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Midal Cables, one of the downstream aluminium industries

Midal Cables, one of the downstream aluminium industries



Getting away from oil domination

Bahrain is battling the bad times with gusto and investments, hoping the tide will change and a new era begins

January, 2016

Bahrain has a fine record of diversification but the shift towards less reliance on oil seems to be a never ending process, oil prices being as volatile as they have been over the past decade.

So it was no surprise that the kingdom’s finance minister, Sheikh Ahmed bin Mohammed Al Khalifa, called for further diversification of income sources.

Sheikh Ahmed was himself quick to point out that oil and gas’ contribution to the GDP dropped to 24 per cent  in 2014, down from 44 per cent in 2000 and non-oil revenues climbed from BD262 million ($695.8 million) in 2009 to BD399 million in 2014.

Nevertheless with oil prices down and causing distress, Bahrain has proposed to tighten its belt and cut down expenditure where feasible. It has already slashed a food subsidy and recently announced an increase in diesel, kerosene and aviation fuel prices.

The government, however, has conveyed that all’s not as bad as it seems.

Sheikh Ahmed cited figures showing the GDP soared to BD12.7 billion in 2014, up from BD3.4 billion in 2000, also stressing there was steady growth in the transformative industries and the financial, transport and telecommunications sectors.

The kingdom’s Economic Development Board (EDB) has forecasted that the non-oil sector will grow 4.6 per cent in 2015 and overall growth will reach 3.6 per cent with output in the oil sector staying flat.

“The robust growth in many sectors of the non-oil economy shows that despite the challenging global environment, Bahrain is thriving,” said its chief executive Khalid Al Rumaihi.

And pointing to gains made in the diversification process, he said that meant the economy is “able to continue to grow and create jobs even when facing considerable headwinds.”

He added that growth was underpinned by strong fundamentals – the region’s “highly supportive demography, ongoing economic diversification and the increasing integration of the Gulf into global trade and travel flows.”

In the meantime, Bahrain will take a series of short- and long-term measures to reduce expenditures by 30 per cent and improve efficiency across entities. It is also implementing economic and fiscal reforms with an eye on long-term development.

An outcome of that approach has been the consolidation of several government ministries and the merging of 10 government organisations.

 

INVESTMENT STRATEGY

A worker at the fabrication yard of Nass Mechanical Contracting Company

A worker at the fabrication yard of Nass Mechanical Contracting Company

A strategy that the government is pursuing and aimed at the long term, when the global economic winds will likely blow more favourably, is to continue to invest in mega projects.

Bahrain National Gas Company (Banagas) is going ahead with its Phase 2 expansion to utilise excess associated gas resulting from increased crude production by Tatweer Petroleum.  Banagas will increase its processing capability by 350 million cu ft of the associated gas and the expansion is considered a worthy project with an estimated cost of $600 million.

Alba signed a gas supply agreement with Bapco for its $3.5 billion Potline 6 expansion that will increase the smelter’s capacity by over half a million tonnes annually and contribute additional metal to the downstream. Though London Metal Exchange prices continue to be low, the thinking is that they will not always remain so and demand will rise with growing populations in key markets and flourishing industries needing aluminium.

Contracts have also been signed for a new enhanced capacity oil pipeline project linking Bahrain to Saudi Arabia. The additional crude that the pipeline will bring will feed Bapco’s refinery expansion plans.

An Energy Conservation Policy has been developed in-house with the objective of reducing overall energy use and optimising the use of energy so that natural resources are conserved, said Energy Minister Dr Abdul Hussein bin Ali Mirza.

The mantra of cost cutting and optimising has taken hold as never before in Bahrain. Alba, Asry and Garmco, for instance, have set up targets to achieve savings and become competitive in the challenging circumstances they find themselves in. Sulb, the steel plant, has also been active in that regard, and its acting chief executive stated that orders have been issued to switch off lights when not needed.

Garmco has implemented restructuring and closed down subsidiaries that lose money, while at the same time focusing on the more promising markets. It is also vigorously pursuing expansion, having recently signed up with Fives to build a casthouse that will yield returns when markets recover and demand picks up.

Bahrain has to work harder to ward off the bad effects of the oil price downturn and one way to insulate if from future damage is to create assets that will, in the long term, make up for lost revenues. They key is to build resilience. Industry expert Seltern Iyigun, Mena region economist at Coface, was quoted in the press as saying that Bahrain and Oman were the most affected in the latest oil price downturn and that more resilient economies benefit from strong macroeconomic fundamentals, among other things.

Citing the UAE as an example of resilience in the face of lower oil prices, Iyigun says the UAE’s economy is one of the most diversified amongst the GCC states, making it resilient to falling oil prices. The non-oil private sector there shows strong growth fueled by domestic demand and tourism. Domestic demand is powered by strong retail sales and rising confidence.

Retail in Bahrain took a new course recently with the inauguration of the $100 million Dragon City which will offer Chinese goods not ordinarily sold in the kingdom. While it would provide for an interesting shopping experience, some see it as a boost to Chinese industry and not the local one. However, the Bahrain Government sees another angle, saying it will inspire investor confidence and spur the tourism sector with increased visits by families from across the border in Saudi Arabia.

 

ENTREPRENEURSHIP

Entrepreneurship in Bahrain has a long history with the pioneers of such leading establishments as Aujan, Zamil and the Landmark Group having had their business roots in the kingdom. That business fervour is still around. Bahrain’s government has set up hubs, some holding world-class industries. Manama is also seeking investors and recently held talks with a German business delegation and a local business team visited China.

In 2014 Bahrain had $957 million in foreign direct investment, a not too gigantic a sum but clearly an encouraging figure considering the kingdom’s size and population. Bahrain has been particularly fortunate in having German business houses setting up their facilities here, among them such high-profile names as BASF, Siemens, Ormosil, RMA Pipeline Equipment, SMS Meer, Allianz Global Investors and Hannover.

China too has not overly neglected Bahrain. Some of the Chinese companies with a presence in Bahrain are China Harbour Engineering Company, China CommService, Huawei, Bank of China, ChinaMex and CPIC. The newly opened Dragon City will send out happy vibes all the way to China and perhaps encourage greater interest among manufacturers to set up their enterprises in the smallest of the Gulf states.




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