Focus: Bahrain’s Economic Influence

Leading Light

Feb. 18, 2016

A market of controllable proportions, it has been a first adopter for strategies of diversification and low barrier to market entry that other Gulf governments have recently begun to pursue in earnest. It is one of the easiest places to do business in the region and has long acted as a base for financial institutions and insurers looking to do business across the region.

Bahrain's drive to diversify has been highly successful, in the first 9 months of 2015, the non-oil sector grew at 4.2% in year when many sectors were flat or even down across emerging markets. Of the nation's GDP, today only 20% comes from the hydrocarbon sector, although the government still depends on a higher percentage for revenues.

In late 2015 and early 2016, Bahrain introduced policies that are likely a bellwether for the rest of the region, depending on a variety of factors. The oil price slump has extended significantly longer than many analysts anticipated and has forced Gulf nations to reconsider spending that seemed guaranteed just months ago. Bahrain has already enacted reforms that other nations are currently considering. It raised the price of the fuel by 56.3% for the first time in 33 years in early 2016, and ended state subsidies on meat in 2015.

Bahrain and the rest of the region face a storm of factors set off by falling oil prices. Central bankers and aggressive investors have begun to eye the region's dollar pegs suspiciously, especially that of Saudi Arabia, who has been burning through currency reserves to maintain its peg as well as suppressing the riyals futures market domestically. Borrowing costs for all of the Gulf governments look set to rise in the near future, and the IMF is advising the majority of the region's governments on austerity packages.

Bahrain has remained at the forefront of major changes that some say are overdue in the Gulf, and has signaled repeatedly that it plans to privatize or at minimum sell state owned shares in some of the largest firms in the country. It trails Saudi Arabia, which has made great strides in privatizing state held firms, and has even publicly floated the idea of selling shares in Aramco, likely the world's most valuable company. Until now, the political will was not present to further privatize Bahrain's economy.

Despite the impressive work that has been done to diversify the Bahraini economy, there is a significant opportunity to make the country's operations leaner and better equipped to weather future turbulence. Recent changes are almost unprecedented and show excellent momentum for further reform, which may unlock significant growth potential as well as showing the way for other Gulf states. As usual, Bahrain has a leading role to play in the region's future.