be most affected as a result of the current liquidity crisis.

The share of government consumption to the total GDP of the country has remained similar from 14.2% in 2006 to 14.3% in 2007 while the share of private consumption decreased marginally from 35.5% in 2006 to 33.8% in 2007. The gross capital formation, which is mainly the capital spending by the government and the private sector, grew by 12.9% and stood at BD1.74bn in 2007. Total gross capital formation contributed 25.1% of GDP in 2007 as compared to 25.8% in 2006. The modest growth in gross capital formation was on account of lower growth in government investment of 7% in 2007 as compared to 69.6% witnessed in the previous year.

Private investment recorded a growth of 15.4% in 2007, though lower than 20.2% observed in 2006, it is double the government investment growth rate witnessed in 2007. Over the period of last four years, government investment grew at a CAGR of 17% whereas private investment grew at a CAGR of 27.8% underlying the importance of private sector in overall growth of the economy. However, we believe, going forward the private investment growth will grow at a rate lower than what we witnessed earlier on account of liquidity squeeze in global markets.

19.4%16.7% 15.9%

8.6%7.1%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

Construction Restaurants& Hotels

FinancialInstitutions

Real Estate& Business

Services

Real GDPgrowth



Table 04: GDP by expenditure activity (current prices)In BD mn 2004 2005 2006 2007*

Government Consumption 707.4 796.2 847.0 994.5

Private Consumption 1,652.0 1,855.7 2,116.2 2,344.0

Government Investment 252.7 278.1 471.6 504.8

Private Investment 771.0 888.6 1,068.2 1,233.3

Net Exports Goods & Services 814.5 1,169.3 1,542.8 1,762.7

Exports Goods & Services 3,886.6 5,037.2 5,889.0 6,510.2

Imports Goods & Services 3,072.1 3,867.9 4,346.2 4,747.5

Change in stocks 26.9 72.8 (85.6) 96.8

Total expenditures on GDP 4,224.5 5,060.6 5,960.3 6,936.0

Domestic Demand 3,410.0 3,891.3 4,417.5 5,173.3 Source: Central Informatics Organization, Bahrain *Provisional Data

Imports increased by 9.2% to BD4.75bn in 2007 over 2006 while exports jumped by 10.5% to BD6.51bn in 2007. The net exports of the country stood at BD1.76bn in 2007 as compared to BD1.54bn in 2006 recording an increase of 14.3%. Domestic demand as a percentage of GDP has gradually decreased and stood at 74.6% in 2007 as compared to 84.3% in 2002. The domestic demand during the year 2007 was strong and grew by 17.1% to BD5.17bn as compared to BD4.41bn recorded in 2006.

The global financial crisis has brought an end to a prolonged oil boom in the Gulf and in Bahrain and has reversed years of strong economic performance and massive fiscal surpluses. We expect economic growth of Bahrain in 2009 to slow down dramatically mainly due to lower oil prices and global slowdown.



Public Finance

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.

Table 05: Summary of government finance (budgeted income & expenditure)

Actual

Global

Estimates Budget

In BD mn 2006 2007 2008 2007 2008 2009 2010

Total Revenue 1,839.6 2,036.7 2,706.1 1,660.6 1,687.9 1,836.0 1,897.0

Oil & Gas 1,416.7 1,633.3 2,233.2 1,235.0 1,241.0 1,498.0 1,556.0

Non-Oil 422.9 403.3 472.9 425.6 446.9 337.0 340.0

Total Expenditure 1,558.4 1,818.1 2,504.0 1,854.6 1,871.9 2,026.0 2,136.0

Recurrent 1,101.3 1,331.1 1,857.0 1,324.6 1,381.9 1,726.0 1,836.0

Projects 457.2 487.0 647.0 530.0 490.0 300.0 300.0

Strategic & Sovereign projects - - - - - - -

Surplus/Deficit before rollover 281.1 218.6 202.0 (194.0) (184.0) (190.0) (239.0)

As a % of GDP 4.7% 3.2% NA -- -- --Source: Central Bank of Bahrain, Ministry of Finance & National Economy, Bahrain

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 governments assumption of US$60/barrel.

Conservative estimates taken in the budget of the past four years lead to a situation of a surplus budget instead of a deficit estimated by the government. This was on account of higher oil prices during the period leaving behind governments budgeted deficit by a wide margin. We expect the trend to reverse and the government is likely to report deficit in line with the budgeted estimates for 2009.

Chart 05: Trend of Bahrains actual and budgeted deficit/surplus

Source: Central Bank of Bahrain, Ministry of Finance & National Economy, Bahrain, Global Research

145.2

382.2281.1

218.6 202.0

(382.6)

(208.6)

(427.8)

(194.0) (184.0)

(500)(400)(300)(200)(100)-100200300400500

2004 2005 2006 2007 2008EBD

mn

Actual surplus/decit Budget surplus/decit



The actual revenue of the government surged by 10.7% to BD2.04bn in 2007 from BD1.84bn in 2006. As we have observed historically, the actual revenue numbers for 2007 beat governments budgeted numbers on the upside by 22.6%. For 2009 and 2010 budgets, the Bahrain government has estimated US$60/barrel for its oil revenue calculation which we believe is on a higher side since the current prices are hovering at around US$40/barrel.

