SOVEREIGN RATING REPORT

The Kingdom Of Bahrain

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Website: www.iirating.com
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Information herein was obtained from sources believed to be accurate and reliable; however, IIRA does not guarantee the accuracy,
adequacy or completeness of any information and is not responsible for any errors or omissions or for the results obtained from the use
of such information. Islamic International Rating Agency is paid a fee for most rating assignments. This rating is an opinion on credit
quality only and is not a recommendation to buy or sell any securities. Copyright 2012 Islamic International Rating Agency. All rights
reserved. Contents may be used by news media with credit to Islamic International Rating Agency

RATING REPORT
Report Date
June 18, 2012

The Kingdom Of Bahrain

Rating Analyst

Ratings

Elham Mohammed

(June 18, 2012)

elham.mohammed@iirating.com

Local Currency
Foreign Currency
National Scale
Outlook

Lila Boutekzez
lila.boutekezez@iirating.com

AAAAA(bh)
Stable

A-2
A-2
A-1+(bh)
Stable

EXECUTIVE SUMMARY
Bahrain is classified as a high income economy with a nominal GDP per capita of US$17,763. Following the global financial crisis, GDP growth rates had
declined across the region. Bahrains GDP growth was amongst the least
volatile amongst Gulf economies during the global economic crisis that followed 2008, having posted positive growth throughout this period.
Nevertheless growth slowed down in 2008-2009 before recovering partly in
2010. At US$13,866m, GDP levels in 2011 marked the lowest growth in a
decade, at 2.2%. The country features high investment and savings rate,
which also augurs well for the its economic potential.
Bahrain has historically registered a strong balance of payments position. The
external account marked a significant improvement in 2011 with record high
oil prices and a reduction in non oil imports resulting in a trade surplus
equivalent to 29.2% of GDP. Despite further increase in workers remittance,
current account surplus increased to 12.6% of GDP (FY10: 3.5%).
While Bahrain posted fiscal surplus prior to 2009, oil price dip in this year and
a considerable increase in developmental expenses in 2010 resulted in a fiscal deficit. The fiscal position is likely to be considerably improved in 2011
with better oil denominated earnings and a lower charge in lieu of developmental expenses. There is considerable untapped potential in Bahrain, in
terms of expanding the tax base and supplementing governments revenues
in future years; development of a strategy in this regard is underway.
The countrys economic structure reflects high dependence on the hydrocarAll figures in US $ millions,
unless otherwise stated

2007

2008

2009

2010

2011

GDP Current

18,472.34

22,151.06

19,621.01

21,929.79

25,825.24

GDP Constant

11,844.68

12,591.76

12,980.05

13,564.36

13,866.14

8.4%

6.3%

3.1%

4.5%

2.2%

Trade Surplus % of Current GDP

14.7%

13.9%

11.5%

11.2%

29.2%

Current Surplus % of Current GDP

15.7%

10.2%

2.9%

3.5%

12.6%

Inflation %

-5.5%

3.5%

2.8%

2.0%

-0.4%

Fiscal Balance % of Current GDP

3.15%

6.57%

-6.05%

-5.58%

14.6%

25.0%

34.8%

Growth %

Debt % of Current GDP

International Reserves

4,230.32

3,943.88

3,807.71

5,089.89

4,733.51

Exports

13,633.5

17,315.7

11,873.7

13,647.1

19,650.3

Imports

10,925.5

14,246.3

9,613.0

11,190.4

12,105.9

Islamic International Rating Agency

Rating Report - The Kingdom of Bahrain

bon segment. About three-fourths of exports and over 80% of government revenues are derived
from oil and gas. To address the situation, Bahrain has done much to achieve diversification. It has
further delineated plans to diversify its earnings profile in Vision - Bahrain 2030. Key areas identified for growth include the service sector including the financial and tourism sectors and high-tech
industrial sectors, in addition to expanding the manufacturing base of the country, particularly in
chemical and Metal-based industries. However, in the short-term, exports base is likely to continue
being driven by hydrocarbon exports.
Bahrain has typically remained a net creditor to the world. Foreign direct investment (FDI) into the
country marked a notable improvement in 2011. Investor support and recent efforts at boosting
investors confidence, by hosting globally followed events, will be instrumental to encourage
growth in FDI.
Debt levels have been on a constantly increasing trend, having risen from 14.6% of GDP in 2008 to
over 35% by 2011. The proportion of domestic debt is noteworthy, comprising over 60% of total
debt. Debt servicing remains under 1% of GDP. Growth in debt levels is primarily attributable to the
fiscal deficit over 2009/2010. External debt has been primarily directed towards increased investment in development projects.
Bahrain is considered a hub of financial services in the region and has earned its reputation as the
largest and most sophisticated centre of Islamic banking and finance. At almost 25%, the financial
sector is the leading component of GDP. Banks in Bahrain took a step back as regional financial
markets suffered between 2008 and 2010, but have demonstrated resilience during this period and
signs of recovery are beginning to emerge.
Several measures have been taken to strengthen the countrys social infrastructure, by way of
investment in education and healthcare. Public sector reforms including judicial reforms have been
instituted. Overall the enforcement of law and order is strong with minimal disruptions to business
in the past decade. The government is considered largely effective and Bahrain is well positioned
amongst global economies, in terms of ease of doing business. Bahrain also ranks the highest
amongst GCC countries on the economic freedom index.

Rating Report - The Kingdom of Bahrain

Islamic International Rating Agency

COUNTRY PROFILE
Bahrain - an archipelago of 36 islands located off Saudi Arabias eastern coast, has an area of 760
square kilometres and 161 kilometres of coastline. The King Fahd Causeway connects it to Saudi
Arabia, while another causeway connecting the country to Qatar is under construction. Manama is
the capital and the hub of financial activity. The currency of exchange is the Bahraini Dinar pegged
to the USD at BD 0.376/USD.
Bahrain was historically noted as a pearling and trading centre and oil was discovered in 1932.
Previously a British protectorate, Bahrain declared itself independent on August 15, 1971; thereafter, it drew up its constitution and elected its first parliament in 1973. The current governing structure is a constitutional hereditary monarchy. The King (Chief of State), Prime Minister (Head of
Government) and Council of Ministers (cabinet; appointed by the King and headed by the Prime
Minister) form the executive branch of the government, while the legislative branch comprises a
bicameral parliament (al-Majlis al-Watani), a 40-member elected Council of Representatives and a
40-member Shura (Consultative) Council appointed by the King, with both chambers members
serving four-year terms. The judicial branch of the government comprises the High Civil Appeals
Court which is independent.
The present King Hamad Bin Isa Al-Khalifa acceded to the throne in 1999 and introduced a number
of economic and political reforms to empower the people and over time deepened the social
safety net to include amenities like free education, medical assistance, and monetary benefits to
the poor. The year 2011 saw civil unrest, which may also have contributed to delaying the economic recovery process that had already begun in the GCC.
Bahrain has cultivated long standing relations with the international community, and has strong ties
with its neighbouring countries in the Gulf Cooperative Council (GCC). These include Saudi Arabia,
Qatar, Oman, UAE and Kuwait. In addition, Bahrains diplomatic relations with USA and UK have
also remained historically robust. At present Bahrain is a member of the United Nations, The Arab
League, WTO and OIC, in addition to the GCC.
Recently, the idea of a gulf union has taken root in the region, the parameters of which go beyond
the existing union of the GCC. Developments on this front could have significant bearing on the
economic and political future of Bahrain.

