Plans for increased spending on infrastructure developments are set to support further growth in Bahrain’s industrial sector via improved transport links and the construction of new large-scale facilities. However, falling oil revenue may impact funding availability for some capital works, potentially cooling long-term prospects in the sector.
Infrastructure and development projects, worth an estimated $22bn, are expected to be rolled out before the end of the decade, the Minister of Transportation, Kamal bin Ahmed said in October. Many of these projects, such as the $2.5bn expansion of production capacity at Aluminum Bahrain (Alba) with the opening of a sixth production line and upgrades to the processing facilities of the Bahrain Petroleum Company (BAPCO), are linked to the industrial expansion program.
But long-term investment plans may be dampened by falling oil prices. A November report issued by ratings agency, Standard & Poor’s (S&P), said any prolonged decline in oil prices will likely slow the economies of the GCC members, in particular hurting infrastructure projects. It noted Bahrain as one of the most vulnerable states, alongside Oman. “The lower oil price could slow economic growth for the GCC and weaken the operating environment for the corporate and infrastructure sector,” said S&P.
Improving flow of goods
Plans to build a second causeway linking the Kingdom with Saudi Arabia, the largest economy in the GCC in terms of GDP and market size, have been welcomed by the industrial and manufacturing sector. Bahrain’s strategic location in the Arabian Gulf is an important advantage for the industrial sector; goods can be moved both within and exported from the Kingdom rapidly. In addition, the harbor area and industrial zones are all within 35 km of Saudi Arabia via the existing King Fahd Causeway.
However, congestion and delays have been a recurrent problem for cross-border trade, increasing the need for the proposed $5bn project, which include a main line rail link and a second road connection.
According to a GCC Investment Outlook 2014 report issued in November, the strengthened logistics connections will bolster regional economic integration. “Projects, such as the regional high-speed rail link and a new causeway between Bahrain and Saudi Arabia announced in September, are expected to enhance the flow of goods and labor,” the report said.
Currently, manufacturing contributes 16.7% to GDP in Bahrain with this figure set to rise to 20% within a decade, according to the Bahrain Economic Development Board (EDB).
After a slow start to the year, the sector posted an expansion of 4.4% year-on-year in the second quarter, up from 0.8% in the first quarter, according to EDB data.
Signs of growth are also emerging from real estate and an increase in demand for warehouse space in most of the main industrial estates, according to real estate consultancy Cluttons, in its outlook report for Bahrain, released mid-October.
There will be a slow but gradual rise in rental rates for industrial property fuelled by growing demand, according to the head of Cluttons Bahrain, Harry Goodson-Wickes. “With the Kingdom set to receive $10bn over the next 10 years through infrastructure projects and the GCC development fund, the industrial sector is expected to expand as infrastructure projects get fast-tracked,” he said.
Government and regulatory support is also boosting the sector. Investment Gateway – Bahrain, a development between the Sheikh Khalifa Bin Salman Port and the airport, will gain from government investment in the King Fahd Causeway for example.
“The government has been progressive by creating a special investment area that allows for freehold ownership for foreigners,” Hasan Al Bastaki, managing director of real estate development company, Manara Developments, told OBG. “Allowing investors to own industrial land, something hard to find anywhere in the GCC, will jump-start the revival of Bahraini industry.”
Cooling oil prices
However, a recent decline in international oil prices, which have fallen 33% since June to below $80 a barrel, could impact investment in the industrial sector and related infrastructure projects. The Organization of the Petroleum Exporting Countries (OPEC) cut its forecasts for global oil demand in November.
The IMF said at the end of October that Bahrain risked running a budget deficit next year if spending plans are not altered to cope with declining oil prices. The fund forecasts 2.9% growth next year, from 3.9% this year. At the same time, many of its major overseas markets are likely to experience slower growth or even a contraction this year, potentially impacting manufacturing exports.
A drop in oil revenue may impact funding available for industrial and infrastructure development, slowing the pace of investment and growth. However, the situation also highlights the need for Bahrain to accelerate its economic diversification plans.
A study by the Centre for Economics and Business Research (CEBR) earlier this year warned that Bahrain’s industries − currently accounting for 27% of goods exports − need to be expanded as hydrocarbons earnings dwindled. “With global oil prices forecast to fall over the medium-term, the need to broaden the industrial base is becoming more pressing,” the report said.
Oxford Business Group