The actual oil & gas revenue of BD1.63bn in 2007 was 32.3% higher than the budgeted estimates. The contribution of oil & gas to the total revenue of the government in 2007 increased further to 80.2% from 77% witnessed in the previous year due to sustained higher oil prices in 2007. Oil revenue for 2008 is again likely to remain substantially high as a proportion of total revenue due to high oil prices in major part of the year. However, we are likely to observe decreasing oil revenue from 2009 onwards on the back of steep crash in oil prices in global markets from US$147/barrel in 2008 to around US$35/barrel in January 2009.

Despite the diversification efforts of the government, oil & gas is still the major contributor to the total revenue of the government. The substantial decline in oil prices is likely to see improvement in non-oil revenue share of the government going forward.

The non-oil revenue was 5.2% lower than the governments budgeted figures of BD425.6mn in 2007. Non-oil revenue which was increasing steadily over the past few years witnessed a decline of 4.6% in 2007 and stood at BD403.3mn as compared to BD422.9mn in 2006. The contribution of non-oil revenue to the total government revenue dropped significantly from 27% in 2003 to 19.8% in 2007. However, for 2009 the contribution of non-oil revenue to the total revenue is likely to witness moderate increase as oil prices has declined significantly. These developments regarding oil prices coupled with governments emphasis on developing manufacturing and energy intensive activities such as aluminum production, financial services, etc. will further give a fillip to non-oil revenues going forward.

The actual expenditure by the government of BD1.82bn in 2007 was 2% below the budgeted expenditure of BD1.85bn continuing its trend of actual numbers being lower than budgeted numbers. The total expenditure of the government in 2007 increased by 16.7% to reach BD1.82bn in 2007 compared to BD1.56bn in 2006. Recurrent expenditure increased by 20.9% in 2007 and stood at BD1.33bn or about 73.2% of the total expenditure. The projects expenditure increased by 6.5% to BD487mn in 2007 as compared to BD457.2mn in 2006. We expect the expenditure of the government to rise in tune with revenue growth. However, it is also likely that the government might have to curtail its expenditure in view of the liquidity crunch in the market.



Current Account

Bahrains 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. This scenario is unlikely to change in the next few years. The total non-oil export, which increases by an impressive 21.3% in 2006, lost its growth momentum in 2007 as it declined by 4.9%. The total non-oil export stood at BD1.07bn in 2007 as compared to BD1.12bn in 2006. During the first nine months of 2008, the non-oil export amounted to BD877.1mn, an increase of 11% over the corresponding figure of 2007.

Table 06: Trade BalanceIn BD mn 2005 2006 2007* Q1-2008* Q2-2008* Q3-2008*

Total Exports 3,851.0 4,587.2 5,126.2 1,588.5 1,888.1 1,890.6

- Oil 2,926.6 3,465.8 4,059.3 1,296.9 1,635.4 1,557.8

% of total 76.0% 75.6% 79.2% 81.6% 86.6% 82.4%

- Non Oil 924.4 1,121.4 1,066.9 291.6 252.7 332.8

% of total 24.0% 24.4% 20.8% 18.4% 13.4% 17.6%

Total Imports 3,531.8 3,953.7 4,319.4 1,073.3 1,280.2 1,007.8

- Oil 1,567.8 1,843.0 2,204.9 679.0 875.4 817.2

% of total 44.4% 46.6% 51.0% 63.3% 68.4% 81.1%

- Non Oil 1,964.0 2,110.7 2,114.5 394.3 404.8 190.6

% of total 55.6% 53.4% 49.0% 36.7% 31.6% 18.9%

Trade Balance 319.2 633.5 806.8 515.2 607.9 882.8

As a % of GDP 6.3 10.6 11.6 Source: Central Bank of Bahrain, *Provisional Data

Bahrains total imports grew at a CAGR of 15.9% during the period 2004 and 2007. The total imports amounted to BD4.32bn in 2007, a growth of 9.2% over the previous year. During the first nine months of 2008, the total import stood at BD3.36bn. Oil imports increased rapidly by 19.6% to BD2.20bn in 2007 as compared to BD1.84bn in 2006. The contribution of oil imports to the total imports has been increasing consistently since the past few years. Oil contributed 33.4% to the total imports in 2002 which increased to 51% in 2007, and is the largest contribution in the last five years. The higher contribution was due to higher oil prices and increased demand in 2007. During the first nine months of 2008, oil imports stood at BD2.37bn an increase of 57.0% over the corresponding figure of 2007. Non-oil imports remained almost stagnant in 2007 and amounted to BD2.11bn. The contribution of non-oil imports to the total imports has declined from 66.6% in 2002 to 49% in 2007. During the first nine months of 2008, the non-oil imports stood at BD989.70mn, a significant decline over BD1,709.70mn recorded in the corresponding figure of 2007.