ECONOMIC STRENGTH
Bahrains real GDP stood at USD 13,866m for 2011 marking a growth of approximately 2.2% over
the previous year. GDP has grown continuously over the years, though growth rates fell in 2008 and
further in 2009. Real GDP growth had been in excess of 5% from 2005-8, before reducing to 3.1%
in 2009. However, the economy posted notable recovery in 2010 as growth accelerated to 4.5%,
before falling in 2011 to its lowest level in a decade. A per capita GDP of $ 17,763 is a fair indicator
of the overall resourcefulness of the country.
The volatility of Bahrains economic growth pattern compares favorably to GDP growth rates in
most GCC countries which posted large dips in their GDP growth trajectory in 2009. The relative
stability of the economic enviroment in Bahrain which has continued to mark year on year growth
each year, despite the global economic crisis, contributes to overall investor comfort.
The quarter by quarter trend of GDP growth in 2011 points to gradual economic recovery and GDP
growth is likely to exceed 4% for 2012, provided the political situation remains stable.
Real GDP growth in 2011 was mostly driven by the transportation and communication segment
(11%), manufacturing (3.9%) and government services (5.6%). On the other hand, growth was constrained mostly in the real estate segment. Reduced overall demand stemming from low occupancy rates coupled with liquidity pressures globally has affected investment in this sector negatively.

Islamic International Rating Agency

Rating Report - The Kingdom of Bahrain

bon segment. About three-fourths of exports and over 80% of government revenues are derived
from oil and gas. To address the situation, Bahrain has done much to achieve diversification. It has
further delineated plans to diversify its earnings profile in Vision - Bahrain 2030. Key areas identified for growth include the service sector including the financial and tourism sectors and high-tech
industrial sectors, in addition to expanding the manufacturing base of the country, particularly in
chemical and Metal-based industries. However, in the short-term, exports base is likely to continue
being driven by hydrocarbon exports.
Bahrain has typically remained a net creditor to the world. Foreign direct investment (FDI) into the
country marked a notable improvement in 2011. Investor support and recent efforts at boosting
investors confidence, by hosting globally followed events, will be instrumental to encourage
growth in FDI.
Debt levels have been on a constantly increasing trend, having risen from 14.6% of GDP in 2008 to
over 35% by 2011. The proportion of domestic debt is noteworthy, comprising over 60% of total
debt. Debt servicing remains under 1% of GDP. Growth in debt levels is primarily attributable to the
fiscal deficit over 2009/2010. External debt has been primarily directed towards increased investment in development projects.
Bahrain is considered a hub of financial services in the region and has earned its reputation as the
largest and most sophisticated centre of Islamic banking and finance. At almost 25%, the financial
sector is the leading component of GDP. Banks in Bahrain took a step back as regional financial
markets suffered between 2008 and 2010, but have demonstrated resilience during this period and
signs of recovery are beginning to emerge.
Several measures have been taken to strengthen the countrys social infrastructure, by way of
investment in education and healthcare. Public sector reforms including judicial reforms have been
instituted. Overall the enforcement of law and order is strong with minimal disruptions to business
in the past decade. The government is considered largely effective and Bahrain is well positioned
amongst global economies, in terms of ease of doing business. Bahrain also ranks the highest
amongst GCC countries on the economic freedom index.

Rating Report - The Kingdom of Bahrain

Islamic International Rating Agency

COUNTRY PROFILE
Bahrain - an archipelago of 36 islands located off Saudi Arabias eastern coast, has an area of 760
square kilometres and 161 kilometres of coastline. The King Fahd Causeway connects it to Saudi
Arabia, while another causeway connecting the country to Qatar is under construction. Manama is
the capital and the hub of financial activity. The currency of exchange is the Bahraini Dinar pegged
to the USD at BD 0.376/USD.
Bahrain was historically noted as a pearling and trading centre and oil was discovered in 1932.
Previously a British protectorate, Bahrain declared itself independent on August 15, 1971; thereafter, it drew up its constitution and elected its first parliament in 1973. The current governing structure is a constitutional hereditary monarchy. The King (Chief of State), Prime Minister (Head of
Government) and Council of Ministers (cabinet; appointed by the King and headed by the Prime
Minister) form the executive branch of the government, while the legislative branch comprises a
bicameral parliament (al-Majlis al-Watani), a 40-member elected Council of Representatives and a
40-member Shura (Consultative) Council appointed by the King, with both chambers members
serving four-year terms. The judicial branch of the government comprises the High Civil Appeals
Court which is independent.
The present King Hamad Bin Isa Al-Khalifa acceded to the throne in 1999 and introduced a number
of economic and political reforms to empower the people and over time deepened the social
safety net to include amenities like free education, medical assistance, and monetary benefits to
the poor. The year 2011 saw civil unrest, which may also have contributed to delaying the economic recovery process that had already begun in the GCC.
Bahrain has cultivated long standing relations with the international community, and has strong ties
with its neighbouring countries in the Gulf Cooperative Council (GCC). These include Saudi Arabia,
Qatar, Oman, UAE and Kuwait. In addition, Bahrains diplomatic relations with USA and UK have
also remained historically robust. At present Bahrain is a member of the United Nations, The Arab
League, WTO and OIC, in addition to the GCC.
Recently, the idea of a gulf union has taken root in the region, the parameters of which go beyond
the existing union of the GCC. Developments on this front could have significant bearing on the
economic and political future of Bahrain.

ECONOMIC STRENGTH
Bahrains real GDP stood at USD 13,866m for 2011 marking a growth of approximately 2.2% over
the previous year. GDP has grown continuously over the years, though growth rates fell in 2008 and
further in 2009. Real GDP growth had been in excess of 5% from 2005-8, before reducing to 3.1%
in 2009. However, the economy posted notable recovery in 2010 as growth accelerated to 4.5%,
before falling in 2011 to its lowest level in a decade. A per capita GDP of $ 17,763 is a fair indicator
of the overall resourcefulness of the country.
The volatility of Bahrains economic growth pattern compares favorably to GDP growth rates in
most GCC countries which posted large dips in their GDP growth trajectory in 2009. The relative
stability of the economic enviroment in Bahrain which has continued to mark year on year growth
each year, despite the global economic crisis, contributes to overall investor comfort.
The quarter by quarter trend of GDP growth in 2011 points to gradual economic recovery and GDP
growth is likely to exceed 4% for 2012, provided the political situation remains stable.
Real GDP growth in 2011 was mostly driven by the transportation and communication segment
(11%), manufacturing (3.9%) and government services (5.6%). On the other hand, growth was constrained mostly in the real estate segment. Reduced overall demand stemming from low occupancy rates coupled with liquidity pressures globally has affected investment in this sector negatively.

