Bahrain was one of the Gulf countries to be hit hardest by political unrest this year, with the majority Shia population pushing for greater freedom and equality. This had a significant effect on Bahrain’s financial sector, which contributes to around 27% of the nation’s GDP, says its central bank.
The banking system took a hit after the unrest, with the consolidated balance sheet plummeting from $222.2 billion at the start of the year to $197.5 billion at the end of May – its lowest level since 2007.
Even before the Arab Spring, Bahrain’s status as a financial hubwas being eroded by the increasing prominence of Dubai and Qatar – both of which have managed to avoid the turmoil that has characterised the Middle East this year.
In September, central bank governor Rasheed Al Maraj announced that Bahrain was planning to issue a $1 billion sukuk and that BNP Paribas, Citi and Standard Chartered Bank had been given the mandates. Bahrain initially invited banks to compete for mandates on a $1 billion conventional bond earlier this year, but the plans were disrupted by the onset of the unrest.
While the situation for Bahrain’s financial sector may look somewhat bleak, Shaikh Mohammed bin Essa Al-Khalifa, CEO of Bahrain’s Economic Development Board, remains confident that the country has lots to offer as a financial hub in the Gulf. The kingdom suffered a blow to its status in August when French bank Crédit Agricole announced it would close its Bahrain office, but Al-Khalifa attributes this to issues in the bank rather than Bahrain.
“Crédit Agricole has its own internal situation,” he says. “At the same time, we have financial situations that are expanding, that were not affected by the financial crisis ... so Bahrain’s economy continues.”
Indeed, Al-Khalifa is keen to point out that there is more to Bahrain than the banking sector, and that non-financial institutions are still interested in the country. For example, German pipe manufacturer RMA is setting up shop in Bahrain, as are Singapore’s MTQ pipeline services.
“For us, it is important to have a well-diversified economy,” he says. “We would rather not have the financial sector grow more than 30% of our GDP. We don’t want to be too dependent on it.”
Al-Khalifa emphasises that RMA made the decision to expand into Bahrain after the majority of the unrest, and that its decision can be grounded in the strong economic fundamentals of both Bahrain and the Gulf region as a whole.
“The growth story is the growth of the Gulf,” he says. “The Gulf is a trillion dollar market today, forecast to double within the coming 10 years.”
While strong fundamentals maybe a feature shared with other prosperous Gulf states, Al-Khalifa believes that Bahrain can distinguish itself from the pack via its low operating costs and favourable regulations for foreign companies.
“We have the lowest operating costs in the Gulf – 30% less than that of Dubai,” says Al-Khalifa. “On top of that, we have better regulations: we allow 100% ownership for international companies. They do not need a local partner.”
The government has been criticised for its actions in the unrest – particularly its decision to prosecute medics who treated protesters. The medics were given prison sentences of up to 10 years. There seems to be little doubt that stories like this are harmful to Bahrain’s image on the international stage – a fact that Al-Khalifa is more than aware of, though he denies the validity of such portrayals.
“We feel we have been unfairly mischaracterised, and parts of the story were taken and publicised because they fit the narrative of the Arab Spring, but not necessarily the facts on the ground in Bahrain,” he says.
Simon Williams, chief economist for HSBC Middle East, told Euromoney in September that Bahrain’s image had taken a hit since the unrest: “New entrants to the region are less likely to look at Bahrain now than they were at the end of last year. There has been erosion to Bahrain’s position and the events of the last six months may have given that an additional push.”
Whether these opinions are justified or not, what seems clear is that the Bahrain government has a lot of work ahead if it wants to quell concerns on its political record and restore its financial prosperity.