Table 07: Foreign Trade Classified by Sections of Commodities - ExportsExports

In BD mn 2005 2006 2007 Q1-2008* Q2-2008* Q3-2008*Animals and Animal Products 7.3 8.8 10.8 4.8 14.6 13.5Vegetable Products 1.6 2.6 1.9 0.4 0.6 0.5Animal & Vegetable Fats & Oils 0.0 0.1 0.0 0.0 0.0 0.0Prepared Foodstuffs, Beverages & Tobacco 11.8 12.1 11.6 4.7 12.0 12.2Mineral Products including Oil 2,993.1 3,566.3 4,134.7 1,312.1 1,642.0 1,573.3Products of chemical & Allied inds. 97.7 108.7 219.4 66.6 6.4 74.9Plastic and rubber articles 19.0 21.2 22.7 8.8 12.2 14.7Raw hides & skins, leather & other 0.1 0.6 0.5 0.0 0.0 0.0Wood, Wood pulp & Papers 14.8 14.8 11.6 2.6 5.5 5.4Textile & Textile Articles 42.8 38.5 45.4 10.6 9.9 10.6Footwear and Others -- 0.1 0.0 0.0 0.0 0.0Plaster, Cement, Stone etc. 4.1 4.0 6.3 1.9 3.5 2.3Base Metals & Articles 487.6 685.0 542.2 166.3 175.2 171.6Machinery & Appliances, Electrical Equipments 31.7 36.1 44.9 22.7 25.6 26.9Transport Equipment 44.5 72.7 55.2 18.2 24.7 20.7Optical, Photographic etc. 2.4 3.7 4.4 0.8 1.2 1.0Others 10.7 11.9 14.6 3.9 4.3 4.7Total 3,769.2 4,587.2 5,126.2 1,624.4 1,937.7 1,932.3

Source: Central Bank of Bahrain,* Provisional Data

In the non-oil sector, base metals and articles thereof constituted the largest item of exports with a contribution of 10.6% in 2007. Base metals was followed by chemical & allied industries with a contribution of 4.3% and transport equipment with a contribution of 1.1% to the total exports. Bahrain needs to develop its other industries which contribute marginally to the total exports of the country. During the first nine months of 2008, exports of base metals stood at BD513.1mn whereas exports of chemical & allied industries stood at BD147.9mn.

Table 08: Foreign Trade Classified by Sections of Commodities - ImportsImports

In BD mn 2005 2006 2007 Q1-2008* Q2-2008* Q3-2008*Animals and Animal Products 56.7 65.8 59.5 7.5 15.1 7.2Vegetable Products 43.7 52.6 49.0 8.9 9.2 5.0Animal & Vegetable Fats & Oils 5.9 7.1 8.0 2.0 1.7 1.6Prepared Foodstuffs, Beverages & Tobacco 82.2 103.9 107.8 18.4 20.9 14.0Mineral Products including Oil 1,708.4 1,975.4 2,295.2 693.9 910.5 820.6Products of chemical & Allied inds. 189.9 337.5 377.0 55.3 35.4 14.7Plastic and rubber articles 47.3 58.8 76.2 15.9 16.8 8.9Raw hides & skins, leather & other 2.7 5.4 4.9 1.1 1.3 0.6Wood, Wood pulp & Papers 39.7 56.9 66.9 12.6 11.4 6.1Textile & Textile Articles 62.4 75.6 64.3 13.6 14.5 6.5Footwear and Others 5.2 7.9 7.0 2.0 1.5 1.1Plaster, Cement, Stone etc. 45.2 70.0 73.4 14.8 16.6 11.5Base Metals & Articles 159.9 234.0 261.8 53.4 66.0 37.2Machinery & Appliances, Electrical Equipments 270.9 479.5 426.2 87.3 93.8 41.8Transport Equipment 218.7 333.6 370.9 74.4 50.9 20.0Optical, Photographic etc. 18.8 41.4 26.5 5.1 7.4 7.0Others 30.2 48.3 44.8 7.1 7.2 4.0Total 2,987.8 3,953.7 4,319.4 1,073.3 1,280.2 1,007.8

Source: Central Bank of Bahrain,* Provisional Data



The major component of Bahrains imports in non-oil sector was machinery, appliances & electrical equipments which contributed 9.9% to the total import in 2007. Machinery, appliances and electrical equipments was followed by transport equipments which contributed 8.6% and base metals & articles with a share of 6.1%.

Bahrains trade with its regional counterparts has increased over the past couple of years. Other GCC member countries contributed 44.1% of non-oil exports and 18.8% of non-oil imports of Bahrain in 2007. Saudi Arabia is the major trading partner of Bahrain. Bahrain exported goods worth BD265.8mn to Saudi Arabia in 2007 representing 60.8% of total non-oil exports of Bahrain to GCC. The other important export destinations are UAE and Qatar representing 17.3% and 10.7% respectively of the total non-oil exports from Bahrain to GCC.

Imports from Saudi Arabia amounted to BD207.5mn in 2007, representing 54.6% of the total non-oil imports of Bahrain from the GCC countries. Saudi Arabia was followed by UAE with a share of 32.3% to the total non-oil imports of Bahrain from the GCC region while Kuwaits share stood at 6.2% in 2007.

