The Kingdom of the Seas

Bahrain, the “kingdom of the seas”, in ancient times was the hub of the main trade routes between India and Mesopotamia. It was then conquered by the Portuguese, the Persians, the Sultanate of Oman, the Ottomans, and finally, it was a British protectorate from 1916 to 1971. Bahrain today is a Kingdom that is focusing on a masterful technological innovation with the aim of playing a prominent role both among the Persian Gulf countries and globally.

The Kingdom of Bahrain is a tiny island state with over 1.5 million inhabitants, the smallest in the Arabian Peninsula, formed by an archipelago of thirty-three islands in the heart of the Persian Gulf. It is led by the Khalifa family and is a Constitutional Monarchy, to underline the fact that it is the most tolerant in the area, probably thanks to the Western influence that began in the 16th century with the Portuguese conquest and continued with the British protectorate.

It is the blatant expression of a geographical area that is trying to establish itself as an economic and financial hub and at the same time does not neglect cultural and leisure aspects.

In the 70s, the Kingdom was famous in the world for the cultivation of pearls.

Today it is known for its oil resources, which cover 20% of its GDP, which provide ⅔ of its tax revenue. These resources are, however, limited compared to those of the “great giants of crude oil” such as Saudi Arabia and Kuwait and it is for this reason that it has been trying to diversify its economy for years, exactly since the end of the 90s of the 20th century.

Since the end of the 20th century, indeed, Bahrain has invested heavily in sectors such as tourism, banking, construction, heavy industry (mostly aluminium) and technology. In fact, it has welcomed the greats of technology and prestigious startups, thus ranking the first place in the MENA area (the Middle East and North Africa). In order to ensure the right infrastructure for business development, the executive has committed to keep taxes and VAT low.

Bahrain’s commercial ecosystem is planned and implemented to be successful, to win.

The small Kingdom is recognized among the best countries in the Area for the ease of doing business. A commitment made with determination that leads to work constantly to revolutionize the industry, introduce and review regulations and launch new initiatives to improve the status quo. The World Bank and the United Nations have recognized Bahrain as the fourth largest growing economy in the world and the existence of the best digital infrastructure among countries in the Gulf Area.

Bahrain’s economy remains, however, closely related to the fluctuation in global crude oil prices, albeit less than other countries in the rest of the region. According to the IMF’s updated forecast of 14 April 2020, due to the outbreak of the COVID-19, GDP growth is expected to fall to -3.6% in 2020 and rise to 3% in 2021 (without prejudice to the global post-pandemic economic recovery). Furthermore, again according to the International Monetary Fund (IMF) estimates, Bahrain’s fiscal deficit will rise to 15.7% of gross domestic product in 2020, compared to 10.6% in 2019.

Fortunately, at least the unemployment rate among citizens is currently estimated to be around 4% and will remain stable in the coming years, although it should reach 4.7% at the end of 2020 and then fall to 3.8% in 2021, again based on the IMF’s World Economic Outlook (April 2020).

It should also be added that ongoing fiscal reforms and more targeted grants under the fiscal balance programme (FBP) have contributed to reducing the fiscal deficit to 8.04% in 2019 (IMF). A number of reforms have been introduced to balance the budget by 2022, but public debt has increased to 101% of GDP and is expected to reach 106% in 2020 and 111% in 2021 (IMF), with considerable gross financial needs. On the other hand, Bahrain’s commitment to monetize newly discovered hydrocarbon reserves of up to 80 billion barrels and about 20 trillion cubic meters of natural gas will improve its economic outlook for the future.

These figures are also the product of the containment measures introduced at the end of March to contain the spread of COVID-19 (including travel restrictions, closure of shops and restaurants and a ban on large public gatherings such as the Bahrain Grand Prix) and regional geopolitical instability.

Given the situation, Bahrain did not stand on the corner and moved quickly.

The measures taken by the government in Manama to stimulate the domestic economy affected by the pandemic, like almost all countries in the world, have been multiple.

These economic measures have been fiscal, monetary and macro-financial.

First of all, since April, a 570 million Bahraini Dinar (BD) stimulus package has been prepared, which is equivalent to approximately $ 1.4 billion or 4.2% of GDP.

The package started in April and will remain in force for at least three months and will include seven initiatives:

1. The payment of salaries for Bahraini people working in the private sector to be financed by the unemployment fund (100,000 people);
2. The exemption of tourist facilities from tourist taxes;
3. The exemption of commercial entities from municipal taxes;
4. Exemption of industrial and commercial entities from payment of the rent to the government;
5. The liquidity fund to support SMEs doubled;
6. The redirection of the Tamkeen programmes (a semi-autonomous government agency which provides loans and assistance to companies) to support the badly affected companies, as well as the restructuring of all debt issued by the company.
7. The payment of electricity and water bills for Bahrain’s people and companies;

A further increase of 5.5 million Bahraini Dinar (BD) in social benefits for low-income families was also announced.