Islamic International Rating Agency

Rating Report - The Kingdom of Bahrain

Real Growth Rate of Economic Activities

2007

2008

2009

2010

2011

GDP

8.4%

6.3%

3.1%

4.5%

2.2%

Oil

1.1%

0.4%

-0.8%

1.8%

3.4%

Non-Oil

9.6%

7.2%

3.7%

4.9%

2.1%

Non-Financial Corporations

7.8%

5.9%

-1.8%

5.8%

2.4%

Manufacturing

6.5%

7.3%

-1.0%

11.4%

3.9%

11.6%

6.3%

11.0%

Transportation and Communication

Trade

4.4%

3.6%

-10.3%

5.6%

1.2%

Real Estate & Business Activities

6.6%

7.5%

-8.8%

2.3%

-5.0%

Financial Corporations

9.3%

5.6%

-4.3%

4.2%

2.6%

Government Services

7.6%

9.3%

5.2%

3.2%

5.6%

The oil and gas segment has historically been a significant contributor to the economy. Crude oil
production mainly originates from two fields, namely the Bahrain Field and the Abu Saafa Field, of
which the latter contributes 77.6% of annual crude oil production.
2006

2007

2008

2009

2010

2011

Crude Oil (US Barrels Thousands)

66,908

67,262

66,864

66,510

66,376

69,452

-Bahrain Oilfield

13,085

12,552

12,027

11,750

11,635

15,516

-Abu Saafa Oilfield

53,823

54,710

54,837

54,760

54,741

53,936

487,932

507,671

538,233

543,425

556,644

552,117

Gas (Million Cubic Feet-MMCF)

Given that petroleum production and refining account for more than 75% of Bahrain's export
receipts, 88% of government revenues, and about 12% of FY11 Real GDP, oil continues to feature
prominently on the countrys agenda. The recently executed Tatweer Petroleums deal with
Occidental Petroleum Corporation of US and Mubadala Development Company of United Arab
Emirates is expected to result in almost tripling oil production of the Bahrain Oilfield from approximately 32,000 barrels a day to about 100,000 barrels. Increased oil output from the Bahrain Oilfield
in 2011 has already arrested the declining rate of Bahrains overall crude oil production over the
past few years, while also increasing its contribution to total production from 17.5% in 2010 to
22.3% in 2011. At the same time investment in refining capacity at BAPCO - the countrys premier
refinery- would also increase refined oil production from 260,000 barrels a day to 360,000 to
400,000 barrels per day, thereby serving local needs as well as contributing to exports. The country
also produces aluminium (using raw material imports primarily from Australia), its second largest
export after oil.
Despite the dominance of oil in the countrys economic structure, Bahrain is one of the regions
most diversified economies. While Bahrain was affected both by oil price trends, as well as adverse
economic conditions prevailing the world over since 2008, it has demonstrated resilience during
this period. The country is noted as a hub of financial activity in the region, playing host to over 400
financial institutions. It has also consolidated its position as the largest centre of Islamic financial
institutions in the world. As a sizeable component of the GDP at almost 25%, the financial sector
benefitted from the stringent regulatory controls exercised by the Central Bank in the period when
the world economy was booming. Several financial institutions operate in Bahrain including various
Islamic and conventional banks, both in the wholesale and retail banking arenas, and Takaful and
Retakaful firms. Moreover, the government has over the last few years focused on developing other
service industries such as information technology, health care and education.

Rating Report - The Kingdom of Bahrain

Islamic International Rating Agency

Nevertheless, in the short-term, oil and gas activities are likely to continue driving the economy,
with continued expansion also in the countrys manufacturing capacity, particularly in sectors such
as metal and chemicals. The vision 2030 the strategic blueprint spelling out the economic direction of Bahrain - foresees and plans for a shift of Bahrain from an oil driven economy to various
other sectors. It envisages a doubling of income for every Bahraini household by 2030. The vision
sees greater opportunities for the Small and Medium Enterprises and has a clear approach to the
development of entrepreneurship in the country. There is also further potential in the growth of
financial services and other service sectors like tourism and telecommunication, growth in which is
anticipated to contribute increasingly to GDP in the medium to long-term.
Moreover, the investment friendly environment in Bahrain represents significant opportunities. Its
comparative advantages in terms of labor cost, energy cost, and tax policies has attracted investment in a variety of sectors. Bahrain is a popular business destination amongst multinational firms,
also due to its advanced communication and transport
facilities. As a liberal economy, it has been amongst the top
10 freest economies in the world and ranks highest amongst
all GCC states.
The high rate of savings which has remained above 30% for
the last 5 years, and an investment rate of 28% for 2010 also
augurs well for the countrys future economic well-being.
Bahrain Mumtalakat Holding Company (Mumtalakat), is the
investment arm of the Kingdom of Bahrain, having been
established in 2006. It was set up to manage a portfolio of
Bahrains non oil and gas related assets and is therefore
invested in strategic holdings in some of the leading sectors
of the economy including communication, aluminum, and real
eal estate.
estate Total assets of Mumtalakat
stood at US$ 13.5b, and equity of US $8.6b as at December 31, 2010.

FISCAL SUSTAINABILITY
The government has derived its revenue mainly from oil and gas activities in the last five years,
averaging over 80%. Fiscal balance has therefore been particularly sensitive to oil prices that underwent a period of considerable volatility in 2008-10. Revenues from oil fell sharply by 37.8% in 2009,
causing total revenue to fall by 36.2%, and given the lowest average oil price in the last 5 years at
US $ 61.8/barrel. In 2010, revenues increased by 27.4% as oil prices recovered to US $ 79.6/barrel
on average. While fiscal surplus was posted prior to 2009, Bahrain has incurred a deficit since then
with a fiscal deficit to GDP ratio of 6.05% in 2009 and 5.6% in 2010. Whereas this was owed to
record low oil prices in 2009, the fiscal deficit in 2010 is mostly attributable to projects undertaken
by the government, mostly in the area of developmental works and housing. Government spending
has grown steadily over the last 5 years leading to fiscal pressures. Special expenditure undertaken
for defence forces in 2009 and 2008, also contributed to an increase in total expenditure for these
years.
On a national level, the reliance of Bahrains economy on oil and gas is planned
to be reduced considerably over the long term. The government is therefore
working on a strategy to cultivate additional income sources. Income from
taxation has been almost non-existent so far. Bahrains tax regime therefore
leaves significant untapped potential to supplement the governments revenues in future years. The government is delineating a strategy to tap this
source of income through possible imposition of corporate income taxes and
value added taxes. While oil companies are currently taxed at approximately
46% of net profits, an across the board levy of corporate taxes, could result in

Islamic International Rating Agency

Rating Report - The Kingdom of Bahrain

Real Growth Rate of Economic Activities

2007

2008

2009

2010

2011

GDP

8.4%

6.3%

3.1%

4.5%

2.2%

Oil

1.1%

0.4%

-0.8%

1.8%

3.4%

Non-Oil

9.6%

7.2%

3.7%

4.9%

2.1%

Non-Financial Corporations

7.8%

5.9%

-1.8%

5.8%

2.4%

Manufacturing

6.5%

7.3%

-1.0%

11.4%

3.9%

11.6%

6.3%

11.0%

Transportation and Communication

Trade

4.4%

3.6%

-10.3%

5.6%

1.2%

Real Estate & Business Activities

6.6%

7.5%

-8.8%

2.3%

-5.0%

Financial Corporations

9.3%

5.6%

-4.3%

4.2%

2.6%

Government Services

7.6%

9.3%

5.2%

3.2%

5.6%

The oil and gas segment has historically been a significant contributor to the economy. Crude oil
production mainly originates from two fields, namely the Bahrain Field and the Abu Saafa Field, of
which the latter contributes 77.6% of annual crude oil production.
2006