Table 09: Non-Oil Foreign Trade with GCC countriesExports Imports

2007 9M-2008 2007 9M-2008

In BD mn Amount % of

Total

Amount % of

Total

Amount % of

Total

Amount % of

Total

Saudi Arabia 265.8 50.2 316.8 50.3 207.5 51.1 175.5 51.7

UAE 75.5 14.3 90.3 14.3 122.7 30.2 91.0 26.8

Kuwait 33.5 6.3 46.4 7.4 23.4 5.8 26.2 7.7

Oman 15.6 2.9 20.8 3.3 11.9 2.9 8.1 2.4

Qatar 46.6 8.8 48.3 7.7 14.8 3.6 26.6 7.8

Others 92.1 17.4 107.8 17.1 25.7 6.3 12.0 3.5

Total 529.1 82.6 630.4 82.9 406.0 93.7 339.4 96.5Source: Central Bank of Bahrain

Bahrains other major international trading partners comprises Australia (9.9% of total trade), USA (8.9%), Japan (7.4%), China (6.1%), Germany (4.1%) and India (3.9%). Australia leads the ranking as the top exporter to Bahrain with exports worth BD272.5mn in 2007, which was occupied by Japan in the previous year. Australia, Japan, China, USA and Germany with exports worth BD272.5mn, BD226.2mn, BD179.3mn, BD144.1mn and BD120.8mn respectively have a major share in total trade with Bahrain.



Chart 06: Bahrains major trading partners

Source: Central Bank of Bahrain

Major trade regions of Bahrain in 2007 were Asia, GCC and Europe which contributed 28.3%, 25.7% and 21.1% respectively to the total trade of the country.

Chart 07: Bahrain trade (export & import) region mix


Bahrain recorded current account surplus in 2003 and since then the country has recorded higher surplus in subsequent years. The current account surplus increased from BD75.4mn in 2003 to BD1.09bn in 2007. In 2007, the current account surplus increased by 32.9% over the previous year. The current account surplus represents 15.8% of GDP in 2007 as compared to 13.8% in 2006. The expansion in the current account surplus was driven largely by the strong growth of merchandise exports which grew by 20.6% in 2007 over the previous year.

207.

5

272.

5

144.

1

226.

2

122.

7 179

.3

120.

8

73.8

73.0 88

.5

35.8

14.8

23.4

265.

8

43.8

139.

4

10.0 75

.5

13.4

9.2

50.4

27.5

8.0

43.7

46.6

33.5

9.9%

6.1%4.1% 3.9% 3.2% 3.0% 2.5% 1.9% 1.8%

14.9%

8.9% 7.4%6.2%

-

50

100

150

200

250

300

350

400

Saud

iA

rabi

a

Aus

tralia

U.S

.A.

Japa

n

UA

E

Chin

a

Ger

man

y

Indi

a

Italy

UK

Net

herla

nds

Qat

ar

Kuw

ait

BD m

n

-10%

-5%

0%

5%

10%

15%

Imports Exports as % of total trade

69

2.5

38

0.3 53

9.6

19

0.8

27

6.5

25

.7

8.0

1.1

20

9.0

43

7.0

13

0.7

14

1.7

47

.3

92

.1

4.6

4.5

28.3% 25.7%21.1%

10.5% 10.2%3.7% 0.4% 0.2%

-100200300400500600700800

Asia GCC Europe America Australiaand otheroceanic

Other Arabcountries

Africa Othercountries

BD

mn

-20%

-10%

0%

10%

20%

30%

40%

Import Export % of total trade



Table 10: Current Account BalanceIn BD mn 2004 2005 2006 2007*

Current Account (a+b+c+d) 177.3 554.3 822.5 1,092.9

a. Goods 277.4 555.7 897.2 1,077.1

General Merchandise 239.0 515.6 844.6 1,018.2

Exports (fob) 2,841.9 3,851.0 4,587.2 5,126.2

Oil and oil products 2,087.3 2,926.6 3,465.8 4,059.3

Non-oil 754.6 924.4 1,121.4 1,066.9

Imports (fob) (2,602.9) (3,335.4) (3,742.6) (4,108.0)

Oil and oil products (1,039.7) (1,567.8) (1,843.0) (2,204.9)

Non-oil (1,563.2) (1,767.6) (1,899.6) (1,903.1)

Repairs on goods 38.4 40.1 52.6 58.9

b. Services (net) 537.1 613.6 645.6 685.6

Transportation 31.4 19.8 18.1 19.1

Travel 179.5 190.2 222.7 235.5

Communication services 235.8 235.5 232.4 241.7

Financial services (Including Insurance) 81.8 158.3 160.6 175.7

Other Business services 8.6 9.8 11.8 13.6

c. Income (net) (216.1) (155.0) (144.7) (112.3)

Direct Investment Income (248.0) (258.4) (315.4) (447.5)

Portfolio Income 175.3 386.4 598.1 772.4

Other Investment Income (143.4) (283.0) (427.4) (437.2)

d. Current Transfers (net) (421.1) (460.0) (575.6) (557.5)

Workers Remittance (421.1) (460.0) (575.6) (557.5)

Current Account Balance as a % of GDP 4.2% 11.0% 13.8% 15.8%Source: Central Bank of Bahrain, *Provisional Data

As a percentage of GDP, the current account surplus has increased from 2.1% in 2003 to 15.8% in 2007. In 2008, Bahrains current account surplus is likely to increase, boosted by the robust performance of the domestic non-oil economy, elevated international commodity prices during most part of the year, favorable economic performance in major export markets.

