bahrain sovereign report

8/10/2019 Bahrain Sovereign Report

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SOVEREIGN RATING REPORT

The Kingdom Of Bahrain


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RATING REPORT

Report Date

June 18, 2012

Rating Analyst

Elham [email protected]

Lila [email protected]

The Kingdom Of Bahrain

EXECUTIVE SUMMARY

Bahrain is classified as a high income economy with a nominal GDP per capi-

ta of US$17,763. Following the global financial crisis, GDP growth rates had

declined across the region. Bahrains GDP growth was amongst the least

volatile amongst Gulf economies during the global economic crisis that fol-

lowed 2008, having posted positive growth throughout this period.

Nevertheless growth slowed down in 2008-2009 before recovering partly in

2010. At US$13,866m, GDP levels in 2011 marked the lowest growth in a

decade, at 2.2%. The country features high investment and savings rate,

which also augurs well for the its economic potential.

Bahrain has historically registered a strong balance of payments position. The

external account marked a significant improvement in 2011 with record high

oil prices and a reduction in non oil imports resulting in a trade surplus

equivalent to 29.2% of GDP. Despite further increase in workers remittance,

current account surplus increased to 12.6% of GDP (FY10: 3.5%).

While Bahrain posted fiscal surplus prior to 2009, oil price dip in this year and

a considerable increase in developmental expenses in 2010 resulted in a fis-cal deficit. The fiscal position is likely to be considerably improved in 2011

with better oil denominated earnings and a lower charge in lieu of develop-

mental expenses. There is considerable untapped potential in Bahrain, in

terms of expanding the tax base and supplementing governments revenues

in future years; development of a strategy in this regard is underway.

The countrys economic structure reflects high dependence on the hydrocar-

Ratings

(June 18, 2012)

Local Currency A- A-2

Foreign Currency A- A-2

National Scale AAA(bh) A-1+(bh)

Outlook Stable Stable

2007 2008 2009 2010 2011

GDP Current 18,472.34 22,151.06 19,621.01 21,929.79 25,825.24

GDP Constant 11,844.68 12,591.76 12,980.05 13,564.36 13,866.14

Growth % 8.4% 6.3% 3.1% 4.5% 2.2%

Trade Surplus % of Current GDP 14.7% 13.9% 11.5% 11.2% 29.2%

Current Surplus % of Current GDP 15.7% 10.2% 2.9% 3.5% 12.6%

Inflation % -5.5% 3.5% 2.8% 2.0% -0.4%

Fiscal Balance % of Current GDP 3.15% 6.57% -6.05% -5.58%

Debt % of Current GDP 14.6% 25.0% 34.8%

International Reserves 4,230.32 3,943.88 3,807.71 5,089.89 4,733.51

Exports 13,633.5 17,315.7 11,873.7 13,647.1 19,650.3

Imports 10,925.5 14,246.3 9,613.0 11,190.4 12,105.9

All figures in US $ millions,unless otherwise stated


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bon segment. About three-fourths of exports and over 80% of government revenues are derived

from oil and gas. To address the situation, Bahrain has done much to achieve diversification. It has

further delineated plans to diversify its earnings profile in Vision - Bahrain 2030. Key areas identi-

fied for growth include the service sector including the financial and tourism sectors and high-tech

industrial sectors, in addition to expanding the manufacturing base of the country, particularly in

chemical and Metal-based industries. However, in the short-term, exports base is likely to continue

being driven by hydrocarbon exports.

Bahrain has typically remained a net creditor to the world. Foreign direct investment (FDI) into thecountry marked a notable improvement in 2011. Investor support and recent efforts at boosting

investors confidence, by hosting globally followed events, will be instrumental to encourage

growth in FDI.

Debt levels have been on a constantly increasing trend, having risen from 14.6% of GDP in 2008 to

over 35% by 2011. The proportion of domestic debt is noteworthy, comprising over 60% of total

debt. Debt servicing remains under 1% of GDP. Growth in debt levels is primarily attributable to the

fiscal deficit over 2009/2010. External debt has been primarily directed towards increased invest-

ment in development projects.

Bahrain is considered a hub of financial services in the region and has earned its reputation as the

largest and most sophisticated centre of Islamic banking and finance. At almost 25%, the financial

sector is the leading component of GDP. Banks in Bahrain took a step back as regional financialmarkets suffered between 2008 and 2010, but have demonstrated resilience during this period and

signs of recovery are beginning to emerge.

