bahrain economic yearbook

ECONOMICYEARBOOK2013

Kingdom of Bahrain

H.R.H. Prince Khalifa bin Salman Al Khalifa

The Prime Minister of the Kingdom of Bahrain

H.M. King Hamad bin Isa Al Khalifa

The King of the Kingdom of Bahrain

H.R.H. Prince Salman bin Hamad Al Khalifa

The Crown Prince, Deputy Supreme Commander and First Deputy Prime Minister

of the Kingdom of Bahrain

INTRODUCTION

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KINGDOM OF BAHRAIN

ECONOMIC YEARBOOK 2013

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This book is intended as a comprehensive reference work on the Bahraini economy. It offers a compendium of data and analysis covering the development, composition, and prospects of the national economy. Apart from reviewing the recent performance and key characteristics of the economy as whole, this work provides a detailed overview of individual sectors ranging from the historically important hydrocarbons sector to emerging champions in areas such as private education and health care. The book contains seven chapters, which are: Profile of the economy, Macroeconomic developments, Financial markets, Foreign trade, Social infrastructure, International benchmarking, and Individual sectors.

The opening discussion on the Bahraini economy since the turn of the millennium depicts a decade success. Annual real GDP growth in Bahrain averaged 5.0% between 2000 and 2012. The economic expansion was underpinned by strong structural drivers in the form of demographic dynamism, economic diversification, and an advantageous location. The contribution of these factors was significantly enhanced by a decade of economic reform designed further develop the education system, improve the business climate, and upgrade the national infrastructure, among other things. Growth further benefited from a long period of high oil prices, rising government spending, a real estate boom, and high demand for health care and educational services.

This work highlights Bahrains track record as a regional pioneer of economic diversification. While partly attributable to maturing hydrocarbons sector, the track record also reflects Bahrains long-standing investments in human capital and regulatory reform. The past decade proved transformative in terms of diversification as the real GDP weight of Mining & Quarrying (primarily oil and gas) declined from 44% in 2000 to 20% in 2012. All non-oil sectors, with the exception of Real Estate, saw an increase in their GDP share.

The analysis further reveals the resilience of the Bahraini economy which has continued to record growth even in the face of major challenges created by the global crisis. After 1.9% expansion in 2011, the rate of increase accelerated to 3.4% in 2012, despite technical disruptions in the oil sector. With hydrocarbons production normalizing and continued momentum in the non-oil economy, real GDP growth in 2013 is expected to exceed 5.0%.

The Yearbook highlights the competitive advantages of Bahrain, above all in the areas of qualified human capital and a central location. Bahrains long history of economic openness has led to a high degree of integration in the global economy. A benchmarking of Bahrains standing in a number of international indices underscores substantial competitive strengths in areas such as human development, macroeconomic stability, finance services, efficient business regulations, openness to trade, and ICT readiness.

Introduction

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KINGDOM OF BAHRAINKINGDOM OF BAHRAIN

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A SNAPSHOTOF BAHRAIN





Key Indicators

2012 proved to be the year of steady consolidation

Bahrain Economic Outlook 2011 2012 2013e 2014e

Real GDP growth (%) 1.9 3.4 5.3 4.2Non-hydrocarbon sectors 1.4 6.7 4.1 4.5Hydrocarbons sector 3.6 -8.5 10.3 3.1Inflation (CPI %) -0.4 4.1 8.6 6.6Nominal GDP growth (%) 13.4 2.8 2.9 3.0Current account (% of GDP) 11.1 7.3 8.9 10.2Fiscal balance (% of GDP) -0.3 -2.0* -5.3** -5.7**Oil price in USD (Arabian Medium) 106 107 106 105

* Based on the 2012 budget, oil price is USD80. ** Based on the draft budget for 201314, oil price is USD90Source: Central Informatics Organisation, Ministry of Finance, Economic Development Board team analysis

Surface area 765.3 sq km

Population, 2010 est. 1,234,600

Population density 1,630/sq km

Main population centers Manama (capital) Muharraq Riffa Isa Town Hamad Town

GDP, 2011 est. USD26.1bn PPP USD31.1bn

GDP per capita, 2011 est. USD23,100 PPP USD31,100

Currency 1 Bahraini Dinar (BHD) = 1000 Fils = USD2.65

HDI1 0.796

Language Arabic


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TABLE OF CONTENTS




1. Profileoftheeconomy GDPBreakdown:ApioneerinDiversification 9

2. Macroeconomic developments Economic prospects 19

3. Financial markets Equity markets 39 Bond and sukuk markets 43 Interbank markets 45

4. Foreign trade Current account 48 Capitalandfinancialaccount 53

5. Social infrastructure Education in Bahrain 55 Healthcare 59 Entrepreneurship 65

6. International Rating environment 75 Bahrain global rankings performance 76

7. Individual sectors Oil and gas sector 79 Financial services 83 Insurance and takaful 9 4 Manufacturing 9 8 Transport and communications 104 Real estate and construction 112 Trade 116 Social and personal services 118 Government services 120 Tourism 121 References 129


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PROFILE OFTHE ECONOMY

01


Figure 1: Nominal and real GDP (200012)



GDP Breakdown: A pioneer in diversification

Historical growth (200012)The opening decade of the 21st century proved a period of rapid economic development in Bahrain. Real output growth averaged 5.0% annually1 between 2000 and 2012, driven by high oil prices, rising government spending, expansion in property and construction, as well as high demand for private social and personal services (mostly private health and education).

Source: Central Informatics Organisation

1 Real GDP has been rebased from 2001 to 2010. The result has been an adjustment of sector proportions, most notably with themining&quarryingsector,whichexperiencedrelativelyhighinflation.

EconomicdiversificationBahrain, partly due to its relatively modest hydrocarbon endowments, has long been a pioneer of economic diversification in the Gulf region. While it was first regional economy to discover oil in 1932, it also was home to the first oil refinery (1936), as well as industrial ventures such as Aluminium Bahrain (ALBA, set up in 1968). A significant offshore banking sector emerged in the 1970s. But the first decade of the 21st century proved particularly transformative in terms of economic diversification and witnessed rapid expansion across much of the non-oil economy. Using 2010 as a base year, mining and quarrying (primarily oil and gas) accounted for 44% of real GDP and decreased to 20% in 2012, while nominal GDP remained at 25% of GDP in both years. With the exception of real estate and mining and quarrying, the share of all major sectors increased their share of real GDP between 2000 and 2012. The three fastest growing sectors over the period were social and personal services, construction, and transportation and communications.

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Figure 3: Real GDP by sector (200012)


Source: Central Informatics Organisation, Economic Development Board team analysis

Sector 2000 2012 CAGR % 2000 Share 2012 Share of GDP of GDP

Social and Personal Services 111 549 14.3% 2% 5%Construction 142 688 14.1% 2% 7%Transportation and Communication 234 716 9.8% 4% 7%Other 271 616 7.1% 5% 7%Retail 172 461 8.6% 3% 5%Government 514 1,235 7.6% 9% 12%Finance 781 1,745 6.9% 14% 17%Manufacturing 713 1,577 6.8% 12% 15%GDP 5,736 10,187 4.9% 100% 100%Real Estate 289 428 3.3% 5% 4%Mining and Quarrying 2,510 2,172 -1.2% 44% 20%

Figure 2: Share in real GDP by sector



Recent trendsFollowing a exceptional decade of robust growth and increasing oil prices, Bahrain continued to record significant growth despite a number of challenges faced in recent years. Despite a severe global downturn since 2009, regional political challenges in 2011, and oil production dips in 2012, the economy has consistently posted positive growth throughout this period.

In 2012, Bahrain real GDP grew by 3.4%, despite a 8.5% fall in oil production due to unscheduled maintenance in the Abu Saafa field, which accounts for the majority of Bahrains crude oil production. Thus, growth in 2012 was driven by the non-oil sector, which expanded by 6.7%.

The hotels and restaurants sector experienced the fastest growth of any sector in 2012, growing by 13.6% over the year. While impressive, this growth rate in large part represented normalization from disruptions in 2011. Manufacturing as well as social and personal services grew by a robust 5% and 13%, respectively. The main drivers were expansion in the petrochemical and oil-related industry as well as private health care.

Figure 4: Real GDP composition, 2000 Figure 5: Real GDP composition, 2012

Source: Central Informatics Organisation Source: Central Informatics Organisation


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Figure 6: Quarterly real GDP growth (200912)

Figure 7: Quarterly real GDP growth (YoY)






PopulationAccording to the Central Informatics Organization (CIO)s 2010 Census, Bahrains population grew at a rapid pace between 2001 and 2010, nearly doubling from 0.66mn to 1.22mn - an annual average growth rate of 7.4%. The Bahraini and non-Bahraini population grew by an annual average of 3.7% and 11.8% respectively. Consequently, non-nationals increased their share of the total population from 38% in 2001 to 54% in 2010.