Chart 08: Bahrain current account

Source: Central Bank of Bahrain, *Provisional Data

75.4 177.3

554.3

822.5

(18.7)

1,092.9

2.1%4.2%

11.0%

13.8%15.8%

-0.6%(200)

-

200

400

600

800

1,000

1,200

2002 2003 2004 2005 2006 2007*

BD

mn

-2%0%2%4%6%8%10%12%14%16%18%

Current account as % of GDP



Net outflow on the capital and financial account increased to BD1.1bn in 2007 as compared to BD826.7mn in 2006. Net inflow from the capital account amounted to BD18.8mn in 2007 as compared to BD28.2mn in 2006 while net outflow from the financial account expanded from BD854.9mn in 2006 to BD1.12bn in 2007. The increase in net outflow from financial account was largely due to substantial increase in direct investments which increased from BD2.05bn in 2006 to BD2.60bn in 2007. The portfolio investment declined from BD3.32bn in 2006 to BD3.22bn in 2007.

Table 11: Capital & Financial AccountIn BD mn 2004 2005 2006 2007*

Capital Account 18.8 18.8 28.2 18.8

Financial Account (206.3) (629.5) (854.9) (1,115.4)

Direct Investments (64.0) (32.6) 727.5 32.7

Portfolio Investments (1,317.8) (1,735.0) (3,320.5) (3,218.5)

Other Investments 1,234.9 1,248.7 2,047.2 2,602.3

Reserve Assets (59.4) (110.6) (309.1) (531.9)

Capital and Financial Account (187.5) (610.7) (826.7) (1,096.6)Source: Central Bank of Bahrain, *Provisional Data

In the capital and financial account, acquisition of portfolio investments abroad is expected to decline due to current global scenario and liquidity crunch in the market while inflows of foreign direct investment into Bahrain are likely to moderate for the same reason. We believe the growth of financial sector will be the most impacted.



Monetary Policy

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.

Chart 09: Bahrains central bank key rate changes


The Central Bank of Bahrain has reduced interest rate on 3 months interbank deposits from 5.1% in Q1-2007 to 2.8% in Q2-2008 which was later increased to 3.2% in Q3-2008 but again reduced to 2.4% in Q4-2008. Following the same trend the deposit rates for the 3-12 months period also declined sharply from 5.23% in Q1-2007 to 1.29% by Q4-2008 which is in line with the declining interest rate scenario in US. The interest rate in the different categories of business loans provides a mixed picture. The interest rate for the construction sector increased from 6.8% in Q1-2008 to 7.9% in Q2-2008 while in Q3-2008 it declined to 7.4%, it was further increased to 8.6% in Q4-2008. For the manufacturing sector, interest rate declined sharply from 6.33% in Q1-2008 to 4.71% in Q2-2008 while in Q3-2008 it reversed with an increase to 6.03% and again to 7.54% in Q4-2008.

Table 12: Money Market and Commercial Banks Interest rates

% per annum2007 2008

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4Money Market3 month Inter Bank 5.10 5.30 5.40 4.90 3.30 2.80 3.20 2.40Deposits Savings 0.32 0.31 0.36 0.36 0.31 0.31 0.35 0.23Less than 3 months 4.49 4.27 4.22 3.78 1.78 1.68 1.81 1.163-12 months 5.23 5.07 4.17 3.47 1.64 1.78 1.88 1.29Business LoansConstruction & Real Estate 9.20 8.35 7.63 6.63 6.80 7.90 7.44 8.60Manufacturing 6.86 8.30 7.11 6.69 6.33 4.71 6.03 7.54Trade 7.79 7.96 7.68 6.05 5.20 7.34 6.81 8.17Personal LoansSecured by Mortgages 9.18 8.51 9.22 9.13 8.66 8.42 8.43 8.24Secured by Vehicle Title 9.81 9.77 9.94 9.56 9.18 8.59 7.90 7.54Secured by Deposits 9.04 9.10 9.22 8.45 8.15 8.49 6.22 6.72Salary Assignments 8.12 8.14 8.22 8.42 8.31 7.35 8.23 8.37Credit Cards 20.67 20.74 20.53 20.97 20.89 21.79 21.80 21.78


1.75%1.50%

0.75%1.25%

1.00%

0.25%

4.75%

3.50%

2.75%

0%

1%

2%

3%

4%

5%

09-Oct-2008 30-Oct-2008 18-Dec-2008One-week deposit facility Reverse repo rates Repo rates



The interest rate for personal loan segment declined from 8.66% in Q1-2008 to 8.24% in Q4-2008. We believe that rather than decreasing interest rates for personal loans, business loans should be made cheaper to boost the economic activity in these difficult times. The central banks worldwide including Central Banks of Bahrain has realized these concerns and are lowering interest rates for all categories of loans to boost the confidence in the economy. We believe that in view of the current liquidity crunch in the market coupled with lack of domestic demand interest rates are likely to fall further.

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.

The growth in money supply was primarily attributed to the increase in private sector time and savings deposits (Quasi Money) as well as demand deposits. Mostly keeping in line with the rising demand deposits, the money (M1) increased by 20.7% during 2008 to reach BD1.90bn as compared to BD1.57bn at the end of 2007. Quasi money witnessed an increase of 17.5% over 2007 and stood at BD4.83mn.

Money supply as measured by M2 and M3 also witnessed robust growth. The broad money supply measured by M2 increased from BD5.68bn at the end of 2007 to BD6.73bn at the end of 2008, an increase of 18.4% whereas M3 has increased by 19.9% from BD6.66bn in 2007 ending to BD7.98bn at the end of 2008.