Several measures have been taken to strengthen the countrys social infrastructure, by way of

investment in education and healthcare. Public sector reforms including judicial reforms have been

instituted. Overall the enforcement of law and order is strong with minimal disruptions to business

in the past decade. The government is considered largely effective and Bahrain is well positioned

amongst global economies, in terms of ease of doing business. Bahrain also ranks the highest

amongst GCC countries on the economic freedom index.

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Islamic International Rating Agency Rating Report - The Kingdom of Bahrain


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COUNTRY PROFILE

Bahrain - an archipelago of 36 islands located off Saudi Arabias eastern coast, has an area of 760

square kilometres and 161 kilometres of coastline. The King Fahd Causeway connects it to Saudi

Arabia, while another causeway connecting the country to Qatar is under construction. Manama is

the capital and the hub of financial activity. The currency of exchange is the Bahraini Dinar pegged

to the USD at BD 0.376/USD.

Bahrain was historically noted as a pearling and trading centre and oil was discovered in 1932.

Previously a British protectorate, Bahrain declared itself independent on August 15, 1971; thereaf-

ter, it drew up its constitution and elected its first parliament in 1973. The current governing struc-

ture is a constitutional hereditary monarchy. The King (Chief of State), Prime Minister (Head of

Government) and Council of Ministers (cabinet; appointed by the King and headed by the Prime

Minister) form the executive branch of the government, while the legislative branch comprises a

bicameral parliament (al-Majlis al-Watani), a 40-member elected Council of Representatives and a

40-member Shura (Consultative) Council appointed by the King, with both chambers members

serving four-year terms. The judicial branch of the government comprises the High Civil Appeals

Court which is independent.

The present King Hamad Bin Isa Al-Khalifa acceded to the throne in 1999 and introduced a number

of economic and political reforms to empower the people and over time deepened the social

safety net to include amenities like free education, medical assistance, and monetary benefits tothe poor. The year 2011 saw civil unrest, which may also have contributed to delaying the eco-

nomic recovery process that had already begun in the GCC.

Bahrain has cultivated long standing relations with the international community, and has strong ties

with its neighbouring countries in the Gulf Cooperative Council (GCC). These include Saudi Arabia,

Qatar, Oman, UAE and Kuwait. In addition, Bahrains diplomatic relations with USA and UK have

also remained historically robust. At present Bahrain is a member of the United Nations, The Arab

League, WTO and OIC, in addition to the GCC.

Recently, the idea of a gulf union has taken root in the region, the parameters of which go beyond

the existing union of the GCC. Developments on this front could have significant bearing on the

economic and political future of Bahrain.

ECONOMIC STRENGTH

Bahrains real GDP stood at USD 13,866m for 2011 marking a growth of approximately 2.2% over

the previous year. GDP has grown continuously over the years, though growth rates fell in 2008 and

further in 2009. Real GDP growth had been in excess of 5% from 2005-8, before reducing to 3.1%

in 2009. However, the economy posted notable recovery in 2010 as growth accelerated to 4.5%,

before falling in 2011 to its lowest level in a decade. A per capita GDP of $ 17,763 is a fair indicator

of the overall resourcefulness of the country.

The volatility of Bahrains economic growth pattern compares favorably to GDP growth rates in

most GCC countries which posted large dips in their GDP growth trajectory in 2009. The relative

stability of the economic enviroment in Bahrain which has continued to mark year on year growtheach year, despite the global economic crisis, contributes to overall investor comfort.

The quarter by quarter trend of GDP growth in 2011 points to gradual economic recovery and GDP

growth is likely to exceed 4% for 2012, provided the political situation remains stable.

Real GDP growth in 2011 was mostly driven by the transportation and communication segment

(11%), manufacturing (3.9%) and government services (5.6%). On the other hand, growth was con-

strained mostly in the real estate segment. Reduced overall demand stemming from low occu-

pancy rates coupled with liquidity pressures globally has affected investment in this sector nega-

tively.

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Rating Report - The Kingdom of Bahrain Islamic International Rating Agency


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The oil and gas segment has historically been a significant contributor to the economy. Crude oil

production mainly originates from two fields, namely the Bahrain Field and the Abu Saafa Field, of

which the latter contributes 77.6% of annual crude oil production.

