By Vladimir Remmer
The world financial equilibrium was devastated in 2006 when the US housing market bubble finally burst.
Real Estate prices plummeted, wiping out securities tied to housing and striking financial institutions globally. The human toll was staggering and manifested in mass evictions, bankruptcies and foreclosures, combined with catastrophic job market contraction and prolonged unemployment.
The consumer wealth adjustment, estimated to be trillions of US dollars, inhibited economic activity throughout most of the world and led to the 2008 – 2012 Global Recession. I believe it was caused, in part, by the misguided attempt on social engineering, Viz. set of events tied to Dodd-Frank legislature, lauded at one point as a great strife on behalf of the lower strata of American society, as it was the social engineering spearheaded by the Obama administration and arguably designed to emulate elements of quasi-socialism in America that greatly impeded US economic recovery and labour market expansion, sending destructive shock waves throughout the world political and economic landscape.
However, the causality of the Global Recession and its perpetuation are not part of this oeuvre, the point has to be made as it transcends the US domestic province and casts its destabilising effect on current economic conditions and state of Collective Action in the greater Middle East.
At the time of Obama’s catalytic speech to Muslim World in Cairo in June of 2009, the most vulnerable of regional states already experienced catastrophic contraction in industrial outputs, depleted foreign currency reserves, out of control rise in cost of living, infrastructure deterioration combined with chronic high unemployment, especially, among youth, acceleration in group interaction leading to political and religious cluster coagulation. Rising density and pervasiveness of economic and socio-political grievances culminated in uncontrollable anger that manifested in further radicalization and a gradual increase in violent content of the collective action movement.
In stark contrast, states members of the Gulf Cooperation Council fared remarkably well the vagaries of Global Recession. During the period of buoyant world economic expansion the Kingdom of Bahrain exerted due effort and treasure to diversification of it’s domestic economy while pursuing reforms and initiatives that earned the country high economic freedom score, that in some aspects overtook the US, making it the 13th freest in the 2014 Index. To the day Bahrain continues to be the freest economy in the Middle East/North Africa region, and its economic freedom score is well above the world average. As part of its diversification program, Bahrain implemented a Free Trade Agreement (FTA) with the US in August 2006, the first FTA between the US and a Gulf state.
Litany of risks can not be downplayed and it is notable how the Bahraini economy has withstood the many negative forces weighted in it. The worldwide deterioration in sales, profitability, and cash flow has initially exacerbated the weakness in capital spending, decrepitude was evident across the board, including in earnings of the foreign affiliates of firms headquartered in Bahrain. Pressure on profit margins has been unrelenting, yet despite of noticeable downshift in world economic activity, accentuated by synchronous downward adjustment in oil price combined with negative shift in pricing power on its finished products on the world markets Bahrain economic activity has held up remarkably in the face of a difficult adjustment toward a more sustainable pattern of expansion.
Bond markets showed faith in the country’s short and long-term economic stability and the consumer price index remained nearly unchanged wile underlying inflation kept at a modest rate as resource utilisation eased. During set period economy continued expanding by approximately four per cent year to year, still slight erosion of growth is expected in 2014.
Hydrocarbon outputs and processing, the key determinant of Bahrain’s economic activity, accounts for over 60 per cent of export receipts, 70 per cent of government revenue and 11 per cent of GDP. [Mundi] Levels of hydrocarbon output remained largely unchanged except for 2013, when production was shut down for several month due to technical disruptions. Recovery in domestic hydrocarbon sector in 2013 expected to account for robust 6.2 rate of growth before returning to its average four per cent in 2014.
