Source: The EIU


Political and Economic Brief:

Bahrain is an archipelago of 36 islands with a size of 727 sq. km. (274 sq. mi.); approximately four times the size of Washington, DC. located off the eastern coast of Saudi Arabia. The four main islands are joined by causeways, and make up about 95% of the total land area. Bahrain became independent from the UK in 1971 and since then it is being ruled by the Al Khalifa family. Bahrain ceased being an emirate and became a constitutional monarchy in February 2002, as part of its present ruler King Hamad bin Isa al-Khalifa's effort to set up a bicameral National Assembly (parliament) in 2002. The initial response from opposition groups was negative, however, gradually they have joined the National Assembly as elected members. Currently, there are 17 MPs from the country's largest opposition group, the al-Wefaq National Islamic Society. However, control over policymaking remains in the hands of the king and the ruling Al Khalifa family, although constraints on press freedom and political activity have been loosened since King Hamad's accession. The Parliament can propose (but not draft) legislation and has the right to amend and reject the budget.

While Bahrain is a net exporter of oil, it is the smallest Middle East oil producer by volume, and unlike other Gulf states, Bahrain exports refined petroleum products rather than crude oil. Bahrain’s proven oil reserves stood at 125 million barrels as of January 2008, all of which are located in the Awali field. In addition to what is produced in its territory, Bahrain and Saudi Arabia share the 300,000 barrels per day (bbl/d) of oil production from the offshore Abu Saafa field. This figure is counted in Saudi oil production figures, but half of the output is given to Bahrain. Separately, Bahrain also purchases Arab Light crude oil from Saudi Arabia via a subsea pipeline, which it refines for export at its Sitra refinery. Bahrain’s proven natural gas reserves stood at 3.25 trillion cubic feet (Tcf) as of January 2008, much of it associated gas from the Awali oil field.

Bahrain’s GDP at current prices increased from US$ 8.5 billion to US$ 18.2 billion in 2007 and is estimated to be around US$ 19.6 billion in 2008.  Oil constituted around 24% of total GDP in 2007 and there is a consistent growth in non-oil sector’s contribution to GDP over the last 5-6 years.


Hydrocarbons provides the foundation for Bahrain’s two major industries: refining and aluminum smelting. Bahrain is a major producer of Aluminium at an estimated 869,878 metric tones for 2008.  Over the past few years, particularly since 2004, there is a significant improvement in both non-financial services and financial services sectors’ contribution to GDP. Financial services currently make up 27.6% of Bahrain’s GDP, and there are over 400 licensed financial institutions. This has created a large pool of local talent. Of around 10,000 people employed in the industry, 72% are Bahraini, with very high levels of financial skills and expertise. International banking groups based in Bahrain include BNP Paribas, Citibank, Merrill Lynch and Standard Chartered; Middle Eastern banks like Arab Bank, the Arab Banking Corporation, Arcapita, GIB, NCB Capital, Gulf Finance House and Investcorp; and Asian banks such as Bank of China and India’s ICICI. Many insurance groups are also here, including AIG, ALICO, AXA and Zurich. They enjoy a trusted regulatory environment, effective and transparent legislation, and the best resources and expertise the region has to offer.


Bahrain has also been an innovator in Islamic finance. It has the largest concentration of Islamic financial institutions in the Middle East, including commercial, investment and leasing banks, insurance companies, and mutual funds. Bahrain plays host to a number of organizations central to the development of Islamic finance, including the Accounting and Auditing Organisation for Islamic Financial Institutions, the General Council for Islamic Banks and Financial Institutions, the International Islamic Financial Market and the International Islamic Rating Agency.

The banking sector in Bahrain is very highly developed. Banking sector’s deposits and domestic credit were  US$ 25.8 billion and US$ 13.5 billion as against  the Broad Money Supply (M2) of US$ 17.5 billion at the end of the first half of 2008.

Domestically, the vast majority of Bahrain’s total energy consumption comes from natural gas, with the remainder supplied by oil. With demand for energy rising and domestic production falling, Bahrain will become increasingly dependent on oil and gas imports unless it can increase domestic production.

The government is seeking to lower unemployment by promoting private-sector growth, setting quotas on the employment of expatriates and increasing the local skills base. However, persuading businesses to replace cheaper expatriate workers with more expensive local labour will prove difficult.


Bahrain had a current account surplus of US$ 3.2 billion and its reserves were US$ 4.4 billion as of the first half of 2008. Though the economy is sound and there is no immediate concern, with the country's hydrocarbons reserves limited and dwindling, the government will be unable to guarantee local citizens employment in the public sector as the Government’s current expenditure has reached a staggering 65.4% of total revenue in 2007.


Future Outlook

           Buoyed by strong regional demand, real GDP growth is forecast to average 6.6% a year in 2008-09. However, inflation is also expected to rise, to an annual average of 6.9% in 2008-09 compared with 4.4% at the end of 2007. GDP growth should remain robust, largely as a result of high oil prices and the associated regional boom. Domestic demand will be supported by strong public-sector spending growth and by rising employment, as banking, aluminium output and tourism continue to expand and as new construction projects come on stream. Real GDP growth is forecast to moderate gradually, from 7% in 2007 to a still strong 5.3% in 2012.

           Manufacturing growth may be constrained by the difficulty of sourcing sufficient quantities of natural gas to expand aluminium output. In addition, the financial sector which makes up a greater proportion of GDP than the oil sector, will face intensifying competition from elsewhere in the region, notably Dubai and Qatar, but also, increasingly, Saudi Arabia.

           We expect the the price of dated Brent Blend will be very volatile but will remain above an annual average of US$80/barrel in 2008-12, specially as low US interest rates in the early part of the forecast period appear to be driving speculators into the commodity market in search of higher yields.

           Persistent oil price strength will support continued fiscal and current-account surpluses, and will also finance further strong rises in government spending. The resulting rapid expansion of the money supply, coupled with real-economy supply bottlenecks, will contribute to inflationary pressure.