Given that petroleum production and refining account for more than 75% of Bahrain's export

receipts, 88% of government revenues, and about 12% of FY11 Real GDP, oil continues to feature

prominently on the countrys agenda. The recently executed Tatweer Petroleums deal with

Occidental Petroleum Corporation of US and Mubadala Development Company of United Arab

Emirates is expected to result in almost tripling oil production of the Bahrain Oilfield from approxi-mately 32,000 barrels a day to about 100,000 barrels. Increased oil output from the Bahrain Oilfield

in 2011 has already arrested the declining rate of Bahrains overall crude oil production over the

past few years, while also increasing its contribution to total production from 17.5% in 2010 to

22.3% in 2011. At the same time investment in refining capacity at BAPCO - the countrys premier

refinery- would also increase refined oil production from 260,000 barrels a day to 360,000 to

400,000 barrels per day, thereby serving local needs as well as contributing to exports. The country

also produces aluminium (using raw material imports primarily from Australia), its second largest

export after oil.

Despite the dominance of oil in the countrys economic structure, Bahrain is one of the regions

most diversified economies. While Bahrain was affected both by oil price trends, as well as adverse

economic conditions prevailing the world over since 2008, it has demonstrated resilience duringthis period. The country is noted as a hub of financial activity in the region, playing host to over 400

financial institutions. It has also consolidated its position as the largest centre of Islamic financial

institutions in the world. As a sizeable component of the GDP at almost 25%, the financial sector

benefitted from the stringent regulatory controls exercised by the Central Bank in the period when

the world economy was booming. Several financial institutions operate in Bahrain including various

Islamic and conventional banks, both in the wholesale and retail banking arenas, and Takaful and

Retakaful firms. Moreover, the government has over the last few years focused on developing other

service industries such as information technology, health care and education.

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Real Growth Rate of Economic Activities

2007 2008 2009 2010 2011

GDP 8.4% 6.3% 3.1% 4.5% 2.2%

Oil 1.1% 0.4% -0.8% 1.8% 3.4%

Non-Oil 9.6% 7.2% 3.7% 4.9% 2.1%

Non-Financial Corporations 7.8% 5.9% -1.8% 5.8% 2.4%

Manufacturing 6.5% 7.3% -1.0% 11.4% 3.9%

Transportation and Communication 11.6% 6.3% 11.0%

Trade 4.4% 3.6% -10.3% 5.6% 1.2%

Real Estate & Business Activities 6.6% 7.5% -8.8% 2.3% -5.0%

Financial Corporations 9.3% 5.6% -4.3% 4.2% 2.6%

Government Services 7.6% 9.3% 5.2% 3.2% 5.6%

2006 2007 2008 2009 2010 2011

Crude Oil (US Barrels Thousands) 66,908 67,262 66,864 66,510 66,376 69,452

-Bahrain Oilfield 13,085 12,552 12,027 11,750 11,635 15,516

-Abu Saafa Oilfield 53,823 54,710 54,837 54,760 54,741 53,936

Gas (Million Cubic Feet-MMCF) 487,932 507,671 538,233 543,425 556,644 552,117



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Nevertheless, in the short-term, oil and gas activities are likely to continue driving the economy,

with continued expansion also in the countrys manufacturing capacity, particularly in sectors such

as metal and chemicals. The vision 2030 the strategic blueprint spelling out the economic direc-

tion of Bahrain - foresees and plans for a shift of Bahrain from an oil driven economy to various

other sectors. It envisages a doubling of income for every Bahraini household by 2030. The vision

sees greater opportunities for the Small and Medium Enterprises and has a clear approach to the

development of entrepreneurship in the country. There is also further potential in the growth of

financial services and other service sectors like tourism and telecommunication, growth in which isanticipated to contribute increasingly to GDP in the medium to long-term.

Moreover, the investment friendly environment in Bahrain represents significant opportunities. Its

comparative advantages in terms of labor cost, energy cost, and tax policies has attracted invest-

ment in a variety of sectors. Bahrain is a popular business destination amongst multinational firms,

also due to its advanced communication and transport

facilities. As a liberal economy, it has been amongst the top

10 freest economies in the world and ranks highest amongst

all GCC states.

The high rate of savings which has remained above 30% for

the last 5 years, and an investment rate of 28% for 2010 also

augurs well for the countrys future economic well-being.