2007

2008

2009

2010

2011

Crude Oil (US Barrels Thousands)

66,908

67,262

66,864

66,510

66,376

69,452

-Bahrain Oilfield

13,085

12,552

12,027

11,750

11,635

15,516

-Abu Saafa Oilfield

53,823

54,710

54,837

54,760

54,741

53,936

487,932

507,671

538,233

543,425

556,644

552,117

Gas (Million Cubic Feet-MMCF)

Given that petroleum production and refining account for more than 75% of Bahrain's export
receipts, 88% of government revenues, and about 12% of FY11 Real GDP, oil continues to feature
prominently on the countrys agenda. The recently executed Tatweer Petroleums deal with
Occidental Petroleum Corporation of US and Mubadala Development Company of United Arab
Emirates is expected to result in almost tripling oil production of the Bahrain Oilfield from approximately 32,000 barrels a day to about 100,000 barrels. Increased oil output from the Bahrain Oilfield
in 2011 has already arrested the declining rate of Bahrains overall crude oil production over the
past few years, while also increasing its contribution to total production from 17.5% in 2010 to
22.3% in 2011. At the same time investment in refining capacity at BAPCO - the countrys premier
refinery- would also increase refined oil production from 260,000 barrels a day to 360,000 to
400,000 barrels per day, thereby serving local needs as well as contributing to exports. The country
also produces aluminium (using raw material imports primarily from Australia), its second largest
export after oil.
Despite the dominance of oil in the countrys economic structure, Bahrain is one of the regions
most diversified economies. While Bahrain was affected both by oil price trends, as well as adverse
economic conditions prevailing the world over since 2008, it has demonstrated resilience during
this period. The country is noted as a hub of financial activity in the region, playing host to over 400
financial institutions. It has also consolidated its position as the largest centre of Islamic financial
institutions in the world. As a sizeable component of the GDP at almost 25%, the financial sector
benefitted from the stringent regulatory controls exercised by the Central Bank in the period when
the world economy was booming. Several financial institutions operate in Bahrain including various
Islamic and conventional banks, both in the wholesale and retail banking arenas, and Takaful and
Retakaful firms. Moreover, the government has over the last few years focused on developing other
service industries such as information technology, health care and education.

Rating Report - The Kingdom of Bahrain

Islamic International Rating Agency

Nevertheless, in the short-term, oil and gas activities are likely to continue driving the economy,
with continued expansion also in the countrys manufacturing capacity, particularly in sectors such
as metal and chemicals. The vision 2030 the strategic blueprint spelling out the economic direction of Bahrain - foresees and plans for a shift of Bahrain from an oil driven economy to various
other sectors. It envisages a doubling of income for every Bahraini household by 2030. The vision
sees greater opportunities for the Small and Medium Enterprises and has a clear approach to the
development of entrepreneurship in the country. There is also further potential in the growth of
financial services and other service sectors like tourism and telecommunication, growth in which is
anticipated to contribute increasingly to GDP in the medium to long-term.
Moreover, the investment friendly environment in Bahrain represents significant opportunities. Its
comparative advantages in terms of labor cost, energy cost, and tax policies has attracted investment in a variety of sectors. Bahrain is a popular business destination amongst multinational firms,
also due to its advanced communication and transport
facilities. As a liberal economy, it has been amongst the top
10 freest economies in the world and ranks highest amongst
all GCC states.
The high rate of savings which has remained above 30% for
the last 5 years, and an investment rate of 28% for 2010 also
augurs well for the countrys future economic well-being.
Bahrain Mumtalakat Holding Company (Mumtalakat), is the
investment arm of the Kingdom of Bahrain, having been
established in 2006. It was set up to manage a portfolio of
Bahrains non oil and gas related assets and is therefore
invested in strategic holdings in some of the leading sectors
of the economy including communication, aluminum, and real
eal estate.
estate Total assets of Mumtalakat
stood at US$ 13.5b, and equity of US $8.6b as at December 31, 2010.

FISCAL SUSTAINABILITY
The government has derived its revenue mainly from oil and gas activities in the last five years,
averaging over 80%. Fiscal balance has therefore been particularly sensitive to oil prices that underwent a period of considerable volatility in 2008-10. Revenues from oil fell sharply by 37.8% in 2009,
causing total revenue to fall by 36.2%, and given the lowest average oil price in the last 5 years at
US $ 61.8/barrel. In 2010, revenues increased by 27.4% as oil prices recovered to US $ 79.6/barrel
on average. While fiscal surplus was posted prior to 2009, Bahrain has incurred a deficit since then
with a fiscal deficit to GDP ratio of 6.05% in 2009 and 5.6% in 2010. Whereas this was owed to
record low oil prices in 2009, the fiscal deficit in 2010 is mostly attributable to projects undertaken
by the government, mostly in the area of developmental works and housing. Government spending
has grown steadily over the last 5 years leading to fiscal pressures. Special expenditure undertaken
for defence forces in 2009 and 2008, also contributed to an increase in total expenditure for these
years.
On a national level, the reliance of Bahrains economy on oil and gas is planned
to be reduced considerably over the long term. The government is therefore
working on a strategy to cultivate additional income sources. Income from
taxation has been almost non-existent so far. Bahrains tax regime therefore
leaves significant untapped potential to supplement the governments revenues in future years. The government is delineating a strategy to tap this
source of income through possible imposition of corporate income taxes and
value added taxes. While oil companies are currently taxed at approximately
46% of net profits, an across the board levy of corporate taxes, could result in

Islamic International Rating Agency

Rating Report - The Kingdom of Bahrain

a sizable shift in the governments fiscal structure. The introduction of

V
VAT, if it materializes, would also be part of a cooperative initiative
aamongst the GCC to replace the currently prevailing custom taxes. In
aaddition, increased revenues are also expected to come from change
iin the structure of fees and charges, including increased share of
labour charges and commercial registration fees.
la
TThe governments recurrent expenditure has constituted an average of
75% of total expenditure in the past five years. During 2010, expendi7
tture on projects comprised a relatively higher 29.1% (2009: 18.7%) of
ttotal spending as the government scaled up expense on a number of
development initiatives. Typically, spending on manpower or emoluments has been the biggest
component and constituted 33% of expenditures in 2010.
The 2011 budget assumed a 5% increase in revenue and an 18.6% increase in expenses. A substantial increase in grants and subsidies of US $ 1.75b (FY2010: US $ 517m) had been budgeted with a
substantial portion set aside in lieu of grant to the Bahraini family. However, the fiscal deficit is
expected to be considerably lower than projected, given that the average oil prices for 2011 were
at a record high of $ 111/barrel on an average almost 40% higher than the preceding year. Actual
expenditure on development projects was also lower than projected and together with increased
oil and gas revenues, it is likely to reduce the (yet to be reported) total fiscal deficit significantly,
and possibly result in a primary surplus.
Oil prices in the first five months of 2012 indicate volatility. While prices continued their upward
rally in the first four months of this year, there have been significant downswings in May and June
2012, having fallen below $100. However average prices are likely to remain above $80/barrel,
which is a conservative price employed to prepare governments financial budgets and estimates.
GCC governments have recently announced a financial package for Bahrain, amounting to USD 10b
to be disbursed in equal annual installments over the next 10 years. This amount is expected to be
directed toward major infrastructure undertakings with a sizeable portion also to be deployed in
housing development projects. Availability of these funds may further relieve fiscal pressures.

