Bahrain Review

Economic momentum growing

The Midal plant, owned equally by Al Zayani Investments and Saudi Cable

Bahrain is looking at signs the economy may be rebounding but at least one major ratings agency cautions the kingdom may not yet be out of the woods.

The optimism stems from a 10 per cent surge in local bank deposits, a growth of 5 to 7 per cent in loans and expectations that the country’s banks will see a tidy increase in profits of 7 to 10 per cent.

A clutch of top advisers in the financial and development sectors has joined in the chorus, estimating a GDP growth of 3.9 per cent. They see oil production stabilising and the service sector leading steady growth.

The Prime Minister, HH Prince Khalifa bin Salman Al Khalifa, has hailed what is being termed a growing economic momentum. Not everyone though is upbeat. Standard & Poor’s Ratings Services believes unresolved domestic political tensions in Bahrain will cause annual GDP growth to stagnate over the next four years. It affirmed the Gulf kingdom’s long- and short-term foreign and local currency sovereign credit ratings at BBB/A-2 with a stable outlook and said fiscal dependency on sustained high oil prices were also constraining ratings.

“The ratings are constrained by our view of Bahrain’s unresolved domestic political tensions and its fiscal dependency on sustained high oil prices and international donor support,” the S&P report said.

“The ratings are also constrained by stagnating real GDP per capita growth, which we forecast at barely one per cent in 2014-2017. This is low compared to peers at similar wealth levels,” it added.

It noted that Bahrain’s fiscal vulnerability to oil prices remained “acutely high”, but it went on to say that the stable outlook reflects its opinion that political risks and the potental for sharp oil prices declines are unlikely to be severe enough to lead to a downgrade in the near term.

Oil and gas revenues account for 87 per cent of Central Government revenues. The non-oil portion is driven by the financial industry, which accounts for roughly 16 per cent of GDP.

Al Zayani: strengthening the industrial sector

The government has indicated that belt-tightening measures would do a lot of good. Jarmo Kotilaine of the Bahrain Economic Board has been quoted as saying the government is looking at linking  subsidies to those most in need of assistance and introducing fees to boost government revenues.

Central Bank governor Rasheed Al Maraj also touched on the topic saying “we are very much aware that the level of consumption in energy and some of the foods is not sustainable.”

Oil being the important commodity it is to Bahrain’s economy, it will continue to attract government investments such as a $4.8 billion expansion and modernisation of the Bapco refinery. Infrastructure development in general will also see investments of $2.2 billion for Line 6 at Aluminium Bahrain, $1.2 billion for an expansion of Gulf Petrochemical Industries Company and another large investment for modernising Bahrain International Airport.

The key causeway between Bahrain and Saudi Arabia, which suffers from severe congestion, will see an injection of funds for a parallel railway line as a means to remedy the road congestion problem. And this year, the government decided it will spend $7.9 billion on housing units by 2017.

Bahrain’s Ministry of Transport will be inviting bids for deepening the channel at the Khalifa Bin Salman Port. The port has been capitalising on congestion at Dammam and other Saudi ports with shipping lines diverting to Bahrain to save time. Besides, Khalifa Bin Salman Port has Bahrain-bound cargo to handle, making channel-deepening a key project.

The positive aspect of these investments is the opportunity they lend to local construction companies who may share in the contracts pie.

It is clear the government is trying hard to keep the growth momentum growing and some investors have been encouraged to set up their projects in the state despite security issues still to be resolved. Very recently it was announced that an Indian firm, Chemco Group, plans to establish a plastic packaging factory. The plant will be located at the Bahrain International Investment Park and manufacture polyethylene terephthalate (PET) preforms. Chemco’s investments could reach $10 million by 2015 and grow to $20 million with expansions.

Importantly, the plant will hire more than 80 staff by the time it is ready and some 20 more in the next phase. The remarks of Chemco Group chairman Ram Saraogi could serve as a poster slogan and sound bite for the Economic Development Board. Saraogi said his company chose to set up shop in Bahrain due to its “unique business environment, diverse economy and locational advantages making it a gateway to the Gulf market.”

Bahrain’s industry and commerce industry ministry was also elated by the announcement that Gulf Biotech Company, backed by Saudi investors, would set up a new insulin factory at an investment of $93 million. Backing the venture is an alliance involving global multinationals Merck, Helm and Linde.

It will generate jobs for 250 Bahrainis and Saudis when it starts operations by the end of 2015 with an initial production capacity of 42 million units per year. Gulf Biotech is an influential company with key shareholders including Saudi-owned Al Roaya Gulf Group Holdings and the chairman of the company’s board being Saudi Prince Sultan bin Fahad bin Abdulaziz.

Early this year, Al Zayani Industries will set up a plant to make fused aluminium abrasive material in granular and powder form which can be used for cleaning rust in the steel industry. It will be totally export-oriented, focusing on exports to Southeast Asia, Brazil and Europe. Al Zayani has a 30 per cent stake in the enterprise with Paris-based Imerys SA holding the remainder. Investment in the project is $30 million and some 120 jobs will be generated, said entrepreneur Hamid Al Zayani, who is also managing director of Midal Cables, a company in which 50 per cent of the shares are owned by Al Zayani Investments and another 50 per cent by Saudi Cable.

Midal Cables, which has an annual production capacity of 300,000 tonnes, a third of Alba’s output, supplies globally and currently manufactures from its plants in Bahrain and Turkey. It will start manufacturing in Australia, Saudi Arabia and Mozambique this year. Al Zayani said the decision to produce from Mozambique and Australia was prompted by important contracts it had received from Sub-Saharan Africa and Australia.

“The whole idea of our overseas plants is to serve customers locally. Each of the locations has FTA agreements,” said Al Zayani. Midal Cables will expand its production capacity in Bahrain once its raw materials supplier Alba completes its own expansion.

Al Zayani said companies including ones of the Zayani group, were affected by the congestion at the Bahrain-Saudi Causeway. He called for a simplification of procedures and the creation of a dry port in Bahrain so goods can be cleared by customs authorities of both Bahrain and Saudi Arabia. Another solution he backs is the establishment of a ro-ro service to move goods to smaller sea ports in Saudi Arabia through the coordination of both countries.

Bahrain’s industrial sector is receiving support from specialists in warehousing and logistics such as Majaal Warehousing Company which completed its $45 million project across three phases at Bahrain Investment Wharf (BIW) to house firms operating as manufacturers or distributors of consumer goods. Majaal was recently hired by Al Mazaya Holdings of Kuwait to oversee the development and leasing of a $20 million industrial facility at the wharf. It is likely Majaal will sign other similar deals in the near future. Close to 25 companies are now operating in Majaal’s current development and they have collectively invested upwards of $100 million in terms of product and machinery.