Bahrain Mumtalakat Holding Company (Mumtalakat), is the

investment arm of the Kingdom of Bahrain, having been

established in 2006. It was set up to manage a portfolio of

Bahrains non oil and gas related assets and is therefore

invested in strategic holdings in some of the leading sectors

of the economy including communication, aluminum, and real estate. Total assets of Mumtalakat

stood at US$ 13.5b, and equity of US $8.6b as at December 31, 2010.

FISCAL SUSTAINABILITY

The government has derived its revenue mainly from oil and gas activities in the last five years,averaging over 80%. Fiscal balance has therefore been particularly sensitive to oil prices that under-

went a period of considerable volatility in 2008-10. Revenues from oil fell sharply by 37.8% in 2009,

causing total revenue to fall by 36.2%, and given the lowest average oil price in the last 5 years at

US $ 61.8/barrel. In 2010, revenues increased by 27.4% as oil prices recovered to US $ 79.6/barrel

on average. While fiscal surplus was posted prior to 2009, Bahrain has incurred a deficit since then

with a fiscal deficit to GDP ratio of 6.05% in 2009 and 5.6% in 2010. Whereas this was owed to

record low oil prices in 2009, the fiscal deficit in 2010 is mostly attributable to projects undertaken

by the government, mostly in the area of developmental works and housing. Government spending

has grown steadily over the last 5 years leading to fiscal pressures. Special expenditure undertaken

for defence forces in 2009 and 2008, also contributed to an increase in total expenditure for these

years.

On a national level, the reliance of Bahrains economy on oil and gas is planned

to be reduced considerably over the long term. The government is therefore

working on a strategy to cultivate additional income sources. Income from

taxation has been almost non-existent so far. Bahrains tax regime therefore

leaves significant untapped potential to supplement the governments reve-

nues in future years. The government is delineating a strategy to tap this

source of income through possible imposition of corporate income taxes and

value added taxes. While oil companies are currently taxed at approximately

46% of net profits, an across the board levy of corporate taxes, could result in

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a sizable shift in the governments fiscal structure. The introduction of

VAT, if it materializes, would also be part of a cooperative initiative

amongst the GCC to replace the currently prevailing custom taxes. In

addition, increased revenues are also expected to come from change

in the structure of fees and charges, including increased share of

labour charges and commercial registration fees.

The governments recurrent expenditure has constituted an average of

75% of total expenditure in the past five years. During 2010, expendi-

ture on projects comprised a relatively higher 29.1% (2009: 18.7%) of

total spending as the government scaled up expense on a number of

development initiatives. Typically, spending on manpower or emoluments has been the biggest

component and constituted 33% of expenditures in 2010.

The 2011 budget assumed a 5% increase in revenue and an 18.6% increase in expenses. A substan-

tial increase in grants and subsidies of US $ 1.75b (FY2010: US $ 517m) had been budgeted with a

substantial portion set aside in lieu of grant to the Bahraini family. However, the fiscal deficit is

expected to be considerably lower than projected, given that the average oil prices for 2011 were

at a record high of $ 111/barrel on an average almost 40% higher than the preceding year. Actual

expenditure on development projects was also lower than projected and together with increasedoil and gas revenues, it is likely to reduce the (yet to be reported) total fiscal deficit significantly,

and possibly result in a primary surplus.

Oil prices in the first five months of 2012 indicate volatility. While prices continued their upward

rally in the first four months of this year, there have been significant downswings in May and June

2012, having fallen below $100. However average prices are likely to remain above $80/barrel,

which is a conservative price employed to prepare governments financial budgets and estimates.

GCC governments have recently announced a financial package for Bahrain, amounting to USD 10b

to be disbursed in equal annual installments over the next 10 years. This amount is expected to be

directed toward major infrastructure undertakings with a sizeable portion also to be deployed in

housing development projects. Availability of these funds may further relieve fiscal pressures.

DEBT MANAGEMENT

The governments debt rose in tandem with the increase in the deficit level and followed a steep

incline from 2009. Total outstanding public debt increased from US$ 3.2b in 2008 (14.6% of GDP) to

US$ 4.9b in 2009 (25.0% of GDP) and further to US$ 7.6b in 2010 (34.8% of GDP). Further increase

in borrowings in 2011 is likely to push the debt to GDP ratio upwards, while remaining below 40%.