In addition, in response to urgent health needs created by COVID-19, the Council of Ministers authorized the Minister of Finance and National Economy to withdraw from the general account up to BD 177 million or 1.3% of GDP.

Another important announcement that has been made by the authorities concerns their target to reduce the expenditures of non-priority government agencies by up to 30% and to delay some capital expenditures to meet lower oil revenues due to falling oil prices.

On the monetary and macro-financial side, on 17 March, the Central Bank of Bahrain (CBB) extended its credit lines to banks up to BHD 3.7 billion (USD 10 billion or 28% of GDP) to facilitate deferred debt payment and the extension of additional credit.

The Central Bank of Bahrain also followed the Fed’s interest rate cuts in response to the COVID-19 pandemic: the one-week rate on bank deposits was reduced (in two phases) from 2.25% to 1.0%, the overnight deposit rate from 2.0% to 0.75% and the overnight loan rate (in one phase) from 4.0% to 2.45%.

Other key measures taken to support banks and their customers are:

1. The loosening of the loan-to-value ratio for new residential mortgages;
2. The cap on debit card fees;
3. The reduction of the liquidity buffer ratio for retail banks from 5% to 3%;
4. The request to banks to offer a six-month postponement of repayments without interest or penalty and to refrain from blocking customer accounts if a customer has lost his job.

The Central Bank of Bahrain is also checking with the banks on the adequacy of their contingency plans.

What is certain is that the Kingdom is going through a complicated financial crisis, made more dramatic by the price of oil, far from the 90 dollars a barrel that would guarantee solidity to the state and break-even public accounts, according to the International Monetary Fund (at the moment, Brent is bought on the markets at prices equal to half of those levels, so you can well understand how complicated is the fiscal crisis for the state).

The small oil producer must, therefore, strengthen its finances to make up for a coronavirus-induced budget deficit.

To do this, Bahrain has, therefore, engaged banks operating on the international market (Bank ABC, Gulf International Bank, HSBC, JPMorgan, National Bank of Bahrain and Standard Chartered) to issue on its behalf 4.5-year susuk (Islamic bonds) and 10-year conventional dollar bonds.

The size of the bonds is not yet known, but according to fund managers, the new bonds should yield 50 basis points more than the existing bonds, with reference to the bond maturing in 2029, coupon 6.75%, which currently yields 7.45%.

As a result, new bonds are expected to yield 8.25%. A high yield, due to its junk classification.

Junk because in Bahrain the various major rating agencies have given low ratings: “B+” for S&P (Standard & Poor’S) and Fitch, “B2” for Moody’s.

High returns, therefore, but equally high risks.

For Bahrain, as for other countries that invest in foreign currency securities, there is a serious credit risk; although in extreme cases the country always has the chance to release the dinar from the dollar, emptying it and thus increasing tax revenues, as well as reserves.

Furthermore, it should not be forgotten that it can turn again to the other Gulf countries, as it did in 2018. In that year, in fact, he had to apply for a 10.25 billion $ maxi loan (package) from the rich neighbors of Saudi Arabia, Kuwait and the United Arab Emirates to avoid being forced to turn to international bodies and therefore submit to unpopular fiscal and monetary policies. The package in question fortunately came with a zero interest rate and a 30-year maturity per withdrawal.

The Gulf’s friends have just reported that they want to prevent the default of anyone in the area for geopolitical reasons, with the exception of Qatar and Iran.

Manama has in fact represented an ally for the Gulf in dealing with Iranian influence in the region, preserving its stability.

In addition, Bahrain is home of the headquarters of the U.S. Fifth Fleet, as well as being an ally of Washington, and, at the same time, shares with Riyadh the concern arising from the discontent of some Shiite Muslim citizens against the Sunni dynasties in power, and accuses Iran (Shiite) of feeding it more.

Therefore, as Toby Iles, the director of Fitch Ratings, says, the strategic importance of Bahrain and its small size ensured that the country received the support of its Gulf allies.

To this must be added that Bahrain’s main trade relations are with Saudi Arabia, the dominant power in the region.

In fact, just take the first quarter of 2020 as an example, the volume of bilateral trade between Bahrain and the Kingdom of Saudi Arabia has exceeded 3 billion Saudi riyals (SR), which is more or less equivalent to $ 819 million, according to the latest data issued by the Information and e-Government Authority of Bahrain.