Figure 9: Bahraini and non-Bahraini population by gender (2001 and 2010)

Source: Central Informatics Organisation National Census Data 2001 and 2010


2011 2012 2013

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

Crude Petroleum & Natural Gas 3.6% 0.5% 3.0% 17.4% -4.3% -8.5% -4.7% -14.6% -6.8% -8.0% 8.0% 18.6%Manufacturing 3.1% 21.2% 6.0% 4.8% -13.2% 4.7% 8.7% 8.8% 2.4% -1.1% 2.0% -1.9%Construction -7.9% -1.1% -5.8% -9.7% -14.4% 4.1% 1.4% 5.8% 2.8% 6.6% 2.8% 5.6%Trade -1.7% 1.6% -3.1% -1.8% -3.2% 5.9% 5.8% 8.1% 7.9% 1.7% 1.6% 1.8%Hotels & Restaurants -17.2% -19.8% -20.6% -13.5% -15.4% 13.6% 13.5% 20.7% 13.5% 7.7% 13.5% 8.9%Transport and Communication 6.1% 7.3% 6.0% 4.8% 6.4% 4.4% 6.1% 3.1% 5.4% 3.2% 4.8% 1.7%Social & Personal Services 11.2% 14.8% 8.7% 5.4% 16.1% 12.5% 13.6% 11.6% 15.1% 10.0% 6.2% 7.8%Real Estate & Business Activities -6.6% -2.3% -5.8% -9.0% -9.1% 3.6% 1.2% 3.4% 3.8% 6.2% 1.7% 1.8%Financial Corporations -0.4% -1.4% -2.2% 0.0% 2.1% 4.0% 4.3% 3.7% 4.2% 3.9% 3.0% 2.8%Government Services 14.4% 16.5% 14.7% 13.5% 13.0% 12.0% 13.3% 12.5% 11.3% 11.1% 4.2% 2.7%Other 1.2% 1.4% 5.6% 4.8% -6.5% 11.6% 10.5% 11.8% 7.5% 17.0% 0.4% 3.4%GDP 2.1% 4.8% 2.2% 4.5% -2.7% 3.4% 4.8% 3.0% 3.4% 2.5% 4.2% 5.3%



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Figure 10: Bahraini and non-Bahraini population by age (2010)


In terms of age composition, the local population is fairly young with 42% under the age of 20 and just 4.1% over 65 as of 2010. For Bahrainis, the dependency ratio2, which is commonly used to compare the size of working age population to the dependent population, decreased between 2001 and 2010. This indicates a continued increase in the working-age population over the decade. The dependency ratio stood at 89% in 2010 compared to 104% in 2001 implying that the Bahraini population in the age group of 2064 is now larger than the dependent (019 and 65+) segment.

The non-Bahraini population is overwhelmingly in the working-age category with 88% aged between 20 and 64 as of 2010 and is characterized by a low dependency ratio of 14%, compared to 20% in 2001. Also, non-Bahraini males outnumber females with 2.6 males per female. These indicators reflect the significant numbers on low wage expatriate workers who are primarily employed and numerically dominance in labor-intensive sectors such as retail and construction.

2Dependencyratioisdefinedas019and65+populationoverthoseintheagegroupof2064.



Bahraini workforce and participation ratesThe Bahraini workforce participation rate3 stood at 58.4% in 2010. This is relatively low as compared to developed countries such as the US, where the participation rate in the age group of 2064 stood at 78.7% in the same year. A lower participation rate is largely reflective of a significant, albeit diminishing, gender differential in participation among Bahrainis. Labor force participation by Bahraini women is significantly lower than that of men, 40.1% as compared to 76.5% respectively. However female participation rates have risen by an average of ten percentage points over the decade.

As depicted in the graph below, both males and females in the age group of 25 and 35, have the highest levels of labor force participation in Bahrain, followed by a gradual decrease for males in higher age groups and a more pronounced decline in female participation.

Figure 12: Bahraini participation rates (2010)

Source: Central Informatics Organisation, Economic Development Board

3Participationratedefinedasworkforceaged2064overthepopulationaged2064.

Figure 11: Population by nationality and broad age group (200110)

Population Annual avg. growth Share of population

2001 2010 2001 2010

Total 650,604 1,234,571 7.4% 100.0% 100.0%0-19 232,364 320,316 3.6% 35.7% 25.9%20-64 401,877 888,021 9.2% 61.8% 71.9%65+ 16,363 26,234 5.4% 2.5% 2.1%Bahraini 405,667 568,399 3.8% 100.0% 100.0%0-19 192,446 240,591 2.5% 47.4% 42.3%20-64 198,257 304,231 4.9% 48.9% 53.5%65+ 14,964 23,577 5.2% 3.7% 4.1%Non-Bahraini 244,937 666,172 11.8% 100.0% 100.0%0-19 39,918 79,725 8.0% 16.3% 12.0%20-64 203,620 583,790 12.4% 83.1% 87.6%65+ 1,399 2,657 7.4% 0.6% 0.4%



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In terms of the sectoral breakdown, over one-third of civilian Bahraini employment was in government, with retail and manufacturing being the next largest employers of Bahrainis, at 16% and 11% of total Bahraini employment, respectively. While the public sector continues to account for a large share of overall Bahraini employment, it should be noted that the proportion is markedly lower than in the other Gulf Cooperation Council (GCC) member states. Among non-Bahrainis, 63% are employed in construction, retail, or domestic work.

Figure 14: Employment by nationality (200212)

Source: Labour Market Regulatory Authority

Labor marketTotal civilian employment in the Kingdom increased from 307,000 to 647,578 between 2002 and 2013. As non-Bahraini employment outpaced Bahraini employment, the share of employed Bahrainis as a share of total employment fell from 34% to 23% over the period. Non-Bahraini employment and Bahraini employment grew by 3.5% and 8.7%, respectively, over the same period.

Figure 13: Bahraini population and workforce pyramid (in 000), 2010

Source: Central Informatics Organisation, Economic Development Board



Figure 15: Bahraini workers by sector (2011) Figure 16: Non-Bahraini workers by sector (2011)

Source: Social Insurance Organisation, Labour Market Regulatory Authority


Figure 17: Employment in 2011 (by nationality)


Total Bahraini Non-Bahraini

Manufacturing 80,867 15,707 65,160Construction 130,793 10,920 119,873Trade 127,403 23,966 103,437Hotels and restaurants 33,556 3,118 30,438Transport and communication 20,474 8130 12344Social and personal services 22,850 5602 17248Real estate and business activities 37,613 8071 29542Finance 14,849 9,273 5,576Government 58,147 52,730 5,417Domestic workers 95,297 95,297Other 25,729 10,264 15,465Total employment 647,578 147,781 499,797


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MACROECONOMICDEVELOPMENTS

02



Economic Prospects

Bahrains real GDP grew by 3.4% in 2012. However, the recovery was, to an extent, contained by a protracted dip in oil production due to technical disruptions in the Abu Saafa offshore oilfield during most of the year. In 2013, growth is expected to reach 5.3%, largely thanks to the normalization of oil production from the Abu Saafa field, as well as planned further increases in production from the Bahrain Field. The EDB expects real GDP growth to revert to 4.2% in 2014e.

Figure 19: IIF, IMF, and EDBs GDP forecasts (201213)

2012 2013

IIF 3.7 4.6IMF 2.0 2.8CIO 3.4 5.3*

Figure 18: Table. Medium-term macroeconomic forecasts (201114)

2011 2012 2013e 2014e

Real GDP growth (%) 1.9 3.4 5.3 4.2Non-hydrocarbon sectors 1.4 6.7 4.1 4.5Hydrocarbons sector 3.6 -8.5 10.3 3.1Inflation (CPI %) -0.4 4.1 8.6 6.6Nominal GDP growth (%) 13.4 2.8 2.9 3Current account (% of GDP) 11.1 7.3 8.9 10.2Fiscal balance (% of GDP) -0.3 -2.0* -5.3** -5.7**Oil price in USD (Arabian Medium) 106 107 106 105

*Basedonthe2012finalaccounts**Basedonthedraftbudgetfor201314Source: Central Informatics Organisation, Economic Development Board, National Oil and Gas Authority

Source: Central Informatics Organisation, International Monetary Fund, Institute of International Finance, * Economic Development Board

Monetary policy Bahrain has a long history of pursuing a fixed exchange rate policy. The Dinar was officially pegged to the International Monetary Funds (IMF) Special Drawing Rights (SDRs) in 1980. In 2001, the fixed exchange rate parity with the USD was made official and a countercyclical fiscal policy was utilized to stabilize growth. Bahrain is committed to an exchange rate peg at BHD 0.376 per US Dollar, corresponding to approximately BHD 1 = USD 2.65957. The exchange rate is a nominal anchor of the Kingdoms monetary policy framework, which aims at protecting the currencys external value while ensuring internal price stability. Within this framework, the Central Bank has some flexibility to alter domestic monetary conditions by changing policy interest rates (repo rates), introducing prudential guidelines on bank lending, and adjusting reserve requirements to achieve the required balance between price stability and growth.


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Since Bahrain is a small and open economy with foreign trade accounting for more than 110% of nominal GDP5, the exchange rate represents a logical anchor for monetary policy. It reduces transaction costs and exchange rate uncertainty, and thereby stimulates trade. Given the role of the US Dollar as the leading global reserve currency as well as its central role in international trade and finance, pegging Dinar to the Dollar enhances the credibility of monetary policy and contributes to financial stability.

Monetary policy instrumentsThe CBB utilizes three main monetary policy instruments to influence liquidity conditions in the banking sector, as shown below.