At 62%, domestic debt constitutes a significant proportion of total debt. The governments expo-

sure to exchange-rate volatility and its subsequent implications on the nations debt repayment

capacity are relatively minimal. In absolute terms, interest payments amounted to about $ 241m,

equivalent to about 4% of recurrent expenditure and 1% of GDP. While also on a gradually increas-

ing trend, these indicators depict the strong servicing capacity of the Kingdom of Bahrain. The

increasing trend of development bonds and loans depicts higher investment in developmental

activities including deployment in infra-

structure projects. Nevertheless, the

rising trend in debt to GDP ratio should

be restrained.

Fiscal reforms under consideration can

potentially diminish the incline in debt

levels. The debt to GDP ceiling stood at

60% and is not likely to be breached in

6

Millions in USD 2010 2011 (3 Q)

T-Bills 1,516 2,154.3

Al Salaam Islamic securities 95.7 143.6

Islamic Leasing Securities 2,287.2 2,925.5

Development Bonds 2,593.1 2,593.1

Total Securities in Issuance 6,492 7,816.5

i

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the foreseeable future, even if fiscal position is stressed using considerably

lower oil prices than currently prevailing trends.

Total securities in issuance including T-Bills, but excluding loans (development

loans and other local loans) increased to US$ 7.8b by end 3Q 2011, up from

US $ 6.5b at previous year-end.

As short-term debt in issuance continues to grow, the proportion of medium

to long-term borrowing in total loans, is on a declining trend and hovers about70%, having fallen from 76% in 2010. Going forward, stabilization of the fiscal

position as expected will play an important role towards maintaining the current debt to GDP ratio.

EXTERNAL ACCOUNT

The Balance of Payments position has been generally healthy, given the persistent surplus recorded

in the current account. An improved current account surplus of 12.6% to GDP at US $ 3.25b was

posted in 2011, vis-a-vis 3.5% (US $ 770.7m) in the preceding year. This was largely driven by an

improvement in trade balance to US $ 7.5b (2010: US $ 2.46b), and despite the significant outflow

on account of net transfers (workers remittances) and investment returns.

Oil exports, which make up more than three-fourths of the countrys exports, are the main con-tributor to the overall favourable trade performance since 2010. Bahrains exports stood at US$

19.7b in 2011 compared to US $ 13.6b in 2010, and were supported mostly by escalating oil prices.

Imports on the other hand have increased at a slower pace, having grown to US $ 12.11b relative

to US $ 11.19b in 2010.

Bahrains imports are also denominated by crude oil, which constitutes about 60% of total imports.

Import constitution reduces the sensitivity of the overall balance of payments position to oil price

changes, which nevertheless remains substantial. A positive development in 2011 was the reduc-

tion in non oil imports vis-a-vis an increase in non oil exports, reducing the non oil trade deficit to

US $477m - the most favourable since at least 2005. As a result of oil price movements and the

trends in non oil imports during the last year, the trade surplus had improved considerably to 29.2%

of GDP (2010:11.2%). The year 2012 may witness increased volatility in oil prices, given the pricetrajectory so far, which may impact the surplus position for the year.

Saudi Arabia is the countrys largest export market with a share of 23.2% in total non-oil exports,

whereas the GCC as a block accounts for 50% of countrys non-oil exports. The principal import

sources are China, Brazil, and USA. Major imports other than oil include electrical appliances,

machinery and transportation equipment.

In order to promote bilateral trade, Bahrain has signed numerous trade agreements, the most sig-

nificant of which is the free trade agreement with USA. The signing of this agreement in 2005

rendered most products tax exempt under this agreement. The countrys trade policy is liberal with

no quotas levied on imported products and services. Under the customs union with GCC countries,

import tax is standardized on all non GCC goods, while no taxes are levied on GCC produced goods.

The government is also planning an export oriented initiative of setting up an Export DevelopmentCenter (EDC), with a focus on developing non oil exports and promoting the SMEs. These efforts

are directed at diversifying the exports base.

Every year, around US$ 1.5b - 2b flows out of Bahrain in terms of remittances as the expatriate

population comprises a larger proportion of the labor force at 54%. Bahrain nevertheless posted an

improving current account position in 2011.

Reflective also of free capital mobility in the economy, Bahrain remained a net creditor to the world

at large, with a net international investment position (IIP) at $ 20.4b in 2011 higher than $ 16.95b

in 2010. According to the Central Bank of Bahrain Statistics, the Inward Foreign Direct Investment

rose to US$ 15.93b in 2011 as compared to US$ 15.15b in 2010. The liberal investment environ-

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ment in Bahrain offers lucrative investment opportunities to foreign investors and the Government

also gives various fiscal incentives to the investors in terms of a favorable tax policy and other

incentives. Nevertheless, Bahrain saw yet another year of net investment abroad and amounting

to about US $ 4b. While there was a net inflow of portfolio investment into the country amounting

US $ 5.5b, net outflow of capital in lieu of foreign direct investment and other investments amount-

ed $ 9.5b.