DEBT MANAGEMENT
The governments debt rose in tandem with the increase in the deficit level and followed a steep
incline from 2009. Total outstanding public debt increased from US$ 3.2b in 2008 (14.6% of GDP) to
US$ 4.9b in 2009 (25.0% of GDP) and further to US$ 7.6b in 2010 (34.8% of GDP). Further increase
in borrowings in 2011 is likely to push the debt to GDP ratio upwards, while remaining below 40%.
At 62%, domestic debt constitutes a significant proportion of total debt. The governments exposure to exchange-rate volatility and its subsequent implications on the nations debt repayment
capacity are relatively minimal. In absolute terms, interest payments amounted to about $ 241m,
equivalent to about 4% of recurrent expenditure and 1% of GDP. While also on a gradually increasing trend, these indicators depict the strong servicing capacity of the Kingdom of Bahrain. The
increasing trend of development bonds and loans depicts higher investment in developmental
Millions in USD
2010
2011 (3 Q) activities including deployment in infrastructure projects. Nevertheless, the
T-Bills
1,516
2,154.3 rising trend in debt to GDP ratio should
Al Salaam Islamic securities
95.7
143.6 be restrained.
Islamic Leasing Securities
2,287.2
2,925.5 Fiscal reforms under consideration can
Development Bonds
2,593.1
2,593.1 potentially diminish the incline in debt
levels. The debt to GDP ceiling stood at
Total Securities in Issuance
6,492
7,816.5
60% and is not likely to be breached in

Rating Report - The Kingdom of Bahrain

Islamic International Rating Agency

the foreseeable future, even if fiscal position is stressed using considerably

lower oil prices than currently prevailing trends.
Total securities in issuance including T-Bills, but excluding loans (development
loans and other local loans) increased to US$ 7.8b by end 3Q 2011, up from
US $ 6.5b at previous year-end.
As short-term debt in issuance continues to grow, the proportion of medium
to long-term borrowing in total loans, is on a declining trend and hovers about
70%, having fallen from 76% in 2010. Going forward, stabilization of the fiscal
position as expected will play an important role towards maintaining the current debt to GDP ratio.

EXTERNAL ACCOUNT
The Balance of Payments position has been generally healthy, given the persistent surplus recorded
in the current account. An improved current account surplus of 12.6% to GDP at US $ 3.25b was
posted in 2011, vis-a-vis 3.5% (US $ 770.7m) in the preceding year. This was largely driven by an
improvement in trade balance to US $ 7.5b (2010: US $ 2.46b), and despite the significant outflow
on account of net transfers (workers remittances) and investment returns.
Oil exports, which make up more than three-fourths of the countrys exports, are the main contributor to the overall favourable trade performance since 2010. Bahrains exports stood at US$
19.7b in 2011 compared to US $ 13.6b in 2010, and were supported mostly by escalating oil prices.
Imports on the other hand have increased at a slower pace, having grown to US $ 12.11b relative
to US $ 11.19b in 2010.
Bahrains imports are also denominated by crude oil, which constitutes about 60% of total imports.
Import constitution reduces the sensitivity of the overall balance of payments position to oil price
changes, which nevertheless remains substantial. A positive development in 2011 was the reduction in non oil imports vis-a-vis an increase in non oil exports, reducing the non oil trade deficit to
US $477m - the most favourable since at least 2005. As a result of oil price movements and the
trends in non oil imports during the last year, the trade surplus had improved considerably to 29.2%
of GDP (2010:11.2%). The year 2012 may witness increased volatility in oil prices, given the price
trajectory so far, which may impact the surplus position for the year.
Saudi Arabia is the countrys largest export market with a share of 23.2% in total non-oil exports,
whereas the GCC as a block accounts for 50% of countrys non-oil exports. The principal import
sources are China, Brazil, and USA. Major imports other than oil include electrical appliances,
machinery and transportation equipment.
In order to promote bilateral trade, Bahrain has signed numerous trade agreements, the most significant of which is the free trade agreement with USA. The signing of this agreement in 2005
rendered most products tax exempt under this agreement. The countrys trade policy is liberal with
no quotas levied on imported products and services. Under the customs union with GCC countries,
import tax is standardized on all non GCC goods, while no taxes are levied on GCC produced goods.
The government is also planning an export oriented initiative of setting up an Export Development
Center (EDC), with a focus on developing non oil exports and promoting the SMEs. These efforts
are directed at diversifying the exports base.
Every year, around US$ 1.5b - 2b flows out of Bahrain in terms of remittances as the expatriate
population comprises a larger proportion of the labor force at 54%. Bahrain nevertheless posted an
improving current account position in 2011.
Reflective also of free capital mobility in the economy, Bahrain remained a net creditor to the world
at large, with a net international investment position (IIP) at $ 20.4b in 2011 higher than $ 16.95b
in 2010. According to the Central Bank of Bahrain Statistics, the Inward Foreign Direct Investment
rose to US$ 15.93b in 2011 as compared to US$ 15.15b in 2010. The liberal investment environ-

Islamic International Rating Agency

Rating Report - The Kingdom of Bahrain

a sizable shift in the governments fiscal structure. The introduction of

V
VAT, if it materializes, would also be part of a cooperative initiative
aamongst the GCC to replace the currently prevailing custom taxes. In
aaddition, increased revenues are also expected to come from change
iin the structure of fees and charges, including increased share of
labour charges and commercial registration fees.
la
TThe governments recurrent expenditure has constituted an average of
75% of total expenditure in the past five years. During 2010, expendi7
tture on projects comprised a relatively higher 29.1% (2009: 18.7%) of
ttotal spending as the government scaled up expense on a number of
development initiatives. Typically, spending on manpower or emoluments has been the biggest
component and constituted 33% of expenditures in 2010.
The 2011 budget assumed a 5% increase in revenue and an 18.6% increase in expenses. A substantial increase in grants and subsidies of US $ 1.75b (FY2010: US $ 517m) had been budgeted with a
substantial portion set aside in lieu of grant to the Bahraini family. However, the fiscal deficit is
expected to be considerably lower than projected, given that the average oil prices for 2011 were
at a record high of $ 111/barrel on an average almost 40% higher than the preceding year. Actual
expenditure on development projects was also lower than projected and together with increased
oil and gas revenues, it is likely to reduce the (yet to be reported) total fiscal deficit significantly,
and possibly result in a primary surplus.
Oil prices in the first five months of 2012 indicate volatility. While prices continued their upward
rally in the first four months of this year, there have been significant downswings in May and June
2012, having fallen below $100. However average prices are likely to remain above $80/barrel,
which is a conservative price employed to prepare governments financial budgets and estimates.
GCC governments have recently announced a financial package for Bahrain, amounting to USD 10b
to be disbursed in equal annual installments over the next 10 years. This amount is expected to be
directed toward major infrastructure undertakings with a sizeable portion also to be deployed in
housing development projects. Availability of these funds may further relieve fiscal pressures.