Exchange rate facility: CBB offers to buy/sell Bahraini Dinars against the US Dollar at rates very close to the official exchange rate.

Standing facilities: A set of lending and deposit instruments are designed to influence overnight liquidity, overnight interest rates and steering the short-term money market to the key policy rate determined by the CBB.

The Central Bank of Bahrain (CBB) defines its role as the main authority responsible for maintaining monetary and financial stability, and having the instruments and operational independence in pursuing its policy objectives. It is also the single integrated regulator of Bahrains financial industry. As part of the fixed exchange rate policy, CBB offers a foreign exchange facility, implying that it stands ready to buy and sell US dollars, at rates very close to the official exchange rate. CBB provides this facility to commercial banks located in the Kingdom of Bahrain.4

Figure 20: Exchange rate: Bahraini Dinar vs. US Dollar

Source: Central Bank of Bahrain

4 www.cbb.gov.bh5 Central Informatics Organisation National Accounts 2011



Minimum reserve requirements: Credit institutions in Bahrain are required to hold a minimum reserve of 5% of the value of non-bank deposits on accounts with CBB. These funds are used to ease temporary fluctuations in bank liquidity and influence interbank transfers.

Monetary policy developmentsInterest ratesIn line with the loose monetary policy pursued by the US Federal Reserve, money market and commercial interest rates have been on a downtrend in Bahrain since 2006.

Key policy interest rates Policy interest rates refer to the rates that CBB extends on its deposit and lending standing facilities. The one-week deposit rate, which serves as the key policy rate, normally provides a ceiling and a floor for the overnight market interest rate. The CBBs policy rates influence short-term interest rates in the money market that, in turn, impact the deposit and lending rates that retail banks offer to their customers. With the US Fed undertaking several rate cuts since 2008, the CBB reduced its key policy interest rate (one-week deposit facility) eight times: from 5% in Oct 2007 to 0.5% in Sep 2009.

In 2012, the CBB maintained the one-day Bahraini Dinar deposit rate at 0.25% and one-week maturity rate at 0.5% for retail banks; similarly, it retained the 2.25% lending rate for the overnight repo and BHD secured rate. Interbank ratesIn 2006, the CBB developed the Bahrain Interbank Offered Rate (BHIBOR) in collaboration with a number of Bahraini banks and Reuters. BHIBOR indicates the interest rate charges between banks on short- term loans ranging from overnight to 12-month maturities.6

Figure 21: CBB and US Federal Reserve policy rates (%)

Source: Central Bank of Bahrain, Federal Reserve

6 www.cbb.gov.bh/page-p-monetary_policy_framework.htm


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As of 4Q12, the three-month BHIBOR rate stood at 0.32% compared to 0.25% in 4Q11, while the six-month rate was 0.56% in 4Q12 compared to 0.50% in 4Q11.

Loan and deposit ratesAs of 4Q12, the weighted average Bahraini Dinar time deposit rate (312 months) stood at 1.00%, marginally lower than 1.11% in 4Q11. The weighted average savings rate decreased from 0.24% to 0.22% over the same period.

Commercial loan rates have generally declined over the past year. The weighted average interest rate on business loans rose slight to 5.67% in 4Q12 from 5.58% in 4Q11, while that on personal loans fell to 5.96% from 6.28% during the same period. Mortgage rates fell from 6.71% to 6.58%.

Figure 22: Interbank rates, quarterly averages,%


Figure 23: Time and deposit rates,%




InflationThe average rate of consumer price inflation in Bahrain rate stood at 2.8% YoY in 2012 compared to 0.4% in 2011. Housing and food carry the two largest weights in the Consumer Price Index (CPI), at 24% and 21% respectively, and have in recent years been the main drivers of inflationary trends in the Kingdom.

Figure 24: Business and personal loan rates,%


Figure25:InflationinBahrain(2006=100)



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In 2011, the decline in inflation was primarily ascribed to the 12.4% YoY fall in housing cost in the Housing, Water, Electricity, Gas and Other Fuels category. The correction in rentals matched broader regional trends as several market segments witnessed an oversupply due to a sharp reversal in the economic cycle. However, recent trends suggest the market is in the process of bottoming out.

Although housing inflation further declined by 3% YoY in 2012, the main CPI index increased due to a sharp rise in the recreation and culture (22% YoY), and alcoholic and tobacco (13.7% YoY) indices. Food and beverages (4.0% YoY), and furnishings, household equipment and routine household maintenance (4.9% YoY) were the other main contributors. The large increase in recreation and culture prices was mainly ascribed to a higher number of tourism package deals, particularly in the pilgrimage and Umrah category.

Figure 26: Growth in CPI (YoY)


Figure 27: CPI index (YoY growth)

2010 2011 2012

CPI 2.0% -0.4% 2.8%Food and beverages 4.9% 2.0% 4.0%Alcoholic beverages and tobacco 5.6% 5.1% 13.7%Clothing and footwear 1.7% 2.2% 2.2%Housing, water, electricity, gas and other fuels -1.2% -12.2% -3.0%Furnishing, household equipment and routine household maintenance 1.5% 2.0% 4.9%Healthcare services 3.5% 3.2% 1.0%Transport 3.5% 3.7% 2.4%Communication -2.4% -2.5% -4.1%Recreation and culture 0.1% 6.9% 22.0%Education 6.1% 1.9% 1.9%Restaurants 6.0% 0.9% 1.5%Miscellaneous goods and service 2.3% 11.6% 3.5%




Money Supply Reflecting the dynamism of the economy, all measures of money supply have grown consistently since 2000. The narrowest measure, M1 (defined as currency outside of banks and demand deposits) increased more than five-fold from BHD449.2mn in 2000 to BHD2.61bn in 2012. The broadest measure, M3 (which includes all types of deposits, also general government) expanded more than four times from BHD2.48bn in 2000 to BHD10.43bn at the end of 2012.

The broad money supply, as measured by M3, has exhibited continuous growth. It includes M2 as well as large time deposits, institutional money-market funds, short-term repurchase agreements, along with other larger liquid assets. The slightly narrower measure, M2, grew at a steady rate between 2002 and 2004, and recorded an average growth rate of 32% YoY in 2008. Since 2009, growth in M2 was moderately positive and reached 6.1% YoY in 2012. An increase in the money supply over the past decade was primarily driven by a rise in private sector time and savings deposits (quasi money) which surged 233%, as well as demand deposits (+410%) between 2001 and 2012.

Figure 28: Money supply ( BHD mn)


Figure 29: Components of money supply

1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12

Currency Outside Banks 444.7 406.9 397.4 402.2 414.2 424.5 418.0 421.4(g) 34.4% 21.0% 17.2% 15.0% -6.9% 4.3% 5.2% 4.8%Demand Deposits 1,989.9 2,063.7 2,073.1 2,234.7 2,248.9 2,305.3 2,367.3 2,189.7(g) 6.1% 0.1% 4.9% 14.3% 13.0% 11.7% 14.2% -2.0%Time and Savings Deposits 5,482.1 5,448.8 5,292.8 5,498.2 5,715.3 5,649.3 5,669.1 5,853.7

(g) 9.0% 3.2% -1.1% -1.2% 4.3% 3.7% 7.1% 6.5%



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In recent years, the funding of Bahrains public debt has become increasingly dependent on sukuk rather than conventional bonds. The main types are Ijara leasing securities and Al Salam Islamic securities issued by CBB. Between 2001 and 2008, Government of Bahrain lowered its reliance on conventional debt and did not issue any development bonds during the period. However, in 2012, it issued conventional development bonds worth BHD564mn (USD1.5bn), which was oversubscribed four times. This demonstrates confidence in the Kingdoms economic prospects.

In a pioneering move by international standards, the CBB began regular sukuk issuance in 2001. The market grew steadily in subsequent years as is evident from the fact that Islamic instruments were used to finance 32% of the Kingdoms total public debt in 2012 as compared to 24% in 2001. Increasing the relative importance of Islamic instruments is in line with the governments plans to boost the Kingdoms stance as an Islamic financial hub.

The standard CBB Ijara leasing securities have a maturity of 182 days, while that of Al Salam securities is 91 days. The former dominate the CBBs Islamic debt instruments accounting for 96% of total Shariah-compliant issuance in 2012, while the remainder is made up of Al Salam issues. The total outstanding volume of Islamic leasing securities increased from BHD112.8mn in 2002 to BHD1.2bn in 2012. In value terms, Al Salam Islamic securities totaled BHD54mn in 2012, almost equivalent to the level witnessed in 2011. This highlights their primary role as short-term liquidity management instruments for the banking sector.

Public DebtBahrains domestic public debt instruments increased by 575% between 2001 and 2012. According to the CBB data, the aggregate value of the Kingdoms public debt instruments totaled BHD3.87bn as of December 2012 implying a growth of 22% YoY. Of this total, BHD2.6bn was issued in conventional bonds and BHD1.27bn in sukuk.

