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Bahrain’s fiscal discipline bodes well for its capital markets

Banking and finance now contributes 17 percent of the country's GDP

The performance of the Bahrain Bourse has been muted this year but a rush of IPOs could bring a windfall Bahrain Bourse
The performance of the Bahrain Bourse has been muted this year, but a rush of IPOs could bring a windfall

As a small island nation located in the middle of the Gulf’s most strategic oil and gas infrastructure, Bahrain has successfully diversified its economy from dependence on oil and gas exports. 

After the destruction of Beirut in the Lebanese civil war of the mid-1970s, Bahrain staked its claim as the Gulf’s offshore banking centre, primarily as a hub for foreign exchange trading and a bookings centre for international banks making multi-billion dollar syndicated loans to Saudi mega-projects.

Bahrain also leveraged its regulatory infrastructure to nurture the evolution of sharia-compliant banking, capital markets, asset management and insurance (takaful). Bahrain’s Islamic finance sector now accounts for 42 percent of all banking assets, having accumulated $80 billion in assets. 

The banking and finance sector in Bahrain now contributes 17 percent of its GDP, just ahead of oil and gas at 16 percent. It has created thousands of well-paying professional jobs in the more than 400 licensed global and regional financial institutions now based in the kingdom that specialise in corporate and investment banking, asset management and insurance. 

Five decades after the Bahrain Monetary Authority unveiled offshore banking legislation in the 1970s, Bahrain is now one of the largest financial centres between London and Singapore, despite the growth of newer hubs in Dubai, Doha and Abu Dhabi.

Bahrain’s GDP is $46 billion and its 2.5 percent growth rate in 2023 demonstrates that it has overcome the twin macro shocks of the oil price plunge and a collapse in global tourism during the Covid-19 pandemic.

Even though oil was first discovered in Bahrain in 1932, the kingdom is a relatively small producer.

Its dependence on oil and gas export revenues has fallen steadily in the last three decades as the government has done its best to diversify the economy into sectors like banking and finance, tourism, manufacturing and property development.

The Achilles’ heel of the Bahraini economy is its public debt-to-GDP ratio, the highest in the GCC at 94 percent. Standard & Poor’s rates the kingdom at below investment grade at B+. But the kingdom has enjoyed consistent financial support from Saudi Arabia, the UAE and Kuwait over the past two decades. 

The reason Bahrain’s sovereign Eurobonds and sukuk issues are generally over-subscribed is due to high demand from government investment agencies and financial institutions in its three wealthier GCC neighbours.

Bahrain’s high public finance leverage makes it vulnerable to rising US dollar interest rates, the reason the Bahraini government has made fiscal consolidation and the development of the non-oil growth sectors cornerstones of its economic strategy. 

The fiscal deficit at 4.5 percent of GDP is still a concern for the government even though it is down from 11 percent of GDP just after the pandemic in 2021 and 5 percent last year.

Ideally, Bahrain would like to bring its budget deficit down to 4 percent of GDP but the recent fall in Brent crude below $80 a barrel and Manama’s social welfare obligations make that a difficult target to achieve in 2024 or 2025.

Bahrain’s investment prospects will attract regional investors when Mumtalakat privatises stakes in state-owned companies

The Bahraini stock market performance has been muted in 2024. The All Share Index is up a mere 5 percent on a year-to-date basis as of early June 2024, without any of the IPO-driven liquidity frenzy seen in Saudi Arabia, Abu Dhabi and Dubai. 

The fall in US dollar interest rates since October and improved perceptions of Bahrain’s sovereign credit risk suggest that regional investors were prescient in over-bidding for the 12-year Eurobond sukuk issued in February, which now trades at a premium to their issue price.

Bahrain’s investment prospects will attract regional investors when Mumtalakat, its sovereign wealth fund, privatises stakes in state-owned companies. 

Stakes in National Bank of Bahrain, Aluminum Bahrain (Alba), Mumtalakat’s real estate arm Edamah and Bahrain Food Holding Company are all candidates for an offering, according to buy-side analysts.

As PIF in Saudi Arabia and Mubadala in Abu Dhabi have so dramatically demonstrated, a sovereign wealth fund that morphs into a deal engine for mergers and acquisitions, privatisation and local listings can turbo-charge capital markets.

Hopefully, Bahrain will enjoy a privatisation IPO windfall in 2025.

Matein Khalid is the chief investment officer in the private office of Abdulla Saeed Al Naboodah and the CEO designate of a venture capital firm. He is also an adjunct professor of real estate investing and banking at the American University of Sharjah.

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