DEBT MANAGEMENT
The governments debt rose in tandem with the increase in the deficit level and followed a steep
incline from 2009. Total outstanding public debt increased from US$ 3.2b in 2008 (14.6% of GDP) to
US$ 4.9b in 2009 (25.0% of GDP) and further to US$ 7.6b in 2010 (34.8% of GDP). Further increase
in borrowings in 2011 is likely to push the debt to GDP ratio upwards, while remaining below 40%.
At 62%, domestic debt constitutes a significant proportion of total debt. The governments exposure to exchange-rate volatility and its subsequent implications on the nations debt repayment
capacity are relatively minimal. In absolute terms, interest payments amounted to about $ 241m,
equivalent to about 4% of recurrent expenditure and 1% of GDP. While also on a gradually increasing trend, these indicators depict the strong servicing capacity of the Kingdom of Bahrain. The
increasing trend of development bonds and loans depicts higher investment in developmental
Millions in USD
2010
2011 (3 Q) activities including deployment in infrastructure projects. Nevertheless, the
T-Bills
1,516
2,154.3 rising trend in debt to GDP ratio should
Al Salaam Islamic securities
95.7
143.6 be restrained.
Islamic Leasing Securities
2,287.2
2,925.5 Fiscal reforms under consideration can
Development Bonds
2,593.1
2,593.1 potentially diminish the incline in debt
levels. The debt to GDP ceiling stood at
Total Securities in Issuance
6,492
7,816.5
60% and is not likely to be breached in

Rating Report - The Kingdom of Bahrain

Islamic International Rating Agency

the foreseeable future, even if fiscal position is stressed using considerably

lower oil prices than currently prevailing trends.
Total securities in issuance including T-Bills, but excluding loans (development
loans and other local loans) increased to US$ 7.8b by end 3Q 2011, up from
US $ 6.5b at previous year-end.
As short-term debt in issuance continues to grow, the proportion of medium
to long-term borrowing in total loans, is on a declining trend and hovers about
70%, having fallen from 76% in 2010. Going forward, stabilization of the fiscal
position as expected will play an important role towards maintaining the current debt to GDP ratio.

EXTERNAL ACCOUNT
The Balance of Payments position has been generally healthy, given the persistent surplus recorded
in the current account. An improved current account surplus of 12.6% to GDP at US $ 3.25b was
posted in 2011, vis-a-vis 3.5% (US $ 770.7m) in the preceding year. This was largely driven by an
improvement in trade balance to US $ 7.5b (2010: US $ 2.46b), and despite the significant outflow
on account of net transfers (workers remittances) and investment returns.
Oil exports, which make up more than three-fourths of the countrys exports, are the main contributor to the overall favourable trade performance since 2010. Bahrains exports stood at US$
19.7b in 2011 compared to US $ 13.6b in 2010, and were supported mostly by escalating oil prices.
Imports on the other hand have increased at a slower pace, having grown to US $ 12.11b relative
to US $ 11.19b in 2010.
Bahrains imports are also denominated by crude oil, which constitutes about 60% of total imports.
Import constitution reduces the sensitivity of the overall balance of payments position to oil price
changes, which nevertheless remains substantial. A positive development in 2011 was the reduction in non oil imports vis-a-vis an increase in non oil exports, reducing the non oil trade deficit to
US $477m - the most favourable since at least 2005. As a result of oil price movements and the
trends in non oil imports during the last year, the trade surplus had improved considerably to 29.2%
of GDP (2010:11.2%). The year 2012 may witness increased volatility in oil prices, given the price
trajectory so far, which may impact the surplus position for the year.
Saudi Arabia is the countrys largest export market with a share of 23.2% in total non-oil exports,
whereas the GCC as a block accounts for 50% of countrys non-oil exports. The principal import
sources are China, Brazil, and USA. Major imports other than oil include electrical appliances,
machinery and transportation equipment.
In order to promote bilateral trade, Bahrain has signed numerous trade agreements, the most significant of which is the free trade agreement with USA. The signing of this agreement in 2005
rendered most products tax exempt under this agreement. The countrys trade policy is liberal with
no quotas levied on imported products and services. Under the customs union with GCC countries,
import tax is standardized on all non GCC goods, while no taxes are levied on GCC produced goods.
The government is also planning an export oriented initiative of setting up an Export Development
Center (EDC), with a focus on developing non oil exports and promoting the SMEs. These efforts
are directed at diversifying the exports base.
Every year, around US$ 1.5b - 2b flows out of Bahrain in terms of remittances as the expatriate
population comprises a larger proportion of the labor force at 54%. Bahrain nevertheless posted an
improving current account position in 2011.
Reflective also of free capital mobility in the economy, Bahrain remained a net creditor to the world
at large, with a net international investment position (IIP) at $ 20.4b in 2011 higher than $ 16.95b
in 2010. According to the Central Bank of Bahrain Statistics, the Inward Foreign Direct Investment
rose to US$ 15.93b in 2011 as compared to US$ 15.15b in 2010. The liberal investment environ-

Islamic International Rating Agency

Rating Report - The Kingdom of Bahrain

ment in Bahrain offers lucrative investment opportunities to foreign investors and the Government
also gives various fiscal incentives to the investors in terms of a favorable tax policy and other
incentives. Nevertheless, Bahrain saw yet another year of net investment abroad and amounting
to about US $ 4b. While there was a net inflow of portfolio investment into the country amounting
US $ 5.5b, net outflow of capital in lieu of foreign direct investment and other investments amounted $ 9.5b.

Rating Report - The Kingdom of Bahrain

Islamic International Rating Agency

quent to 2008, signs of a turnaround are beginning to emerge, with retail banking being in the
forefront and an improvement in the sectors profits. Business volumes in the wholesale banking
sector continue to decline, although the ongoing deleveraging in the sector stems mostly from a
strategic decision to reduce risks, without impairing profitability.
There are 49 companies listed on the stock exchange with a total market capitalization of USD 16.63b.
The stock index has been declining and trading volumes are at an all time low at 520.22m, down from
a peak of 1,675.843m in 2008. At 1,143.69, the index has posted a negative return of 20.15% in 2011.

EXCHANGE RATE MANAGEMENT AND MONETARY POLICY

The Central Bank of Bahrain (CBB) has maintained a fixed exchange rate between the Bahraini dinar
(BD) and the US dollar (USD) at a rate of BD 0.376 per USD with no restrictions on capital mobility.
Effectively the peg has not deviated from 0.376 to the USD since 1980. This has facilitated trade in
the GCC region wherein peg to US $ has remained a dominant arrangement. External trade is a
considerable proportion of GDP, underlying the benefits of the peg, and has protected international trade and investment from exchange rate volatility in times of price instability, while also
keeping inflation under control. The Bahrain Dinar is pegged to the USD since 2001, prior to which
it had been pegged to the IMFs SDRs (Special Drawing rights).
Inflation in Bahrain has remained mostly in check. The average inflation for 2010 was at 2% compared to a high of 3.5% recorded in 2008. The CPI index has fallen by about (0.4%) in 2011, on the
back of reduced demand. Asset prices remained largely static following a substantial drop from the
peak of 2008.
Because of the fixed exchange rate regime, CBB policy rates follow US interest rates. This alignment
was reflected in the reduction in the overnight deposit and repurchase rates following the commencement of policy accommodation in 2007 by the US Federal Reserve (Fed). The CBB had maintained interest rates at low levels since 2008, when short-term T-Bill yields fell to 2.8% from 4% in
2007, falling further in 2009 to 0.9%. Current yields on 3 month t-bills at around 0.7% have
remained largely stable since 2009.