Table 13: Money SupplyBD mn 2006 2007 1Q08 2Q08 3Q08 4Q08

Currency in Circulation (1) 279.7 307.6 321.9 337.4 378.0 370.8

Currency held by Banks (2) 52.0 51.4 56.6 61.9 70.8 66.6

Currency Outside Banks (3)=(1)-(2) 227.7 256.2 265.3 275.5 307.2 304.2

Demand Deposits (4) 1,058.1 1,316.4 1,595.5 1,929.2 1,794.7 1,594.5

Money (M1) (5)= (3)+(4) 1,285.8 1,572.6 1,860.8 2,204.7 2,101.9 1,898.7

Quasi Money (6) 2,749.4 4,110.0 4,196.1 4,383.3 4,566.9 4,829.7

Money Supply (M2) (7)=(5)+(6) 4,035.2 5,682.6 6,056.9 6,588.0 6,668.8 6,728.4

Deposits General Government (8) 857.4 974.5 1,000.6 1,034.0 1,292.0 1,253.4

Money Supply (M3) (9)=(7)+(8) 4,892.6 6,657.1 7,057.5 7,622.0 7,960.8 7,981.8Source: Central Bank of Bahrain

The total public debt of the country increased at a CAGR of 2.8% during the period 2002-2008. The total public debt of the country stood at BD705mn at the end of 2008 with a growth of 14.3% over the previous year due to increase of BD90mn in treasury bills instruments during the year. The composition of the total debt in Bahrains financial profile has seen a shift from conventional instruments like development bonds and treasury bills to Islamic instruments like Islamic Leasing Securities and Al Salam Islamic Securities. The increasing proportion of Islamic instruments in its public debt profile is in line with the governments aim to make the Kingdom an Islamic financial hub.



Chart 10: Domestic public debt outstanding


Bahrain governments reliance on conventional debt has been declining since 2000. The share of conventional instruments to total public debt has dropped drastically from 76.4% in 2002 to 14.6% in 2007, though in nine months of 2008 the share increased to 25.5% due to addition of BD90mn treasury bills. Government has been using short term treasury bills regularly since the past few years and has done away with the development bonds. All the development bonds were matured in 2004 and since then the government has not issued any development bonds.

Table 14: Domestic Public Debt Instruments - Conventional Instruments Development Bonds Treasury BillsBD mn Matured New Issue Balance Matured New Issue Balance2002 21.0 - 296.0 520.0 490.0 160.0 2003 156.0 - 140.0 500.0 470.0 130.0 2004 140.0 - - 460.0 460.0 130.0 2005 - - - 525.0 525.0 130.0 2006 - - - 610.0 642.0 162.0 2007 - - - 367.0 295.0 90.0 2008 - - - 498.0 588.0 180.0


The Bahrain government started issuing Islamic instruments since 2001 which gathered momentum in subsequent years as the government started depending heavily on Islamic instruments for its debt requirements. This can be gauged from the fact that the Islamic instruments constituted 23.6% to the total public debt of the country in 2001 which increased to 85.4% in 2007. The total government borrowing stood in the range of BD585mn to BD705mn during the period 2002 and 2008 with the majority of new borrowings in Islamic instruments.

Table 15: Domestic Public Debt Instruments - Islamic Instruments Islamic Leasing Securities Al Salam Islamic SecuritiesBD mn Matured New Issue Balance Matured New Issue Balance2002 -- 75.2 112.8 112.8 112.8 28.2 2003 -- 180.5 293.3 112.8 112.8 28.2 2004 -- 140.0 427.3 112.8 112.8 28.2 2005 141.7 156.4 442.0 135.2 152.0 45.1 2006 90.0 120.0 472.0 180.0 180.0 45.1 2007 120.0 155.0 508.6 81.0 54.0 18.1 2008 191.6 190.0 507.0 72.1 72.0 18.0


28.2

28.2

28.2

45.1

45.1

18.1

18.0

112.

8

293.

3

427.

3

442.

0

472.

0

508.

6

507.

0

160.

0

130.

0

130.

0

130.

0

162.

0

90.0 1

80.0

296.

0

140.

0

-

100

200

300

400

500

600

2002 2003 2004 2005 2006 2007 2008

BD

mn

Al Salam Islamic Securities Islamic Leasing Securities Treasury Bills Development Bonds



Islamic Leasing Securities, which are long-term instruments with maturity of three to five years, dominate the Islamic instruments segment with a share of 96.6% in 2008 while the rest is Al Salam Islamic Securities. Islamic Leasing Securities increased from BD112.8mn in 2002 to BD507.0mn in 2008. Al Salam Islamic Securities, which are short-term instruments with a maturity of 91 days, stood at BD18mn at the end of 2008 almost at the same level of 2007.

Chart 11: Total Debt to GDP (current value)

Source: Central Bank of Bahrain, Global Research

The total public debt of Bahrain as a proportion of GDP declined substantially from 18.7% in 2002 to 8.9% in 2007 and according to our estimates to 8.8% for 2008. We expect the proportion to remain at a similar level going forward.