Figure 30: Public outstanding domestic debt by type of instrument (in BHD mn)




Fiscal policy Bahrains fiscal position in recent years has reflected the sharp economic cycle linked to the global economic crisis and the oil price boom that preceded it. After a small deficit in 2002, Bahrain accumulated substantial surpluses totaling BHD1.7bn between the years 2003 and 2008. During that period, the government debt-to-GDP ratio decreased from 32.5% in 2003 to 12.6% in 2008. The collapse in global oil prices in the second half of 2008 triggered a deterioration in the fiscal situation which became manifest in 2009. As a result, Bahrains deficit reached BHD446 million, while the debt-to-GDP ratio rose to 21.4% in 2009 and further to 29.7% in 2010.

In 2011, oil prices again rose to reach a level close to the estimated fiscal break-even price of USD114 per barrel. This, coupled with reduced public project spending, helped contain the deficit to BHD31.3mn, a reduction of 93% as compared to 2009. In 2012, spending growth outpaced revenue growth raising the deficit to BHD227mn or 2% of GDP. As of 2012, debt to GDP was 36.7%, compared to 21.4% in 2009 (Figure 31).

The collapse in oil prices in late 2008 highlighted the growing dependence of the current fiscal system on high and growing oil prices at a time when permanent current expenditures dominate government spending.

Figure 31: Fiscal overview

Source: Ministry of Finance, Economic Development Board

RevenuesOil and gas-related revenues are the main sources of government income and their importance has been further underpinned by historically high oil prices in recent years. Since 2007, revenues from hydrocarbons have contributed at least 80% of total government revenues (Figure 32), although the contribution of oil and gas to GDP was only 25.2% of nominal GDP as of 2012. The offshore Abu Saafa field, a resource shared with and managed by Saudi Arabia, is the main source of oil revenues. Over the past three years, revenues from this field alone have constituted an average of 80% of total hydrocarbon revenues. Although the revenue share of the onshore Bahrain Field has been more modest, it has been growing since the establishment of Tatweer Petroleum Company in 2009. The company aims to substantially increase Bahrain Field production, with the original target set at 100,000 b/d. Tatweer boosted its crude oil output from 32,000 b/d in 2009 to 42,500 b/d in 2011 and further to some 45,300 b/d in 2012. The fiscal contribution of gas remains marginal, representing around 10% of total hydrocarbon revenue.


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Non-hydrocarbon revenues account for a small share of the total government revenues, and their relative importance has been declining in recent years due to higher oil prices. The share of non-oil revenues fell from 31% in 2001 to 13% in 2012, however, the absolute value of non-hydrocarbon revenues remained relatively stable during the decade, growing by annual average of 2% between 2001 and 2012. Non-hydrocarbon revenues mainly comprise different fees and levies, with the majority of revenue comes from the Public Administration sector, and specifically from the Customs and Ports and Maritime Affairs, the Ministry of Interior, the Survey and Land Registration Bureau, and the Ministry of Justice and Islamic Affairs.

Figure 32: Hydrocarbon and non-hydrocarbon government revenues

Source: Ministry of Finance

The dominance of hydrocarbon revenues as a source of government income remains the norm across the GCC region. Bahrains share of hydrocarbon revenues is in line with the regional average with four other the GCC countries sourcing at least 80% of their revenues from hydrocarbons. Kuwait had the highest share as of 2010 at 94% while Qatar represented the other end of the spectrum at 49%.

Figure 33: Hydrocarbon revenues as % of total revenues, 2010

Source: Bahrain Ministry of Finance, Central Bank of Kuwait, Oman Ministry of National Economy, Qatar Ministry of Economy and Finance, Saudi Arabian Ministry of Finance, UAE National Bureau of Statistics



ExpenditureBahraini government expenditures rose sharply during the past decade, alongside increases in GDP. Spending grew by 314%, from BHD0.79bn in 2000 to BHD3.26bn in 2012, driven by robust growth in recurrent (280%) and project expenditures (500%).

Figure 34: Government expenditure by category (BHD mn)

Source: Ministry of Finance, Economic Development Board analysis

Figure 35: Recurrent spending by category, 2001 Figure 36: Recurrent spending by category, 2012

Source: Ministry of Finance Source: Ministry of Finance


KINGDOM OF BAHRAIN

Figure 37: Growth rate of government expenditure by category

Source: Ministry of Finance, Economic Development Board analysis

Project expenditure has been relatively volatile in recent years. The sharpest increases were recorded in 2002, 2006, 2010 and 2012. These hikes were mostly driven by the infrastructure sector, mainly by the Ministry of Housing and the Ministry of Works.

Public debt and the debt-to-GDP ratioBetween 2000 and 2012, Bahrains total government debt rose from BHD0.9bn to BHD4.2bn. As a share of GDP, total debt, which includes domestic and foreign borrowing reached 32.5% in 2003 and 36.7% in 2012. This marked a sharp reversal from the trend seen during the preceding decade. Factors such as favorable oil prices, large budget surpluses, and reduction in borrowing needs had allowed Bahrain to decrease its debt-to-GDP ratio to a low of 12.6% in 2008. This positive dynamic was reversed with the onset of the global economic crisis. Due to Bahrains dependence on oil revenues, debt rose quickly between 2009 and 2010 as oil prices dropped, and countercyclical fiscal policy saw a rise in government expenditure, which totaled BHD3.26bn in 2012.

Although foreign borrowing7 has increased both in absolute terms and as a proportion of total government borrowings in recent years, domestic borrowing8 still accounts for the majority of Bahrains debt. In 2012, domestic borrowing made up 55% of total government debt, as compared to 85% in 2000. By contrast, foreign borrowing increased from a modest 15% of total loans in 2000 to 45% in 2012.

7 International development bonds, international Islamic leasing securities, development funds owned mainly by GCC8 Local development bonds, local issuing of Islamic leasing securities, T-bills, al salam leasing securities, and other local loans

with domestic creditors



Key growth driversOver the last decade, a range of key development indicators in Bahrain improved significantly due to extensive economic and social reforms. Important steps included: (i) the corporatization of state-owned businesses; (ii) the adoption of improved governance and transparency standards through the formation of a Tender Board and National Audit Court; (iii) the elimination of red tape which constricted foreign investment; (iv) the liberalization of the telecommunications sector through the establishment of the Telecommunication Regulatory Authority (TRA); and (v) the formal regulation the healthcare sector to elevate the standards of care through the establishment of the National Health Regulatory Authority (NHRA).

Bahrains real GDP expanded by 78% from 2000 to 2012, while aggregate employment grew by 133% from 2002 to 1Q13. The rise in commodity prices and a strong global economy over the past decade drove a significant increase in exports. From 2002 to 2012, Bahrains goods export revenues grew by 229%. These trends bolstered the living standards as average real wages of Bahrainis increased 33% between 2002 and 2010.

Figure 38: Proportion of domestic and foreign loans for Government of Bahrain

Source: Central Bank of Bahrain, Ministry of Finance


KINGDOM OF BAHRAIN

Figure 39: GDP, employment, exports, and wage growth

Source: Central Informatics Organisation, Labour Market Regulatory Authority, Economic Development Board analysis

It should be noted, however, that the rapid development since the turn of the century was in important ways linked to extensive growth increases in overall inputs rather than productivity. For instance, a rapid increase in low-cost foreign workers, especially in labor-intensive sectors such as tourism and construction, went hand in hand with declines in labor productivity. This highlights the need for more innovation and the need to stimulate growth in higher value-added sectors.

Figure 40: Private sector employment by nationality (000)

Source: Labour Market Regulatory Authority



In spite of the desirability of rebalancing growth, the contribution of employment to overall growth is projected to further increase over the next two decades as the projected expansion in the workforce is likely to be higher than real GDP growth. This will likely mainly be fueled by faster growth in the working-age population relative to the dependent population (below the age of 20 and above 65).

Income components as drivers of GDP growth9

Figure 42 breaks down GDP growth between 2006 and 2011 into the contributions of the individual expenditure components. Increasing consumption was by far the most important driver of GDP growth over the last six years, growing by an annual average of 10%. The GDP share of consumption rose from 42% in 2006 to 58% in 2011. Consumption registered robust increases (in excess of 10%) between 2008-2010 and accounted for the bulk of growth over the past few years while investments faced volatile growth.

Government and private consumption experienced relatively similar average growth rates over the same period at 11% and 10% respectively. However, government consumption was particularly strong in 2011 at 18%, due partially to salary increases for civil service employees and the government reacting to the global downturn through countercyclical policy.

Figure 41: Employment and GDP growth

Source: Central Informatics Organisation, Labour Market Regulatory Authority, Economic Development Board analysis

9GDP=Consumption+investment+governmentspending+netexports


KINGDOM OF BAHRAIN

Investments experienced low annual average growth over the period between 2006-2012 of 2%, however, growth was very volatile, ranging from a low of -35% in 2011 to a high of 38% in 2007. Investment accounted for 24% of GDP in 2006 and 20% in 2012, however, government investments as a share of GDP have actually increased with slow growth in private investments being the primary cause for the overall GDP contribution decrease.

Despite the substantial GDP contribution of investment, the amount of investment needed to generate an additional unit of output has more than doubled over the past decade10. This highlights the importance of new initiatives to boost efficiency and thereby long-term growth.

Figure 42: Contribution to real GDP growth by expenditure components

Source: Central Informatics Organisation, Economic Development Board analysis

10EfficiencyofinvestmentismeasuredbytheIncrementalCapitalOutputRatio(ICOR).ThisindicatormeasurestheamountofinvestmentneededtogenerateoneadditionalunitofGDP.LowerICORsignifieshigherefficiency.



