FEDERATION OF EURO-ASIAN STOCK EXCHANGES
ANNUAL REPORT APRIL 2009
BAHRAIN STOCK EXCHANGE
ECONOMIC AND POLITICAL DEVELOPMENTS
Political Outlook
In 2009-10, the rule of the king is expected to
remain broadly stable, but discontent over
the pace of political liberalization and the
persistence of economic inequalities will
result in social unrest. Tensions over political
and economic issues will be exacerbated by
sectarian strains, as many of the country's
majority Shia population believe that they are
economically and politically marginalized by
the Sunni ruling family, which holds most of
the important cabinet posts.
The US will remain one of Bahrain's key
international allies and the US Navy's Fifth
Fleet will retain its base in Juffair, on the
outskirts of the capital, Manama. From the
government's point of view, the alliance with
the US helps to guarantee the country's
security against external threats, at least from
other states. The foreign minister has called
for a regional organization to include Iran,
Israel and the Arab states, and the country
may facilitate back-channel talks between
the US and Iran.
Economic reform efforts are driven by the
need to diversify the economy away from oil
(as output is declining), stimulate private-
sector growth and foreign investment, and
address high unemployment among Bahraini
nationals. "Bahrainization" quotas for
employing nationals have failed to solve the
problem and so the government is pursuing
other initiatives, including a 1% levy on
salaries to fund an unemployment insurance
scheme, and a levy on employers for each
expatriate they employ, which funds training
for nationals. The state's ability to upgrade its
infrastructure and invest in education will be
constrained by the dependence of the public
finances on oil revenue, which is unlikely in
2009-10 to match the heights seen in 2007-
08.
Economic performance
Economic growth is likely to slow sharply in
2009, to 3.4%, picking up only slightly to
4.3% in 2010 as a global and regional
economic slowdown bites into demand for
Bahrain's exports of goods and services. As
a small, open economy with a domestic
market of just 1m people, Bahrain's
economic growth is highly dependent on
regional demand, particularly for its financial
services, the largest sector of the economy.
Nonetheless, growth in Bahrain, as in the
rest of the Gulf Co-operation Council (GCC),
is likely to be higher than in most countries of
the world given the savings amassed by
regional governments in the recent years of
very strong oil prices.
Domestically, private consumption should
expand in 2009-10 as the population rises
and as wage increases agreed in 2008 feed
through into household spending. However,
employment growth is likely to be low or flat,
and private consumption will therefore grow
more slowly than in 2007-08. Despite a likely
cut in interest rates in 2009, consumer price
inflation is expected to moderate in 2009-10,
because of slower domestic demand growth,
a fallback in world commodity prices in 2009
(and only minimal price growth in 2010) and
the projected stabilization of the US dollar
(and thus the Bahraini dinar) against the
Euro and other world currencies. The official
consumer price index is widely believed to
understate the real extent of price pressures,
having been in the region of 3-4% throughout
the first half of 2008.
Bahrain is preparing for a currency union
with four other GCC states--Saudi Arabia,
Kuwait, Qatar and the UAE. A GCC single
currency was originally scheduled for
introduction in 2010, but is likely to take
longer, as the member states pursue
convergence on inflation and seek a
consensus on the functions and location of a
central bank. In the meantime, the Central
Bank of Bahrain is expected to maintain the
dinar's peg to the US dollar at the rate of
BD0.376:US$1 that has been in place for
over two decades. The authorities value the
currency peg because it minimizes
exchange-rate risk associated with dollar-
denominated oil export earnings and acts as
a nominal anchor to reassure investors. They
will resist domestic pressure for a one-off
revaluation as a bid to address inflation
temporarily, since this would damage the
Central Bank's credibility and would have
only a limited impact on inflation, and since
such pressure is likely to ease as the US
dollar stabilizes against the Euro.
Determinant of the trade balance, with oil
accounting for around 80% of export
earnings and over half of the import bill. The
trade and services balances are forecast to
remain firmly positive, with declining demand
for Bahrain's exports of goods and services
partly offset by lower demand for imported
goods and services. The income balance is
likely to widen in 2009 as the global financial
turmoil undermines income on dividends
from foreign assets, but should begin to
narrow in 2010. The current transfers balance
will also remain in deficit because of
dependence on expatriate labor, which will
continue to provide most of the private-
sector workforce.*
* The Economic Intelligence Unit Ltd. October 2008
Key Information Contacts
Central Bank of Bahrain http://www.cbb.gov.bh/cmsrule/bmaindex.jsp
Ministry of Finance http://www.mofne.gov.bh/English/eindex.asp
Bahrain Government http://www.bahrain.gov.bh
Economic Development Board http://www.bahrainedb.com
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