18.7%16.1%

13.9%12.2% 11.4%

8.9% 8.8%

0%

5%

10%

15%

20%

2002 2003 2004 2005 2006 2007 2008E



Inflation

The impact of US dollar depreciation against other major currencies has increased the weightage of imported inflation for the Bahraini economy in 2007. Official consumer price data indicate that inflation averaged only 3.3% in 2007, up slightly from 2.1% in 2006. A high inflation rate of 4.5% was observed in food, beverages & tobacco followed by housing water, electricity & fuels and healthcare services category which witnessed price rise of 4.1% each in 2007. Household goods & services is the only sector which witnessed decline in prices in 2007. The prices of household goods & services sector declined by 5.7% in 2007. During 2008, the economy experienced inflation of 3.5%.

Table 16: Consumer Price Index (2006=100) 2003 2004 2005 2006 2007

Food, Beverages & Tobacco 93.1 95.2 98.0 100.0 104.5

Clothing & Footwear 99.9 101.3 100.7 100.0 102.1

Housing, Water, Electricity & Fuels 85.6 90.8 96.4 100.0 104.1

Household Goods & Services 102.6 102.4 100.6 100.0 94.3

Healthcare Services 96.5 96.4 96.8 100.0 104.1

Transport 95.8 97.0 98.8 100.0 102.6

Communications 100.0 100.0 100.0 100.0 100.0

Recreation & Culture 106.5 103.0 101.2 100.0 100.2

Education 99.1 99.0 98.8 100.0 100.6

Miscellaneous 87.5 89.9 91.9 100.0 102.3

General Index 93.4 95.5 98.0 100.0 103.3

Inflation % 1.7 2.3 2.6 2.1 3.3 Note: Bahrain government shifted the base year for calculation of Inflation from 1994-95 to 2006.Source: Central Informatics Organization, Bahrain

Considering the high inflation rate that was witnesses in other GCC countries, the official inflation figures in Bahrain appear to be low. The depreciation of the dollar (to which the dinar is pegged) against the euro last year will have pushed up the cost of imports from Europe, and this will have exerted upward pressure on some prices.

The reason that the official inflation rate is so low may reflect the relative weights in the CPI and the fact that quite a number of items in the basket are subsidized or controlled. For example, according to the new index that was released last year, which uses a new base of 2006=100, there was no change in the price of communication, and there was a decline in the price of household goods & services. The only significant increase was in the price of food, beverage and tobacco, which was up by about 4.5%.

On the other hand, inflation in Bahrain could be lower than in the rest of the GCC, reflecting in part the fact that rent increases have not been as significant due to regulation and because there has not been as much pressure on the supply of housing. Wage growth of just over 10% in both the private and public sector in 2007 was also more moderate than in a number of the neighboring countries.

The latest preliminary inflation figures from Central Informatics Organization indicate that the annual inflation in Bahrain rose to 5.1% in December from 4.3% in November, 2008.



According to the data, Bahrains, consumer price index rose to 109.4 points on December 31st 2008 compared with 104.1 points a year earlier. The strengthening of dollar and consequent moderating inflationary pressures across the Gulf region have allowed regional central banks to slash interest rates as they seek to defrost credit markets during a global financial crisis.

Inflationary pressures have been easing across the nation after oil prices collapsed more than US$100 a barrel from a July peak. Inflation in Bahrain is likely to drop to around 3.5% in 2009 in view of the sharp fall in commodity prices. Higher inflation was a major concern for most of the GCC countries including Bahrain. Abating inflation in 2009 will allow central bank to lower interest rates in order to boost economy. We see the first half of the year to be the most challenging, but given the strong structural positive changes, we expect Bahraini economy to start staging a moderate recovery at the beginning of the next year.



Population & Labor Force

The population of Bahrain has been growing at a robust pace since the past few years which is in line with the economic boom in the country. Bahrains population grew at a CAGR of 7.8% during the period 2001-2007. The total population of Bahrain stood at 1.04mn at the end of 2007, an increase of 8.2% over previous year. Absolute increase in the population for 2007 over the previous year was about 78,872 as compared to 71,601 in 2006.

Table 17: Bahrains Population (in 000)Year Bahraini Non-Bahraini Total1995 352.9 206.0 558.9 1996 361.5 212.3 573.8 1997 370.4 218.7 589.1 1998 379.4 225.4 604.8 1999 388.7 232.3 621.0 2000 398.2 239.4 637.6 2001 409.6 251.7 661.3 2002 427.2 283.3 710.6 2003 445.6 318.9 764.5 2004 464.8 358.9 823.7 2005 484.8 404.0 888.8 2006 505.7 454.8 960.4 2007 527.4 511.9 1,039.3


Though local Bahraini population comprised the largest chunk of the total population of the country their percentage has been declining consistently since the past years. The proportion of Bahraini to the total population declined from 61.9% in 2001 to 50.7% in 2007. On the other hand, non-Bahraini population has been growing at a rapid pace with its proportion increasing sharply from 38.1% in 2001 to 49.3% in 2007.

Chart 12: Composition of Bahrains population


Male population dominated the total population of the country and comprises 60.8% of the total population in 2007. The percentage of males among Bahrainis is 50.5% of the total Bahraini population while the male population in the total non-Bahraini category is higher at 71.4%. Demographic profile illustrates that, nearly 21.1% of the total population is below the age of 14 in 2007, whereas only 2.5% of the population is above 65 years of age.