EXCHANGE RATE MANAGEMENT AND MONETARY POLICY

The Central Bank of Bahrain (CBB) has maintained a fixed exchange rate between the Bahraini dinar

(BD) and the US dollar (USD) at a rate of BD 0.376 per USD with no restrictions on capital mobility.

Effectively the peg has not deviated from 0.376 to the USD since 1980. This has facilitated trade in

the GCC region wherein peg to US $ has remained a dominant arrangement. External trade is a

considerable proportion of GDP, underlying the benefits of the peg, and has protected interna-

tional trade and investment from exchange rate volatility in times of price instability, while also

keeping inflation under control. The Bahrain Dinar is pegged to the USD since 2001, prior to which

it had been pegged to the IMFs SDRs (Special Drawing rights).

Inflation in Bahrain has remained mostly in check. The average inflation for 2010 was at 2% com-

pared to a high of 3.5% recorded in 2008. The CPI index has fallen by about (0.4%) in 2011, on theback of reduced demand. Asset prices remained largely static following a substantial drop from the

peak of 2008.

Because of the fixed exchange rate regime, CBB policy rates follow US interest rates. This alignment

was reflected in the reduction in the overnight deposit and repurchase rates following the com-

mencement of policy accommodation in 2007 by the US Federal Reserve (Fed). The CBB had main-

tained interest rates at low levels since 2008, when short-term T-Bill yields fell to 2.8% from 4% in

2007, falling further in 2009 to 0.9%. Current yields on 3 month t-bills at around 0.7% have

remained largely stable since 2009.

FINANCIAL SYSTEM STABILITY

The financial sector remained one of the key contributors to Bahrains economy, accounting for

around 25% of GDP in 2011. Bahrain is the largest financial centre in the region. Islamic banking

received notable impetus in Bahrain, and the country is considered as the hub of Islamic banking.

Number of financial institutions operating in Bahrain as at FYE10 is over 400, of which retail banks

are 29 (6 Islamic) and wholesale banks are 75 (20 Islamic).

Central Bank of Bahrain (CBB) is responsible for licensing and supervision of banks, insurance pro-

viders, and other organisations engaged in investment business. From 2008 onwards, Risk Asset

Ratio (Risk Weighted Capital Ratio) is calculated as stipulated under the Basel II Accord with the

minimum capital requirement set at 12%. Actual capitalization levels in the banking sector tend to

be on the higher side and continue to be above minimum requirements in 2010 and 2011. Over

95% of credit outstanding has been disbursed to the private sector. The CBB is noted in terms of its

expertise as a regulator and banking sector related controls contributed significantly to dampeningthe effect of the global financial crisis on the local environment.

The banking sector enjoyed a period of rapid growth from 2003-2007 where total assets grew from

$100.93b (2003) to $245.8b (2007). However, the financial crisis had an impact on the industry,

where the assets grew marginally in 2008, followed by a period of decline in assets, which have

now reduced to US$ 197.12b in 2011. On an overall basis, wholesale banks represent around two-

thirds of the total assets. The decline in the total assets of the banking sector has come primarily

from the wholesale banks.

While the banking sector has not featured pronounced recovery, following the slowdown subse-

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quent to 2008, signs of a turnaround are beginning to emerge, with retail banking being in the

forefront and an improvement in the sectors profits. Business volumes in the wholesale banking

sector continue to decline, although the ongoing deleveraging in the sector stems mostly from a

strategic decision to reduce risks, without impairing profitability.

There are 49 companies listed on the stock exchange with a total market capitalization of USD 16.63b.

The stock index has been declining and trading volumes are at an all time low at 520.22m, down from

a peak of 1,675.843m in 2008. At 1,143.69, the index has posted a negative return of 20.15% in 2011.

SOCIAL AND INSTITUTIONAL STABILITY

In a coordinated effort by ministries and government agencies, the Vision 2030 of Bahrain was

launched, which lays out the nations ambitions in the areas of social and economic uplift.