This represents growth of 15.3% compared to the same period of the previous year, despite the exceptional circumstances caused by the spread of COVID-19.

This continued commercial growth was attributed to the steady flow of commercial goods between the two countries across the King Fahd Bridge (although passenger access has been temporarily suspended).

Saudi Arabia took the top of the bilateral trade volume between the countries of Bahrain and the Gulf Cooperation Council (GCC) in the first quarter, accounting for 49.1% of the total of $ 1.666 billion.

In second place was the United Arab Emirates (UAE), which accounted for 33.81% of the GCC total at $ 550.4 million.

In these weeks the most important international relations for Bahrain have to do with oil and its price.

The price of oil in fact, as I have already written previously, is fundamental for the fate of the public budget of the Kingdom and to be able to play a role in the geopolitical context has become one of the countries participating in OPEC+^[1], along with Russia, Azerbaijan, Brunei, Kazakhstan, Mexico, Malaysia, Oman, Sudan and South Sudan.

In recent days, members of the Organization of Petroleum Exporting Countries (OPEC), led by Saudi Arabia and OPEC+ countries, have decided to extend the cuts in oil production over the next month so that oil prices can rise again.

According to the terms of the June-agreement, OPEC and OPEC+ will cut production to 9.7 million barrels per day (mbpd) (almost 10% of global supplies) until the end of July.

In addition, OPEC+ has shown itself compact towards disobedient countries such as Iraq and Nigeria, countries that have so far violated extraction quotas.

They have committed not only to align themselves as soon as possible, but also to recover their arrears by September.

The production cuts will then become even more incisive, reaching even 11 million barrels a day the following month, if everything goes according to the plan: the result is not easy to say the truth, complicated also by the ceasefire just reached in Libya (according to Reuters sources, the Sharara deposit – able to produce 300 thousand bg – is already starting again thanks to the truce, after 4 months of blockade).

In July then the prescribed cut will be 9.6 mgb (and not 7.7 mbg as it was likely to be, according to the schedule approved last April, adding the recovery of 1.4 mbg (the missed cuts, according to Energy Intelligence estimates).  This would then lead to a reduction of 11 mbg: enough to move the oil market into deficit, in order to start the disposal of the huge stocks accumulated during the pandemic, which have exceeded one billion barrels in the world.

From now on, the Joint Ministerial Monitoring Committee (JMMC) will meet once a month until December to review the market situation.

The next meeting of the JCCM should be held on Thursday 18 June to review the market situation and recommend a possible extension of the cuts until the end of August.

What is certain is that the OPEC+ agreement is conditional on the respect of production quotas, which will be verified monthly: if someone goes wrong, everything will be skipped.

This is precisely what makes the agreement vulnerable. In the more than three years of OPEC Plus’s existence (and in the sixty years of OPEC’s existence) it has never occurred, even for short periods that all members have honored their commitments 100%.

These cuts in oil production are certainly a breath of fresh air for Bahrain’s economy and its state budget.

It should be noted positively that in this complex situation in the Kingdom at the moment there have been very few redundancies in the private sector, as reported by Gulf News, this demonstrates the cooperation and social responsibility of Bahrain’s companies.

Bahrain’s Minister of Labour and Social Development, Jameel Humaidan, stated that the government’s proactive initiatives through the launch of a financial and economic package to support citizens and the private sector to cope with the impact of current conditions have contributed to the stability of the labour market.

He also argued that the dissemination of false information about a wave of redundancies in the private sector has caused panic for employees, which may affect their productivity in all sectors. Al Humaidan has invited those who have been made redundant to communicate immediately with the Ministry through the available channels.

The Minister also stated that “there will be no decline in the standard of living of citizens” and that “the rhythm of employment has not stopped despite the coronavirus crisis, due to the fact that the ministry has continued to hold electronic job fairs that have allowed all unemployed people to register and participate in the job bank offered, and a good number of citizens have been employed in all sectors during the last period”.

In conclusion, it can be said that Bahrain’s policy of diversifying the economy from its limited oil supplies was truly far-sighted.

Its dynamic economy and a strong banking sector have ensured that the economy, although hard hit, is reacting positively to the weight of a global lockdown and therefore of an international crisis, compared to many other countries. Just look at the level of unemployment.

In this sense The Economic Vision 2030, which was launched in October 2008 by His Majesty King Hamad bin Isa Al Khalifa, is part of a vision of foresight, of seeing beyond.

It is a global economic vision for Bahrain, which provides a clear direction for the continued development of the Kingdom’s economy and to build a better life for every inhabitant.

Vision 2030 is in fact focused on a definition of the vision of government, society and economy, based on 4 guiding principles: sustainability, equity, competitiveness and sustainable development.

By Michele Brunori