353 362 370 379 389 398 410 427 446 465485 506 527

206 212 219 225 232 239252 283

319 359404 455

512

-100200300400500600700800900

1,0001,100

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

('000)

Bahraini Non-Bahraini



The population below the age of 14 as a proportion of total population has decreased significantly from 28% in 2000 to 21.1% in 2007 whereas the population above 65 years of age remains stagnant at around 2.5%. The total working population of the country accounted for 76.4% of the total population in 2007.

Table 18: Age Distribution of Bahrains Population 2004 2005 2006 2007

Population Under Age 14 198,872 205,393 212,444 219,613

Population Above Age 65 21,057 22,684 24,397 26,250Source: Central Bank of Bahrain

The total employed persons in Bahrain stood at 471,088 at the end of 2008, accounting for 42.4% of the total population. The employment generation witnessed a growth of 24.1% in 2008, above the CAGR level of 12.6% observed between 2001 and 2008.

The public sector employment figures are highly skewed in favor of local Bahraini population comprising 87.6% of the total workforce in the public sector at the end of 2008. This figure has more or less remained same during the past five years. On the other hand, the private sector employment has registered a significant growth of 26.6% in 2008 over 2007, which increase from 340,217 in 2007 to 430,882 at the end of 2008. Non-Bahraini dominates the private sector employment and comprised 81.0% of the total private sector workforce at the end of 2008. The proportion of non-Bahraini to the total private sector population has increased from 68.2% in 2001 to 81.0% in 2008. The proportion of non-Bahraini to the total employment in the country increased from 57.5% in 2001 to 75.1% at the end of 2008.

The employment in the private sector has been growing at a rapid pace since the past few years. The private sector to public sector employment ratio increased from 5.4 in 2001 to 8.7 in 2007 and has further increased to 10.7 at the end of 2008. This indicates the increasing emphasis of the government on private sector growth. Though the current environment seems to be a bit tough for the private sector, in the long term this ratio will continue to increase further as the private sector is expected to grow faster than the government sector.

Table 19: Employment Scenario 2004 2005 2006 2007 1Q08 2Q08 3Q08 4Q08

Total Employment 285,390 336,508 351,862 379,471 410,162 432,638 458,456 471,088

Private Sector 247,814 299,080 313,039 340,217 370,825 393,279 419,268 430,882

- Male 220,878 268,580 283,533 310,019 336,913 357,311 380,961 389,802

- Female 26,936 30,500 29,506 30,198 33,912 35,968 38,307 41,080

- Bahraini 66,229 71,900 65,614 66,834 72,864 75,679 78,191 81,867

- Non-Bahraini 181,585 227,180 247,425 273,383 297,961 317,600 341,077 349,015

Public Sector 37,576 37,428 38,823 39,254 39,337 39,359 39,188 40,206

- Male 21,861 21,495 22,160 21,906 21,904 21,820 21,638 22,108

- Female 15,715 15,933 16,663 17,348 17,433 17,539 17,550 18,098

- Bahraini 33,754 33,691 34,771 34,847 34,846 34,843 34,769 35,204

- Non-Bahraini 3,822 3,737 4,052 4,407 4,491 4,516 4,419 5,002Source: Central Bank of Bahrain



As mentioned above, the number of foreigners in Bahrain greatly outnumbers that of nationals. To manage this situation, the Labor minister has proposed a five-year residence cap on expatriates. The proposal calls to limit the stay of an expatriate worker to five years. The proposal, however, does not include skilled expatriates, such as teachers, lawyers, doctors and journalists.

There is an urgent need for the government to develop its human capital in line with the long-term requirements of the industries. The Bahrain government has realized these problems and has initiated number of measures to improve the quality of manpower and to attract local Bahrainis to the private sector. To achieve the above target, the government has given high priority to the Labor market and education reforms, which wants to reduce dependence on foreign workers and encourage the expansion of private sector through the creation of high value industries and services. Phase 1 of education reforms has four main elements.

- Improving the quality of teachers through better training (including the opening of a new teacher training college), greater incentives and objective evaluation.

- Setting up an independent Quality Assurance Authority to evaluate schools, colleges and training institutions based on predetermined criteria.

- Opening a new Bahrain polytechnic to provide technical training (in areas such as engineering and accountancy) tailored to the needs of the labor market.

- Introducing an apprenticeship program that would provide vocational training at secondary school

While education reforms aim to better equip Bahrainis for the workforce, labor market reforms aim to increase incentives for private sector companies to hire them. The measures that have been taken aim to equalize the cost of employing Bahrainis and expatriates, while at the same time funding the cost of training. In the past, private sector employees have tended to be more comfortable hiring expatriates as they are usually cheaper to employ, are more dependent on their employers, and are often regarded as having better skills and a superior work ethic.

To address these issues and level the playing field, the recently established Labor Market Regulatory Authority (LMRA) in July made it more expensive to hire expatriates by increasing the fees charged to companies for work permits while at the same time linking them with resident visas. Employers are now required to pay BD200 every two years for each issued or renewed work license as well as a BD10 monthly fee. The charge also covers a no-objection visa, the residence permit, return visa, medical check-up and CPR card. The revenue raised is paid into the Labor Fund (LF) and is used to train Bahrainis and improve productivity as well as funding the Unemployment Insurance Program. People registered under this program get benefits and job readiness training for six months while they are out of work.



Oil & Gas - Bahrain

Bahrain has been successful in extending a degree of oil production even after many analysts predicted reserves would be depleted by 1997.

bahrain economy

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