Net real exports have had a decreasing share of real GDP over the past decade, from 37% in 2000 to 21% in 2012. Net exports have grown by an annual average of 0% over the period, however there has been large volatility over the period, with the largest fall in net exports experienced in 2008 at -28%, followed by 29% growth the subsequent year. Changes to real net exports have been predominantly caused by shifts in real imports rather than real exports which have experienced a relatively subdued growth rates over the period.

Sectors driving GDP growthIn recent years, growth in the Bahraini economy has been driven above all by four main sectors: manufacturing, financial corporations, telecommunications and transport, and personal and social services. The first two segments have a remarkably consistent track record of high growth rates over the last decade, while their contribution to GDP has remained almost constant in recent years. The analysis below is based on CIOs national accounts data from 200012.11

While construction and real estate output grew significantly at the start of the decade, their pace of expansion has slowed down in recent years as the regional property boom lost momentum. However, with continued growth in population, and developers increasingly focusing on affordable housing options, these sectors are expected to recover gradually.

11 2010 base year

Figure43:Efficiencyofinvestment

Source: Central Informatics Organisation, Economic Development Board Analysis


KINGDOM OF BAHRAIN

Manufacturing, which is historically dominated by oil-related downstream industries, registered an annual average growth of 6.5% between 2000-2012, with the sector growth peaking at 16% in 2005. The sectors contribution to GDP increased from 12.4% in 2000 to 14.8% in 2012, and has been responsible for 18% of GDP growth between 2000 and 2012. Manufacturing has led the process of economic diversification in the Kingdom and is one of the largest employers of Bahraini nationals. The sector has been resilient to economic shocks due to the relatively inelastic demand associated with its outputs.

Financial corporations have successfully capitalized on the wealth of skilled national labor as well as the governments liberalization efforts, including strengthened central bank supervision, anti-money laundering laws, and flexible ownership rights. The annual pace of growth in the sector between 2000-2012 was 7% and its real GDP contribution has hovered around 17% of GDP over the last seven years. With the exception of 2009 and 2011, the sector was responsible for a substantial proportion of growth; 17% in 2008 and 29% in 2010, for instance.

Similarly, the transport and telecommunication sector emerged as one of the most dynamic sectors of the economy toward the end of the last decade mainly due to privatization and liberalization initiatives. Its share of GDP increased from 4% in 2000 to 7% in 2012, although the pace of growth subsequently slowed down. Going forward, the telecommunications sector is projected to grow as the TRA fulfills its licensing targets and executes additional phases of its liberalization agenda. Despite the slowdown, the sector was still responsible for 9% of the GDP growth in 2012.

Figure 44: Sectoral contribution to growth




Growth in the social and personal services sector had the highest average annual growth between 2000-2012 at 14.3%, increasing its share of GDP from 2.1% to 5.4% over the period, and representing 10% of growth over the period in 2012.

The success of economic diversification has happened in tandem with a significant decline in the hydrocarbon sectors share of GDP (from 43.6% to 19%) between 2000-2012. The hydrocarbon sector faced had an overall negative contribution in as of 2012 from 2000 of -12.6%, however, this is largely due to a fall in the sector of 8.5% in 2012 due to temporary maintenance in the Abu Saafa oil field. The oil sector is expected to have a strong recovery in 2013.

Figure 45: Comparison of sectoral contributions to real GDP (2000 and 2012)




FINANCIALMARKETS

03




Equity Markets

Bahrain is an established center of capital market activity. The Bahrain Stock Exchange (BSE), now Bahrain Bourse (BHB), commenced operations in 1987 with the government being an active issuer in the bond and sukuk markets. Institutional development of the markets has led to significant progress in the form of stricter corporate governance directives and the opening of the Kingdoms second exchange, Bahrain Financial Exchange (BFX), in 2009. The development of the equity market over the past decade is a familiar story echoed by other stock markets in the GCC region. Equity issuance and trading volumes increased in early 2000 and reached their peak around the middle of 2008 before the global crisis sharply pushed down the indices and trading volumes alike. Although the Bahraini market has been relatively resilient amid external uncertainty, the equity market failed to develop significant positive momentum since the sharp corrections during the global crisis. However, total market capitalization is slowly rebounding to the pre-crisis levels.

Figure 46: GCC equity market indices (Jan 2007Jun 2013)

Note: Jan 2007 = 100Source: Bahrain Bourse, Kuwait Stock Exchange, Muscat Securities Market, Qatar Exchange, Tadawul, Abu Dhabi Securities Exchange, Dubai Financial Market, Economic Development Board analysis

Bahrain BourseThe establishment of formal capital markets in Bahrain dates back to the 1950s. With the establishment of Bahrains first national holding company in 1957, the Al Jowhara Market came into being as an informal platform for the trading of company shares took place. However, the collapse of this as well as other regional unofficial markets in the 1980s prompted the need for an organized, regulated capital market platform. In 1987, the Bahrain Stock Exchange (BSE) was established according to Amiri Decree No. 4, and operations commenced in 1989 with 29 Bahraini listed companies being traded in an Auction Trading12 system. About a decade later, the system was upgraded to an automated trading platform, which facilitated the listing of multiple asset classes alongside common stock, including bonds, sukuk (Islamic securities), mutual funds, and preferred stock. The BSEs legislative transformation in 2002 from a government-owned entity to a closed shareholding company regulated by the CBB marked the conception of what stands today as the Bahrain Bourse (BHB).

12 A system where investors place their bid and offer orders with the broker, and the broker then matches between them manually


KINGDOM OF BAHRAIN

As of June 2013, BHB was home to 48 listed companies classified across a number of defined sectors: commercial banks, investment, insurance, services, industrial, and hotel and tourism, along with non- Bahraini companies, closed companies, and preferred shares.

The seven commercial banks represent the largest sector on BHB, accounting for 45.4% of the total market capitalization (BHD6.5bn) as of June 2013. The traded eequities include Ahli United Bank, the largest listed company in Bahrain, which accounts for 21.5% of overall capitalization. The second largest sector comprises 12 investment firms (with 23.1% of total capitalization), including Arab Banking Corporation and Investcorp Bank. These sectors, along with five insurance companies,13 constitute 70.8% of the market capitalization reflecting Bahrains prominence as a regional financial center.

Figure 48: BHB market capitalization, Jun 2013

Source: Bahrain Bourse, Economic Development Board analysis

Figure 47: BHB market capitalization, by sector

Source: Bahrain Bourse

13 Including Al-Ahlia Insurance Co., Arab Insurance Group, Bahrain Kuwait Insurance Co., Bahrain National Holding, and Takaful Insurance Co.



The services sector consists of nine companies (with 14.8% of total capitalization) dominated by Bahrain Telecommunications Company (Batelco), which accounts for 59.7% of the sectors capitalization. Hotels and tourism held 2.8% of the total market capitalization in June 2013. The industrial sector, whose share in overall market capitalization stood at 11.6% of the total, was heavily dominated by Aluminium Bahrain (Alba) which is responsible for 97.9% of the sectors capitalization. Alba is the second-largest public company listed on BHB and one of the worlds largest aluminum producers.

The exchange has broadened its range of tradable instruments beyond equity listings to include mutual funds and a debt market comprising conventional bonds and sukuk. As of June 2013, BHB had 26 listed mutual funds and nine bonds and sukuk.

BHB remains a low-volume market compared to regional and global equity markets. The exchange accounted for less than 1% of the aggregate GCC market capitalization as of December 2012. Three main indices Bahrain All-Share, Esterad and Dow Jones Bahrain are used to track the performance of the Bahraini stock market. The market was fairly steady during mid-2000 and reached a record peak in 2008. This was followed by a sharp contraction, alongside other global markets, with the three indices plummeting around 41.9% YoY by January 2009. The Bahrain All-Share Index grew 11.5% to 1,187.8 points during 1H13. A closer look reveals an impressive growth of 27.1% in the commercial banks sector, followed closely by an expansion of around 21.0% in the industrial sector, mainly driven by Alba.

Figure 49: Bahrain Bourse performance (January 2005June 2013)


BHB witnessed relatively high market activity during the years leading up to the recent financial crisis; since then, activity has slowed down considerably with an average overall market turnover of 16.2% over January 2009 to the end of 1Q13. However, overall market turnover reached 74.0% in May and averaged 50.3% during 2Q13. Primarily, the spike in activity reflects the acquisition of 51.6% stake in Bahrain Islamic Bank (BisB) by National Bank of Bahrain (NBB) and SIO Asset Management Company (SIOAMC). Market turnover14 is a ratio of how often shares change hands and is a measure of market liquidity. Consequently, the volume of shares traded reached 302.1mn in February 2008, and has since declined, averaging 59mn shares between January 2009 and the end of 1Q13. However, the volume of shares traded peaked at 612mn shares in May, with the stake purchase by NBB and SIOAMC in BisB.

14 The ratio is calculated by dividing the total value of the shares traded during a period by the market capitalization for that period.