Bahrain has been successful in inducement of capital spending where main benefactors are such high value-added activities as hydrocarbon extraction, transport, refinement and aluminum production. As the result of exploration and improvements in process and technology the oil output capacity is expected to rise from the current 40,000 bpd to 100,000 bpd in 2017. To increase capacity utilisation Saudi Arabia and Bahrain will lay a 350,000 bpd oil pipeline between the two countries. The pipeline will replace an aging 230,000 bpd link and will help Bahrain Petroleum Co. expand its 267,000 bpd Sitra refinery to up to 460,000 bpd pf capacity. Crude oil will be transported from Saudi Aramco’s Abqaiq plant via the 115 km pipeline, 74 km of which will run overland and the rest under the Gulf.
According to Oil and Gas Holding Co., new technologies and deep sea drilling will allow increase in the current gas output at Bahrain field and off shore in near future from current output of 1.5 billion cubic feet a day to well beyond 2.5 billion cubic feet a day ending Bahrain’s dependence on gas imports. However, in case need for the gas import resume, $500 million liquefied natural gas terminal will be constructed to allow potential for processing as much as 500 million cubic feet a day. In concert with expansion of natural gas production, the Aluminum Bahrain BSC, one of the country’s largest industrial consumers of gas, is moving ahead with a planned $2.5 billion augmentation project adding a sixth production unit, those increasing future expected export receipts and, of course, the immediate benefit in employment opportunities for local skilled workforce.
Potential future higher demand for aluminum products and price increase on refined hydrocarbon, the main sources of country’s export revenues, make it possible to maintain a significant trade surplus and act as additional source of improvement in government purchasing power with federal sector employee households and recipients of federal assistance as additional beneficiaries. Liquidation of excess inventory, resulting from global recession, will soon come to an end, and it’s termination will spur local production and incomes. However, timing and force with which that faze in expansion plays out will depend on the behavior of final demand domestically and worldwide. At this time domestic demand remain strong as healthy economy and advancing world equity markets provide an extra spur to household spending.
Highly developed communication and transport facilities make Bahrain home to numerous multinational firms with business in the Gulf. Bahrain’s ship and rig repair yards showcase experience and sophistication in providing marine asset optimization, featuring portfolio of capabilities largest in the Arabian Gulf, elevating Bahrain to status of Middle East hub for marine expertise.
The evident attractiveness of investment opportunities in the Kingdom of Bahrain induce substantial inflow of funds from abroad and continue financing the growth portion of domestic spending. Only in 2012 40 firms established a presence in Bahrain. Tourism is making remarkable recovery, on the back of major trade fairs, return of Cruise Ships and events such as the F1 Grand Prix. Prices for overnight stay at four star hotel rooms grow at approximately 70 per cent for the second consecutive year, spurring additional hiring in service sector.
Bahrain competes with Malaysia as a world centre for Islamic Banking and It’s offshore financial sector, remains preeminent at the regional level. However, uncertainties surrounding the current economic situation remain considerable as the risk would seem to mostly tilted toward weakness while world economy undergoes largely stagnant recovery and spill-over effect of the political unrest and instability in North Africa and Middle East, manifested in perpetuated violent Shi’a sectarian activism, weight heavily on Bahrain responses to thorniest of domestic issues. Despite every effort by the authorities to restore confidence, some businesses have chosen to relocate to Doha or Dubai, perceived as “more stable”.
Elevated risk related to violent political unrest have potential deleterious effect on short-term output and significantly foreshortens the time frame over which businesses are requiring new capital projects to pay off. The consequent heavier discounts applied to those long term expectations induce a major scaling back of new capital spending initiatives by foreign participants.
One other significant decrepitude that cannot be overlooked is the fiscal deficit Bahrain experience since 2009 and it appears to arise from elements of social engineering such as disproportionate, in relative terms, increases in wages of public sector employees, pensions, growing subsidies for “disadvantaged” as well as a policy housing. Although, measures initially do support private spending, yet on the long run create culture of dependence, even entitlement, erode middle class and act as impediment on the way of more robust expansion as exemplified by the “New Normal” stagnant economic state of US, France, Spain and those others who embark on engineering political-economic conditions to, in some cases, pacify constituency or satisfy some immediate political ambition.
Vladimir Remmer © 2014
Analyst