FINANCIAL SYSTEM STABILITY

The financial sector remained one of the key contributors to Bahrains economy, accounting for
around 25% of GDP in 2011. Bahrain is the largest financial centre in the region. Islamic banking
received notable impetus in Bahrain, and the country is considered as the hub of Islamic banking.
Number of financial institutions operating in Bahrain as at FYE10 is over 400, of which retail banks
are 29 (6 Islamic) and wholesale banks are 75 (20 Islamic).
Central Bank of Bahrain (CBB) is responsible for licensing and supervision of banks, insurance providers, and other organisations engaged in investment business. From 2008 onwards, Risk Asset
Ratio (Risk Weighted Capital Ratio) is calculated as stipulated under the Basel II Accord with the
minimum capital requirement set at 12%. Actual capitalization levels in the banking sector tend to
be on the higher side and continue to be above minimum requirements in 2010 and 2011. Over
95% of credit outstanding has been disbursed to the private sector. The CBB is noted in terms of its
expertise as a regulator and banking sector related controls contributed significantly to dampening
the effect of the global financial crisis on the local environment.
The banking sector enjoyed a period of rapid growth from 2003-2007 where total assets grew from
$100.93b (2003) to $245.8b (2007). However, the financial crisis had an impact on the industry,
where the assets grew marginally in 2008, followed by a period of decline in assets, which have
now reduced to US$ 197.12b in 2011. On an overall basis, wholesale banks represent around twothirds of the total assets. The decline in the total assets of the banking sector has come primarily
from the wholesale banks.
While the banking sector has not featured pronounced recovery, following the slowdown subse-

SOCIAL AND INSTITUTIONAL STABILITY

In a coordinated effort by ministries and government agencies, the Vision 2030 of Bahrain was
launched, which lays out the nations ambitions in the areas of social and economic uplift.
Structured around the principles of Sustainability, Competitiveness and Fairness, the vision document culminates into the larger aim of doubling the Bahraini household income by 2030. The vision
is crystallized into implementable objectives in the National Economic Strategy, which provides the
blue print of specific initiatives to be undertaken by each governmental agency, aimed at Individual
Development, National Economics, Healthcare and Education.
Physical infrastructure of Bahrain is fairly advanced with good roads, ports and telecommunication
system. Restoring investor confidence has been a primary national objective. The recent hosting of
the Formula 1 Gulf Air Bahrain Grand Prix attracted 28,000 spectators and contributed to an
improved investors perception worldwide. Bahrain is considered as the freest economy in the GCC
and ranks amongst the top 12 economies on a global scale as ranked by the Economic Freedom
Index. Bahrain has registered a steep improvement in this area over the last few years being ranked
24th in 2007.
The rule of law prevails with low crime rates. However, as per the latest release of statistics by
Transparency International, the country ranks 46th in incidence of corruption. This area needs
address, in view of Bahrain ranking being the lowest amongst the GCC. This, as well as the fact that
strengthening of public sector institutions is a key goal under the National Economic Strategy, has
driven a number of public sector reforms. A Tender Board has been established as a fully independent body which ensures that government contracts are awarded in an above board manner.
There has been considerable effort in cultivating public and social institutions in Bahrain within the
last one decade. Social infrastructure like the judicial system, healthcare and education has
improved in recent years and continues to be the focus of current reforms. Judicial reforms instituted include licensing exams and performance evaluation for all legal professionals and creating
specialized courts, while also introducing private notary services.
The governments focus on social uplift has been considerable, and there has been measureable
success on this front. A notable healthcare initiative is the establishment of a National Health and
Regulatory Authority which was set up to ensure that health care institutions, professionals and
pharmaceuticals are at par with minimum international standards. Bahrain has recently completed
the construction of the King Hamad University Hospital, equipped with state of the art medical
facilities and most advanced information systems. Another initiative in this area is the establishment
of National Emergency Medical Services. Educational reforms have been targeted at vocational training as well as raising academic standards to be at par with internationally employed curriculums.
Bahrains population is estimated at 1.235m as at end of 2010 and has grown at a rapid CAGR of
9.39% over the last one decade. A census is periodically conducted, with the most recent having
been concluded early during 2011. According to the census, more than three fourth of the population is in the 15-64 years age bracket with 64% of the population being male and 38% female. The
gender disparity is explained by the sizeable non-Bahraini population which comprises 54% of the
total population and more than three-fourths of the labour force. The proportion of non-Bahrainis
has been on a continuously increasing trend since 1991, when it stood at about 36%, and is attrib-

Islamic International Rating Agency

Rating Report - The Kingdom of Bahrain

ment in Bahrain offers lucrative investment opportunities to foreign investors and the Government
also gives various fiscal incentives to the investors in terms of a favorable tax policy and other
incentives. Nevertheless, Bahrain saw yet another year of net investment abroad and amounting
to about US $ 4b. While there was a net inflow of portfolio investment into the country amounting
US $ 5.5b, net outflow of capital in lieu of foreign direct investment and other investments amounted $ 9.5b.

Rating Report - The Kingdom of Bahrain

Islamic International Rating Agency

quent to 2008, signs of a turnaround are beginning to emerge, with retail banking being in the
forefront and an improvement in the sectors profits. Business volumes in the wholesale banking
sector continue to decline, although the ongoing deleveraging in the sector stems mostly from a
strategic decision to reduce risks, without impairing profitability.
There are 49 companies listed on the stock exchange with a total market capitalization of USD 16.63b.
The stock index has been declining and trading volumes are at an all time low at 520.22m, down from
a peak of 1,675.843m in 2008. At 1,143.69, the index has posted a negative return of 20.15% in 2011.

EXCHANGE RATE MANAGEMENT AND MONETARY POLICY

The Central Bank of Bahrain (CBB) has maintained a fixed exchange rate between the Bahraini dinar
(BD) and the US dollar (USD) at a rate of BD 0.376 per USD with no restrictions on capital mobility.
Effectively the peg has not deviated from 0.376 to the USD since 1980. This has facilitated trade in
the GCC region wherein peg to US $ has remained a dominant arrangement. External trade is a
considerable proportion of GDP, underlying the benefits of the peg, and has protected international trade and investment from exchange rate volatility in times of price instability, while also
keeping inflation under control. The Bahrain Dinar is pegged to the USD since 2001, prior to which
it had been pegged to the IMFs SDRs (Special Drawing rights).
Inflation in Bahrain has remained mostly in check. The average inflation for 2010 was at 2% compared to a high of 3.5% recorded in 2008. The CPI index has fallen by about (0.4%) in 2011, on the
back of reduced demand. Asset prices remained largely static following a substantial drop from the
peak of 2008.
Because of the fixed exchange rate regime, CBB policy rates follow US interest rates. This alignment
was reflected in the reduction in the overnight deposit and repurchase rates following the commencement of policy accommodation in 2007 by the US Federal Reserve (Fed). The CBB had maintained interest rates at low levels since 2008, when short-term T-Bill yields fell to 2.8% from 4% in
2007, falling further in 2009 to 0.9%. Current yields on 3 month t-bills at around 0.7% have
remained largely stable since 2009.