KINGDOM OF BAHRAIN

Bahrain Financial Exchange Bahrain Financial Exchange (BFX), which commenced operations in 2011, is the first of its kind in the Middle East. The entity is wholly owned by Indias Financial Technologies Group and is directly regulated by the CBB. BFX offers investors internationally accessible platforms for multi-asset trading in cash instruments, derivatives, and Shariah-compliant financial products. Products that have been approved for trading on the exchange include gold futures, natural gas futures, and Eurodollar futures, among other index futures. BFX aims to recover the regions liquidity and capital invested in overseas markets and to pool the wealth into one market to drive investments and growth opportunities in the regional economy.

In 2011, to stimulate the equity market, BHB undertook measures to encourage the listing of additional companies through amendments to its listing rules, which proved challenging amid the difficult post-crisis market conditions. One such revision canceled an article stipulating that a company must have realized profits during the two years prior to its application, or at least for three of the past five years. Furthermore, the Ministry of Industry and Commerce (MOIC), in collaboration with the CBB and the National Corporate Governance Committee, introduced a new Corporate Governance Code in 2010 combining nine core principles that reflect the highest international governance standards15. Enforced under a comply or explain framework, the Code is part of the longer-term initiative to extend BHB and instill confidence in capital markets among investors and companies seeking to raise capital through a listing.

Figure 50: BHBs market turnover and traded volume (September 2005June 2013)


15 The nine core principles cover a range of governance issues, including the role of Board of Directors, internal compliance and audit procedures, remuneration, management structure, and clearer communication with shareholders, in addition to requirements for Shariah-compliant companies.



Bond and sukuk markets in the GCC remain less developed compared to other financial market segments and possess significant growth potential16. In particular, there is growing emphasis on the need for debt securities to finance the regions massive infrastructure boom. Although Bahrain, owing to CBB issuance, is a relative pioneer in the regional bond and sukuk markets, corporate issuance has been comparatively rare to date. In recent years, growth in the national bond and sukuk markets has been almost entirely driven by increased government issuance.

Over the past three years, the conventional bond market in Bahrain has seen corporate issuances by Batelco, Bank of Bahrain and Kuwait (BBK) and Investcorp Bank. Specifically, Investcorp diversified its funding profile through its recent and oversubscribed USD250mn 5-year bond maturing in November 2017. Similarly, the Bahrain-domiciled but largely Saudi-controlled Gulf International Bank has been a regular issuer. In other cases, Bahraini corporates have mostly preferred bank finance. For instance, in late December 2012, Alba announced it had opted for bank loans to refinance an USD169mn bond maturing in March 2013. Furthermore, Batelco launched its USD650mn 7-year corporate bond in April 2013, after completing its acquisition of Cable & Wireless Communications Monaco and Islands business division.

The Kingdom of Bahrain is an established issuer of conventional debt securities and sukuk. With growth of almost 526% since 2Q03, the total outstanding debt issued by the government stood at BHD3.7bn by the end of 1Q13. Of this, BHD2.6bn was conventional debt, while BHD1.1bn was funded through Islamic securities. Government debt issuance has increased markedly following the financial crisis of 2007. Government debt reached 37.9% of GDP in 2012 compared to less than 10% during the years prior to the financial crisis.

Bond and Sukuk Markets

16DeutscheBank:GCCFinancialMarkets(Nov2012)

Figure 51: Total outstanding domestic public debt (200312)

Source: Central Bank of Bahrain, Central Informatics Organisation, Economic Development Board analysis


KINGDOM OF BAHRAIN

A key element of CBB issuance is short- and medium-term government Treasury bills (T-bills). Denominated in BHD, these include weekly issuances of BHD25mn with three-month maturity, monthly offerings of BHD20mn with six-month maturity, and quarterly placements of BHD50mn with 12-month maturity. Government T-bills account for almost one-quarter of the total outstanding domestic public debt (BHD930mn as of 1Q13).

Government development bonds are long-term conventional bonds issued on an irregular basis and are denominated either in USD or BHD, with maturities typically ranging from three to ten years. These bonds constituted around 45% of the outstanding public debt as of 1Q13. In 2012, the CBB held two government development bond issuances of BHD564mn (maturing in July) and BHD185mn (maturing in November). The third issuance was undertaken in July 2013, with an offer size of BHD150mn.

In the Shariah-compliant space, the CBB issues Sukuk Al Salam on a monthly basis, with a standard issue of BHD18mn. These short-term BHD-denominated securities have a maturity of three months. Al Salam accounted for less than 2% share of the outstanding government debt in 1Q13.

CBBs Sukuk Al Ijara are issued every month in installments of BHD20mn and a six-month maturity. Also long-term Sukuk Al Ijara are issued on an ad hoc basis. They are denominated in USD or BHD and have maturities ranging from 310 years. Sukuk Al Ijara accounted for the second-largest proportion of total outstanding government debt at 29.0% in 1Q13.

Figure 52: Outstanding debt by security (20031Q13)

Source: Central Bank of Bahrain, Economic Development Board Analysis



The interbank money market in Bahrain remains relatively small. It is used by banks extend loans to one another at various maturities, mostly overnight. The CBB, in collaboration with Thomson Reuters and the Bahrain Association of Banks (BAB), established the Bahraini Dinar Interbank Offered Rate (BHIBOR) in 2006 as the first official interbank lending market benchmark rate. It represents the average offered interest rate of 10 commercial banks in the Kingdom and is provided for eight tenors, ranging from overnight to 12 months.

Following the onset of the financial crisis, BHIBOR fell from 5.4% in 3Q07 to around 2.8% by mid-2008. Due to escalating fears in the interbank lending market,primarily triggered by the collapse of Lehman Brothers, rates plummeted further during the subsequent year to reach 0.8% by mid-2009. Since then, BHIBOR has remained below 1%; as of 1Q13, it reached 0.29%, close to the Saudi Arabian Interbank Offered Rate (SAIBOR17) of 0.291% and the London Interbank Offered Rate (LIBOR18) of 0.51%19. Monitoring and responding to the US Federal Reserves monetary policy changes, the CBB has undertaken interest rate adjustments to extend liquidity and ensure the interbank markets function effectively and smoothly during turbulent times.

Interbank Lending Market

Figure 53: Bahraini Dinar interbank market rate (quarterly average, % pa)

* Saudi Arabian Interbank Offered Rate** London Interbank Offered RateSource: Central Bank of Bahrain, Saudi Arabian Monetary Agency, British Bankers Association

17 Saudi Arabian Interbank Offered Rate18 London Interbank Offered Rate19 Quarterly averages of three-month BHIBOR, 3-month SAIBOR and 3-month LIBOR



FOREIGNTRADE

04




As a small, but strategically located island nation, Bahrain has a long history of and dependency on trade. This, in turn, has engendered a culture of economic openness. For instance, according to the Heritage Foundation and Wall Street Journal 2013 Index of Economic Freedom, Bahrain ranks as the 12th freest economy in the world. In the Middle East and North Africa (MENA) region, Bahrain ranks first. Another index measuring economic freedom, published by Fraser Institute, ranks Bahrain seventh in the world and first in the MENA region.

Openness to trade is recognized as one of the main component areas determining the level of economic freedom. This indicator is used to measure the ease of cross-border transactions, and flow of goods and services. Bahrains strong position in this regard is built on the reality of no exchange controls, no restrictions on repatriation of profits or capital, no restrictions on converting or transferring funds, and relatively few non-tariff barriers. Moreover, the Kingdoms established regulatory system and strong financial sector makes it more attractive to investors.

Receipts from oil exports generate the majority of government revenue and the funds required to finance imports. The ratio of openness to trade, defined as the sum of imports and exports to GDP, was approximately 109% in 2012, representing one of the highest percentages in the region after the UAE. Prior to 2008, trade, as a percentage of GDP, was the highest in the GCC at around 145% in 2005. As important as foreign trade is, Bahrain export profile is still heavily concentrated on one product, viz. oil.

Figure 54: Trade as a percentage of GDP (GCC states)

Source: World Bank


KINGDOM OF BAHRAIN

Terms of trade20 have been improving in the GCC since 2009, following a large decline during the financial crisis and the concomitant oil price correction. Nevertheless, the purchasing power of imports is increasing due to larger export receipts. However, Bahrains terms of trade are the lowest in the GCC, owing to lower oil exports.

Bahrain recorded a current account surplus of BHD835mn in 2012, a decrease of 31.5% from 2011. As a percentage of GDP, the current account surplus declined from 11.1% in 2011 to 7.3% in 2012, but was still much higher than the 2009 and 2010 figures of 2.4% and 3.0% respectively. The decrease in 2012 was primarily attributable to lower oil exports, caused by a technical disruption to oil production in the Abu Saafa offshore field. On the other hand, the value of oil imports increased 20% in 2012 from a year earlier. Growth in non-oil exports has been consistent; however, non-oil imports decreased in 2011 and 2012, by 28% and 7% respectively. While the drop in imports indicates lower demand, a reduction in the size of the decline is a sign of normalization.

Figure55:Netbartertermsoftradeindex,WorldBank(WDI)2000=100

Source: World Bank

20 Terms of trade refers to the value of a countrys exports relative to its imports. When a country experiences improving terms of trade, its export prices are increasing faster than its import prices; otherwise, the terms of trade would be worsening when prices of exports are increasing at a lower rate than imports.