Structured around the principles of Sustainability, Competitiveness and Fairness, the vision docu-

ment culminates into the larger aim of doubling the Bahraini household income by 2030. The vision

is crystallized into implementable objectives in the National Economic Strategy, which provides the

blue print of specific initiatives to be undertaken by each governmental agency, aimed at Individual

Development, National Economics, Healthcare and Education.

Physical infrastructure of Bahrain is fairly advanced with good roads, ports and telecommunication

system. Restoring investor confidence has been a primary national objective. The recent hosting ofthe Formula 1 Gulf Air Bahrain Grand Prix attracted 28,000 spectators and contributed to an

improved investors perception worldwide. Bahrain is considered as the freest economy in the GCC

and ranks amongst the top 12 economies on a global scale as ranked by the Economic Freedom

Index. Bahrain has registered a steep improvement in this area over the last few years being ranked

24th in 2007.

The rule of law prevails with low crime rates. However, as per the latest release of statistics by

Transparency International, the country ranks 46th in incidence of corruption. This area needs

address, in view of Bahrain ranking being the lowest amongst the GCC. This, as well as the fact that

strengthening of public sector institutions is a key goal under the National Economic Strategy, has

driven a number of public sector reforms. A Tender Board has been established as a fully indepen-

dent body which ensures that government contracts are awarded in an above board manner.There has been considerable effort in cultivating public and social institutions in Bahrain within the

last one decade. Social infrastructure like the judicial system, healthcare and education has

improved in recent years and continues to be the focus of current reforms. Judicial reforms insti-

tuted include licensing exams and performance evaluation for all legal professionals and creating

specialized courts, while also introducing private notary services.

The governments focus on social uplift has been considerable, and there has been measureable

success on this front. A notable healthcare initiative is the establishment of a National Health and

Regulatory Authority which was set up to ensure that health care institutions, professionals and

pharmaceuticals are at par with minimum international standards. Bahrain has recently completed

the construction of the King Hamad University Hospital, equipped with state of the art medical

facilities and most advanced information systems. Another initiative in this area is the establishmentof National Emergency Medical Services. Educational reforms have been targeted at vocational train-

ing as well as raising academic standards to be at par with internationally employed curriculums.

Bahrains population is estimated at 1.235m as at end of 2010 and has grown at a rapid CAGR of

9.39% over the last one decade. A census is periodically conducted, with the most recent having

been concluded early during 2011. According to the census, more than three fourth of the popula-

tion is in the 15-64 years age bracket with 64% of the population being male and 38% female. The

gender disparity is explained by the sizeable non-Bahraini population which comprises 54% of the

total population and more than three-fourths of the labour force. The proportion of non-Bahrainis

has been on a continuously increasing trend since 1991, when it stood at about 36%, and is attrib-

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utable to the boom in labour-intensive industries such as construction and trade.

Census data also reveals that 43.8% of the population is employed. According to most recent press

statements issued by officials of the labour ministry unemployment rates stood at about 3.7%, dur-

ing 2010. Participation of women in the labour force has hovered around 12% for the last few years.

The labour policy in Bahrain is gradually shifting away from quota imposition and towards greater

investment in human capital, with the objective of fostering increased competitiveness of Bahrainis

in the global employment market. This objective is also encapsulated in Bahrain 2030 that sees theempowerment of Bahrains populace as a key ingredient to the countrys economy.

A major initiative in terms of labour improvements is the setting up of The Labour Market

Regulatory Authority (LMRA) and Tamkeen. These initiatives have been instrumental in decreasing

the unemployment rates that had exceeded 15% in 2006 to their current levels. LMRA levies a fee

on companies that employ non-Bahrainis and funds are used for continuing education and employ-

ment facilitation of Bahrainis. These proceeds are utilized towards projects undertaken with the

express objectives of training the Bahrain workforce and promotion of entrepreneurship. The

labour fund Tamkeen provides training, wage subsidy programs and support for SMEs. An employ-

ment benefit program has also been initiated, which in addition to monetary support to the unem-

ployed, also maintains database of unemployed individuals and vacancies, to facilitate employ-

ment.

REGIONAL AND INTERNATIONAL RELATIONS

Bahrain maintains strong ties with major global powers such as the United States and the United

Kingdom as well as its fellow GCC states. The US continues to maintain its Gulf Naval headquarters

in Bahrain. Meanwhile, there have been instances of financial and/or military assistance from GCC

states in the past. The $10b grant to Bahrain from the GCC announced late in 2011 is the most

recent illustration of support from neighbouring states.

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