FINANCIAL SYSTEM STABILITY

The financial sector remained one of the key contributors to Bahrains economy, accounting for
around 25% of GDP in 2011. Bahrain is the largest financial centre in the region. Islamic banking
received notable impetus in Bahrain, and the country is considered as the hub of Islamic banking.
Number of financial institutions operating in Bahrain as at FYE10 is over 400, of which retail banks
are 29 (6 Islamic) and wholesale banks are 75 (20 Islamic).
Central Bank of Bahrain (CBB) is responsible for licensing and supervision of banks, insurance providers, and other organisations engaged in investment business. From 2008 onwards, Risk Asset
Ratio (Risk Weighted Capital Ratio) is calculated as stipulated under the Basel II Accord with the
minimum capital requirement set at 12%. Actual capitalization levels in the banking sector tend to
be on the higher side and continue to be above minimum requirements in 2010 and 2011. Over
95% of credit outstanding has been disbursed to the private sector. The CBB is noted in terms of its
expertise as a regulator and banking sector related controls contributed significantly to dampening
the effect of the global financial crisis on the local environment.
The banking sector enjoyed a period of rapid growth from 2003-2007 where total assets grew from
$100.93b (2003) to $245.8b (2007). However, the financial crisis had an impact on the industry,
where the assets grew marginally in 2008, followed by a period of decline in assets, which have
now reduced to US$ 197.12b in 2011. On an overall basis, wholesale banks represent around twothirds of the total assets. The decline in the total assets of the banking sector has come primarily
from the wholesale banks.
While the banking sector has not featured pronounced recovery, following the slowdown subse-

SOCIAL AND INSTITUTIONAL STABILITY

In a coordinated effort by ministries and government agencies, the Vision 2030 of Bahrain was
launched, which lays out the nations ambitions in the areas of social and economic uplift.
Structured around the principles of Sustainability, Competitiveness and Fairness, the vision document culminates into the larger aim of doubling the Bahraini household income by 2030. The vision
is crystallized into implementable objectives in the National Economic Strategy, which provides the
blue print of specific initiatives to be undertaken by each governmental agency, aimed at Individual
Development, National Economics, Healthcare and Education.
Physical infrastructure of Bahrain is fairly advanced with good roads, ports and telecommunication
system. Restoring investor confidence has been a primary national objective. The recent hosting of
the Formula 1 Gulf Air Bahrain Grand Prix attracted 28,000 spectators and contributed to an
improved investors perception worldwide. Bahrain is considered as the freest economy in the GCC
and ranks amongst the top 12 economies on a global scale as ranked by the Economic Freedom
Index. Bahrain has registered a steep improvement in this area over the last few years being ranked
24th in 2007.
The rule of law prevails with low crime rates. However, as per the latest release of statistics by
Transparency International, the country ranks 46th in incidence of corruption. This area needs
address, in view of Bahrain ranking being the lowest amongst the GCC. This, as well as the fact that
strengthening of public sector institutions is a key goal under the National Economic Strategy, has
driven a number of public sector reforms. A Tender Board has been established as a fully independent body which ensures that government contracts are awarded in an above board manner.
There has been considerable effort in cultivating public and social institutions in Bahrain within the
last one decade. Social infrastructure like the judicial system, healthcare and education has
improved in recent years and continues to be the focus of current reforms. Judicial reforms instituted include licensing exams and performance evaluation for all legal professionals and creating
specialized courts, while also introducing private notary services.
The governments focus on social uplift has been considerable, and there has been measureable
success on this front. A notable healthcare initiative is the establishment of a National Health and
Regulatory Authority which was set up to ensure that health care institutions, professionals and
pharmaceuticals are at par with minimum international standards. Bahrain has recently completed
the construction of the King Hamad University Hospital, equipped with state of the art medical
facilities and most advanced information systems. Another initiative in this area is the establishment
of National Emergency Medical Services. Educational reforms have been targeted at vocational training as well as raising academic standards to be at par with internationally employed curriculums.
Bahrains population is estimated at 1.235m as at end of 2010 and has grown at a rapid CAGR of
9.39% over the last one decade. A census is periodically conducted, with the most recent having
been concluded early during 2011. According to the census, more than three fourth of the population is in the 15-64 years age bracket with 64% of the population being male and 38% female. The
gender disparity is explained by the sizeable non-Bahraini population which comprises 54% of the
total population and more than three-fourths of the labour force. The proportion of non-Bahrainis
has been on a continuously increasing trend since 1991, when it stood at about 36%, and is attrib-

Islamic International Rating Agency

Rating Report - The Kingdom of Bahrain

Rating Report - The Kingdom of Bahrain

Islamic International Rating Agency

utable to the boom in labour-intensive industries such as construction and trade.

Census data also reveals that 43.8% of the population is employed. According to most recent press
statements issued by officials of the labour ministry unemployment rates stood at about 3.7%, during 2010. Participation of women in the labour force has hovered around 12% for the last few years.
The labour policy in Bahrain is gradually shifting away from quota imposition and towards greater
investment in human capital, with the objective of fostering increased competitiveness of Bahrainis
in the global employment market. This objective is also encapsulated in Bahrain 2030 that sees the
empowerment of Bahrains populace as a key ingredient to the countrys economy.
A major initiative in terms of labour improvements is the setting up of The Labour Market
Regulatory Authority (LMRA) and Tamkeen. These initiatives have been instrumental in decreasing
the unemployment rates that had exceeded 15% in 2006 to their current levels. LMRA levies a fee
on companies that employ non-Bahrainis and funds are used for continuing education and employment facilitation of Bahrainis. These proceeds are utilized towards projects undertaken with the
express objectives of training the Bahrain workforce and promotion of entrepreneurship. The
labour fund Tamkeen provides training, wage subsidy programs and support for SMEs. An employment benefit program has also been initiated, which in addition to monetary support to the unemployed, also maintains database of unemployed individuals and vacancies, to facilitate employment.

REGIONAL AND INTERNATIONAL RELATIONS

Bahrain maintains strong ties with major global powers such as the United States and the United
Kingdom as well as its fellow GCC states. The US continues to maintain its Gulf Naval headquarters
in Bahrain. Meanwhile, there have been instances of financial and/or military assistance from GCC
states in the past. The $10b grant to Bahrain from the GCC announced late in 2011 is the most
recent illustration of support from neighbouring states.

10

11

SOVEREIGN RATING REPORT

The Kingdom Of Bahrain

AFS Tower, 1st Floor, Hoora 320, Manama, P.O. Box 20582, Kingdom of Bahrain
Tel: +973 17211606, Fax: +973 17211605
Website: www.iirating.com
Email: iira@iirating.com

Information herein was obtained from sources believed to be accurate and reliable; however, IIRA does not guarantee the accuracy,
adequacy or completeness of any information and is not responsible for any errors or omissions or for the results obtained from the use
of such information. Islamic International Rating Agency is paid a fee for most rating assignments. This rating is an opinion on credit
quality only and is not a recommendation to buy or sell any securities. Copyright 2012 Islamic International Rating Agency. All rights
reserved. Contents may be used by news media with credit to Islamic International Rating Agency