Current Account



Goods Bahrains oil imports and exports grew by 52% and 65% respectively between 2006 and 2012. As of 2012, imports stood at BHD3.4bn, while exports totaled BHD5.7bn. An increase in the value of oil trade during the given years is predominantly due to higher oil prices rather than increases in production, particularly in 2008 and 2011. While prices first rose in 2008 due to fears of supply shortages and rising demand from emerging markets, they subsequently fell by 34% owing to the global economic crisis and subdued demand. Following the global crisis, political instability in the Middle East in 2011 dented investor sentiment and raised fears of future supply shortages and disruptions in production. Consequently, oil prices increased and remained at a historically high levels in 2012.

Figure 56: Bahrains current account (BHD mn)

* 2012 data is provisionalSource: Central Bank of Bahrain

Figure 57: Petroleum product exports (2011)

Source: National Oil and Gas Authority


KINGDOM OF BAHRAIN

Oil and refined petroleum products accounted for 77% of Bahrains total goods exports in 2012. In general, the composition and share of products has not changed since 2000, although the volume of diesel and fuel oil has declined. Conversely, there has been an increase in the volume of jet fuel and asphalt. The total volume of petroleum exports has decreased 7% from 2000, however, a rise in prices during the same period led to an overall increase in the value of oil exports.

Bahrains non-oil exports predominantly consist of mineral products (43%) and metals (39%), mainly including exports of mineral fuels, aluminum and aluminum products, and iron.

Oil constituted 62% of Bahrains total imports in 201121, a marked rise from 48% in 2010. The majority of oil imports were from Saudi Arabia, sent directly to the Bapco refinery where they were manufactured into various petroleum products and then exported at a higher value. On an average, non-oil imports constituted 50% of total imports during the past six years. Bahrains imports are more diversified than its exports and the top categories include machinery, mineral products, transportation, metals and chemicals.

Figure 59: Non-oil goods exports (2011)


Figure 58: Bahraini exports of petroleum products

Petroleum Products Price 2005 2011 % change

Asphalt USD per barrel 24.37 90.23 270%Diesel USD per barrel 62.65 124.75 99%Fuel USD per barrel 38.87 99.01 155%Gasoline USD per barrel 60.05 112.24 87%Jet A-1 Cargo USD per barrel 66.13 125.08 89%Jet A-1 Airport USD per barrel 67.31 126 87%LPG USD per barrel 40.21 73.36 82%Naphtha USD per barrel 49.8 101.68 104%

Sulfur USD per barrel 10.92 44.25 305%

Source: National Oil and Gas Authority

21 That is largely due to general increases in oil receipts due to an increase in the price level



Figure 60: Non-oil goods imports (2011)


The GCC is the dominant destination of Bahraini exports, with Saudi Arabia accounting for 21% of total exports in 2011, followed by Oman and Qatar (12% each), the UAE (8%) and Kuwait (2%). The share of exports to the GCC region has risen from 21% of the total in 2001 to 38% in 2005 and 55% in 2011. At the same time, the share of exports to Asia-Pacific declined from 26% in 2001 to 12% in 2011, while the proportion of exports to the Americas fell from 25% to 7% during the same period. By contrast, exports to South Asia increased from 5% to 9%, largely due to higher trade with India, while exports to MENA countries (minus the GCC) and Europe remained constant.

A large portion of Bahraini imports arrives from China, Brazil and the US, although the composition of imports is highly diversified. The share of non-oil imports from various regions has remained largely stable with the exception of a noticeable shift from Europe to the Americas. Share of imports from Europe declined to 23% in 2011 from 31% in 2001, while that from the Americas grew from 12% to 23% during the same period.

Figure 61: Non-oil goods exports by country of origin (2011)

Source: Central Informatics Organisation Source: Central Informatics Organisation

Figure 62: Non-oil imports by country of origin (2011)


KINGDOM OF BAHRAIN

22 Except for 200, when remittances dropped 22%

ServicesIn 2012, Bahrains net service exports increased by 6% following a 41% decrease in 2011. The 2011 correction was due to a decline in the travel (by 63%), financial services (by 44%), and communication services (by 24%. The fall in travel and communication services was due to regional instability in 2011 including the cessation of flights to major destinations such as Lebanon, Iran and Iraq, and traffic disruption via the King Fahd Causeway. The decision to postpone the Formula 1 Grand Prix in 2011 also added to the decline. In 2012, the economy experienced gradual normalization which led to an increase in net services, particularly in financial and transportation services, by 21% and 16% respectively. Travel and communication services also witnessed a slight rebound of 2% and 1% respectively in 2012.

Income and current transfersBahrains net investment income has been declining in recent years, dipping by 59% and 2% in 2011 and 2012 respectively. The decrease is mainly due to an increase in inward direct investment and a reduction in other investment income. In 2012, net direct investment income grew marginally, however, portfolio income continued to rebound at a slower rate. Workers remittances experienced a large growth in 2011, growing at 25%22, followed by a slight dip in 2012 of 1%.

Figure 63: Net services exports (2011)

* 2012 data is provisional Source: Central Bank of Bahrain



Net capital transfers increased by 31% in 2012 after surging by 52% in 2011. Outward investments rose 168% in 2011, after a steep reduction in 2009, and continued the uptrend in 2012, albeit at a slower rate of 3%. Moreover, inward foreign direct investments escalated 401% in 2011 and 14% in 2012 after a protracted downtrend due to the financial crisis. Receipts from both portfolio and other investments decreased, indicating lower sales of acquired assets abroad. However, positive net assets still indicate some sale of assets abroad. On the other hand, acquisition of portfolio investments by foreign investors increased 163% in 2012 after a sharp decline in 2011. Moreover, there was a reduction in the amount of other investments sold by foreign investors in 2012.

Figure65:Capitalandfinancialaccount


Capital and Financial Account

Figure 64: Net income from investments




SOCIALINFRASTRUCTURE

05




Bahrain in 1919 became the first GCC country to introduce formal education. In another pioneering move in 1928, schools for girls were established to provide equal access opportunities. Currently, education is compulsory for all students until ninth grade in both public and private institutions. More than 265 primary and secondary schools currently operate in the Kingdom, including 65 private schools with curricula from the UK, US, France, India and Pakistan. Bahrain is also home to 16 public and private universities.

The education sector has experienced robust growth in recent years, expanding by a cumulative 205% between 2000 and 2012. The GDP contribution of the sector rose from BHD136mn in 2000 to BHD452mn in 2012, pushing up the GDP share of education from 2.3% to 4.4%. According to the National Accounts, growth in private education outpaced that in government education over the past 12 years. Government education experienced a somewhat volatile aggregate increase of 130% over the period. Private education grew 5.5 times faster. The latter is due to the establishment of private universities and institutions over the past few years.

Figure 66: Share of private and public educational services in real GDP

Source: Central Informatics Organization, Economic Development Board analysis

Education in Bahrain

The total number of teachers in primary and secondary schools was approximately 15,630 in 2010.23 Women constitute a clear majority of tachers in the Kingdom, accounting for an average of 65% of total employment in education between 2001 to 2010. The number of teachers grew 74% during the same period, with the majority being employed in government institutions.

23 Only schools without high education institutions due to lack of information. Here, we focus on both private and government schools


KINGDOM OF BAHRAIN

Between 2002 to 2010, teachers made up an average of 2.9% of the total workforce in Bahrain. Although the number of teachers in the Kingdom has increased since 2001, their proportion of the total workforce has contracted somewhat due to rapid growth in labor-intensive sectors such as manufacturing, construction and retail.

Figure 68: Number of teachers as a share of total employment

Source: Labor Market Regulatory Authority, Central Informatics Organization, Economic Development Board analysis

Figure 67: Education workforce




Figure 69: Education workforce (by nationality)


Approximately 80% of the total number of public school teachers in the Kingdom are Bahraini national. In private schools, by contrast, the corresponding share of nationals is less than 20%.

Public spending24 on education in Bahrain remains below the average of the advanced economies, although this may be partly attributable to lower prices and the absence of taxes in the Kingdom. Public education spending per student in OECD countries25 averaged USD7,600 (BHD2,865) in 2007 across primary, secondary and tertiary levels. The average for Bahrain in the same year was lower at USD4,337 (BHD1,635). Spending on public educational at the primary, secondary and tertiary levels in the OECD countries averaged approximately 4.6% of GDP26 in 2007. The corresponding figure in Bahrain was a comparable 4.4% of real GDP.

Literacy rates27 in Bahrain are relatively high by international standards and have increased in recent years. The most common measure of literacy is the percentage of population above 15 years who can read and write. According to the United Nation Development Program (UNDP) the literacy rate in Bahrain increased from 86.5% in 2001 to 91.9% in 201028.

School attendance in Bahrain is high by international standards. The gross enrolment rate29 iis defined as the ratio of those enrolled in schools to those who are in school enrolment age. Enrolment at the primary30 and secondary levels stood at 107% and 103%, respectively31. The Bahraini ratios are in fact higher than those of the US, the UK, and the rest of the GCC. This reality Bahrains fairly favorable ranking of 48th out of 187 in the UNDPS 2013 Human Development Report. The overall number of students in Bahrain grew by 22% from 138,000 in 2000 to 171,000 in 2010. Private school students accounted for 21% of the total number during that period.

