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Tighter times for Bahrain.

Article Excerpt
Byline: Michael Imeson

Bahrain has been hit hard by the global credit crunch and economic downturn. Although it is the most diversified and least indebted country of the Gulf Co-operation Council (GCC), and has been a major financial centre in the region for more than 40 years, it became the first to have its sovereign credit rating outlook downgraded from "stable" to "negative" by Moody's at the beginning of the year.

The reason given for the re-rating was the country's reliance on finance and hydrocarbons. Oil and gas production accounts for just under 20% of gross domestic product (GDP) and finance for more than 25%. Bahrain has more than 400 licensed financial institutions, most of which are wholesale operations generating revenues from outside the country.

The Bahraini government announced in February it would issue $800m in bonds to finance house building and support the economy. "Anecdotal evidence suggests that housing market activity has started to soften," says the latest economic research report from Gulf Finance House, the Bahraini Islamic investment bank. "We are concerned about the growth prospects of Bahrain, given the steep decline in crude oil prices," add the authors.

Bahrain's real GDP growth is expected to decelerate to 3% this year, compared with 6% in 2008 and 8% in 2007, according to Kuwaiti investment company Global Investment House. Although this forecast compares favourably with those for Saudi Arabia (1.4%), the United Arab Emirates (2%) and Kuwait (2.5%), it is smaller than Oman's (3.5%) and Qatar's (9.4%).

The steep fall in crude oil prices from their peak last summer, output contraction across other key economic sectors, tight liquidity conditions and the fall in asset prices will make 2009 a challenging year for the GCC, says Dr Ala'a Al-Yousuf, Gulf Finance House's chief economist. "As we anticipated in our previous report, the GCC has now firmly joined the last group of countries to be impacted by the global financial crisis," he says. On the plus side, the situation is creating attractive opportunities for cash-rich investors looking for gains over the medium to long term.

Most GCC banks will see profit contractions as a result of slower growth in business volumes, believes Mr Al-Yousuf. Some banks will need to recapitalise or merge and, in...

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