24 Here focus is only on the public source for funds.25OECD2007(latestdataavailable)26OECD2007(latestavailable)27 From this section onward, we focused only on schools without high education institutions due to lack of data28 Latest data available29 GER can exceed 100% due to the inclusion of over-aged and under-aged students because of early or late school entrance and

grade repetition30 Includes elementary and intermediate levels31 According to the UNDP Human Development Report 2013: Data refers to the most recent year available during the period from 2002

to 2011 for the education indicator


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Figure 70: Total number of students in Bahrain


Figure 71: Female to male ratio


Between 2000 and 2010 slightly fewer girls than boys enrolled at the elementary and intermediate levels in Bahrain. The number of girls averaged 95% and 96% of the number of boys during the two years, respectively. by contrast, girls outnumbered boys at the secondary level averaging 104% of the number of boys.

Class size and student-teacher ratios are considered among the key determinants of the quality of teaching in a given country. In 2010, Bahrain had an average of 11 students per teacher. The corresponding OECD average is markedly higher at 1532 students per teacher. The highest student to teacher ratios seen in Bahrain since the turn of the century were in the private school segment in 2001-2002. Since then, however, the figures have been consistently below the OECD average and fairly steady in recent years. Moreover, the ratios have largely converged between the public and the private sector.

32OECD2011:EducationataGlance.In2010,OECDstudent-teacherratioforprimarylevelwas16andsecondarylevelwas14. Here we considered the average of both due to lack of data availability



Figure 72: Student-teacher ratio

Source: Central Information Organization, Economic Development Board analysis

To improve employability and efficiency while more directly catering to the needs of the job market, the government introduced reforms in the education sector over the past decade. These initiatives included a teacher training program, a new polytechnic college for technical and vocational training, an improved upper secondary vocational program, and a quality assurance initiative. Teachers received increased training based on up to date pedagogical standards and techniques. New support and accountability systems for school performance were introduced and national numeracy and literacy strategies were implemented. The quality assurance authority, now in its fifth year of operation, is providing external assessment of public and private educational establishments leading to enhanced student outcomes. According to the World Economic Forum (WEF)s Global Competitiveness Report of 20132014 Bahrains ranking in educational standards has improved and the Kingdom is now placed 48th worldwide in terms of the quality of the educational system in the latest report. This compares to the 56th position in 2008. Enrolment rates in the primary, secondary and tertiary segments currently stand at 97.8%, 103% and 29.8% respectively.

Healthcare

Public healthcare services are provided free of charge to all Bahrainis, and are heavily subsidized for expatriates through a network of Ministry of Health (MoH) hospitals, maternity units and primary healthcare centers. Non-Bahrainis employed in corporations with more than50 employees are covered under a mandatory health insurance scheme33. Moreover, private healthcare is an increasingly important sector in the Kingdom and encompassed 14 hospitals as of 2010.

33This scheme imposes a health tax of BHD60 for each non-Bahraini employee, payable by the employer. Expatriates notcoveredbythisschemepayaflatrateofBHD3pervisit.


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Figure 73: Economic indicators for the healthcare sector

Source: Ministry of Health, Central Informatics Organization, Economic Development Board analysis

The Bahraini healthcare sector registered strong growth of around 10% per year between 2006 and 2012 due to the establishment and expansion of additional public and private healthcare facilities. The annual pace of growth reached 9.5% in 2012. Rising staffing levels at the new facilities also translated into a 10.2% increase in health care employment in 2008, a pace which subsequently declined to 4% in 2010 in response to a broader slowdown in the sector. Growth in the private sector is expected to accelerate following the completion of several projects including Dilmunia Healthcare Island and King Abdulla Medical City.

While GDP contribution of the health care sector steadily increased throughout the decade, its contribution to employment has remained at 2% of the national total in the last six years.

Healthcare expenditure as a percentage of GDP declined somewhat between 2001 and 2007 before rebounding sharply until a temporary correction in 2011. However, further growth momentum is expected from a comprehensive health care reform agenda pursued by the Ministry of Health. The plans includes a comprehensive upgrade of billing mechanisms, storage systems and cost management schemes.



A key objective of reforms in the health care sector has been to improve the quality of the human capital available to the health facilities. The Royal College of Surgeons Medical University of Bahrain was also established in 2004 to provide access to world-class training for upcoming physicians and nurses in the Kingdom. The College of Health Sciences is increasing its training capacity for nurses which is currently at 300 students per year. Nursing has the highest potential to create national jobs due to a high number of foreign workers in this field. Bahrainization in nursing was estimated at 50% in 2009 compared to 80% for physicians. Apart from training initiatives, retention schemes have been developed to address staff shortages. Although growth in the number of healthcare practitioners has mirrored increase in the population, Bahrain continues lag behind the advanced economy average in terms of physician to population ratios. As of 2010, Bahrain had 1.4 physicians per 1,000 people, which compared to the OECD average of 2.8.

Figure 74: Healthcare expenditure (% GDP)

Source: Ministry of Health

Figure 75: Healthcare practitioners vs. population total growth

Source: Central Informatics Organization, Ministry of Health, Economic Development Board analysis


KINGDOM OF BAHRAIN

The development of Bahrains healthcare sector over the past three decades is reflected in the steady improvement in key indicators, especially life expectancy, which is now among the highest in the world. In an important instance of positive progress, the number of hospital beds per 1,000 people is estimated to have increased 50% upon completion of the King Hamad General Hospital. Nonetheless, the ongoing implementation of the health reform agenda is critical to further elevating Bahrains relative position in these indicators. These initiatives include allocating 6.6% of government spending for healthcare in the 201314 draft law for the fiscal budget.

Figure 76: Life expectancy at birth

1990 2011

Bahrain 72.3 75.1Norway 76.5 81.1Canada 77.3 81UK 75.6 80.2Malta 75.3 79.6US 75.2 78.5UAE 71.8 76.5Argentina 71.5 75.9Kuwait 72.5 74.6China 69.4 73.5

Source: United Nations Development Programme

Figure 77: Hospital beds per 1000 population (2009)

Source: World Health Organization



Figure 78: Physicians per 1000 population (2010)


Figure 79: Healthcare expenditure as % of government expenditure (2011)

Figure 80: Healthcare expenditure as % of GDP (2011)




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The National Health Regulatory Authority (NHRA)The National Health Regulatory Authority (NHRA) was established in 2009 in order to separate the governments regulatory function from service provision. The NHRA was set up with a view to elevating healthcare standards in the public system through improved monitoring and inspection of public healthcare facilities and practitioners. Formal supervision had previously been largely restricted to the private sector. Overall healthcare standards are being addressed through an overhaul of healthcare legislation designed to promote fair competition and an open investment environment, as well as to ensure world-class minimum standards for professionals and facilities. The NHRA also aims to improve accountability, encourage research and development, increase options for patients, ensure system-wide integration, enhance the regulation of drugs and pharmaceuticals, as well as boost investments in preventative care. Since the NHRAs establishment, public healthcare facilities devised plans to upgrade their facilities and gain international accreditation. The regulatory authority has also granted licenses to investors in ventures that were previously restricted.

Among other things, the NHRA was tasked with the development of a framework for healthcare research and development in Bahrain. As a result, a project was launched to conduct genetic screening on approximately 15,000 babies in the next two years to support genetic research on prevalent disorders like diabetes (7,059 cases in 2010) and hypertension (7,522 cases). Al Jawhara Center is a research facility licensed by NHRA. It is the first comprehensive genetic research facility in the Kingdom with an academic and research focus on molecular diagnostics and genetic disorders. The center also partners with Arabian Gulf University to provide academic training for medical students. Research conducted at Al Jawhara is focused on prevalent regional disorders, endemic cardiovascular disorders, pharmacogenetics, the human genome, and biomarkers.

Despite significant expansion in recent years, growth potential in healthcare in Bahrain is enormous in view of population growth and the range of existing services. The most promising opportunities exist in tertiary care facilities and research institutions. Since 2007, the private healthcare sector has grown by more than 12% per year, surpassing the pace of expansion in the public sector and thereby capturing a large market share. This movement has been prompted by the proliferation of healthcare insurance in the Kingdom upon the adoption of prepaid schemes by corporations and individuals.



Figure 81: Private healthcare growth outpaces government healthcare investments

Source: Central Informatics Organization

Bahrains human capital is widely recognized as its greatest competitive advantage. This reality, combined with the demographic dynamics of the Kingdom and the need to achieve sustainable economic diversification have made entrepreneurship a key policy priority. Entrepreneurship is a long tradition in an economy with a centuries-long tradition as a regional trading hub. While the Kingdom is home to a large number of established private enterprises, efforts to stimulate the growth of new ones have firmly established themselves as a strategic priority in recent decades. New entrepreneurship can serve as a source of job creation, non-oil diversification, exports, and innovation. Indeed, small and medium-sized companies constitute the backbone of many advanced and a growing number of emerging markets in these areas.

The importance of the SMEs is considerable also in Bahrain where they account for 77% of private sector jobs, although their GDP weight remains significantly lower at just over a quarter. In terms of the number of companies, the dominance of SMEs is overwhelming as they accounting for some 99% of the total. Even beyond its numerical significa

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