Taking stock of economic diversification. 19 November 2017

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Brendan Reed
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1 Taking stock of economic diversification 19 November 2017

2 How did it all begin? The emergence of the oil-government nexus Oil production in Bahrain, 000 bbl Composition of Bahrain s budget revenues, BHD Oil Other % oil Source: Mohammed Ghanim al Rumaihi, Social and Political Change in Bahrain since the First World War, University of Kuwait,

3 Drove a profound transformation Challenge of crowding out 3

4 Why diversification matters? Oil reserves are finite and the ability of any country or company to exploit them depends on factors beyond their control (price, technology) Bahrain has the lowest per capita known oil reserves in the GCC region A heavy reliance on a single commodity tends to be a recipe for economic volatility Often further amplified by pro-cyclical fiscal policy and the financial sector (recycling of petro-dollars) The demand for oil is variable and has responded to significant price changes (1970s, now) The 1970s put an end to oil as a source of stationary energy Regulatory factors are becoming increasingly important and changing the demand profile for oil Growing concern about climate change is shaping attitudes The oil-government nexus can crowd out more sustainable economic activities and create ultimately unsustainable dependencies This can undermine efforts to put in place long-term growth drivers for the post-oil era A rentier economy model can reduce the perceived urgency of investing in and capitalizing on other productive resources, inc. human capital 4

5 Pioneering steps 1930s Bapco 1940s Saudi pipeline 1950s Gulf Air 1960s Mina Salman Alba 1970s Offshore banking 1980s King Fahad Causeway 1990s Islamic finance 2000s Tamkeen Telecomms reform 2010s FinTech ICT 5

6 Shifting gears SUSTAINABILITY COMPETITIVENESS Economy FAIRNESS Government Society 6

7 What is diversification? AXES OF DIVERSIFICATION Extensive v. intensive Labor force composition Government revenue sources Drivers of growth GDP composition Sources of power Composition of exports Role of the private sector Direction of trade Sources of capital/investment 7

8 Shifting gears on diversification Bahrain s GDP composition now overwhelmingly dominated by non-oil activity Bahrain s real GDP composition by sector (%) 100% 90% 80% 70% 60% 50% 40% 30% 20% Other Government Finance Real Est. & Bus. Act. Social & Pers. Serv. Trans. & Comm. Hotel & Rest. Trade Construction Manufacturing Crude Pet. & Nat. Gas 10% 0% Source: Information & egovernment Authority 8

9 Where do we stand? Bahrain s real GDP composition by sector (%) Hotels & Restaurants 2% Real Est. & Bus. Act. 6% Trade 5% Other 4% Crude Pet. & Nat. Gas 19% Social & Pers. Serv. 6% Construction 7% Financial Services 17% Transp. & Comm s 7% Government Services 13% Manufacturing 14% Source: Information & egovernment Authority 9

10 A generation shift The development of the non-oil economy has become increasingly independent of oil Sector CAGR CAGR Oil & gas Finance Manufacturing Government Transp & Comms Construction Social and Personal Services R Est & Bus Act Trade Hotels & Rest s Other Source: Information & e-government Authority 10

11 Growth has become increasingly private sector-led Modest Government contribution while oil is effectively flat Breakdown of real GDP growth, % YoY Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q Oil Government Other GDP Source: Information & egovernment Authority 11

12 Export diversification has progressed well Partly because of an oil price decline. The non-oil merchandise bundle is still narrowly focused on metals and petrochemicals. Composition of exports, % 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Oil Non-oil goods Services Source: Central Bank of Bahrain 12

13 But exports remain cyclically sensitive Reflects the dominance of oil and metals Value of Bahrain s exports, BHD mn Oil Non-oil goods Services Source: Central Bank of Bahrain 13

14 Labour force composition remains uneven 25% Employment and GDP shares by sector, 2013 Bahraini employment by sector Finance 6% Construction 8% Retail 16% Government 36% 20% 15% 10% Other 34% 5% 0% Non-Bahraini employment by sector Government Finance 2% 1% Retail 26% Other 40% Bah. Emp share Nb. Employment GDP share Construction 31% 14

What drives Bahraini employment? Output per worker and Bahrainization rates by sector, 2011 140,000 120,000 100,000 80,000 100.0% 90.0% 80.0% 70.0% 60.0% 50.0% 60,000 40.0% 40,000 30.0% 20.

15 What drives Bahraini employment? Output per worker and Bahrainization rates by sector, , , ,000 80, % 90.0% 80.0% 70.0% 60.0% 50.0% 60, % 40, % 20.0% 20, % - Finance Trans.&Comm. Social&Pers. Government Services Manufacturing Hotels & Restaurants Construction Trade 0.0% Output per worker 2011 Bahrainization (RHS) Source: Information & egovernment Authority, Social Insurance Organisation 15

16 The role of Government spending has increased Government spending as % of GDP has varied in the range of 20-30% of GDP Government expenditure and nominal GDP, BHD mn * 2018* G GDP % (RHS) 0 Source: Ministry of Finance, Information & egovernment Authority 16

17 Minimal Government revenues diversification Oil remains consistently ahead of three-quarters of the total Government expenditure and nominal GDP, BHD mn * 2018* Source: Ministry of Finance, Information & egovernment Authority 17

18 Increasing the role of private capital Independent Water and Power projects => PARADIGM SHIFT Used since Al Ezzel in 2004 Hidd, Al Dur Al Dur 2 planned Now generate 77.4% of power and 65.1% of water Social housing Pioneering ventures by Naseej (2013) and Diyar al Muharraq (2015) Eskan Bank now has a USD3.5bn program Wastewater treatment Muharraq sewage effluent plant (2011) Tubli expansion Education and healthcare Private capital well established in both sectors Pilot schemes for PPPs, King Abdullah Medical City Transportation Under active consideration King Hamad Causeway, Northern Link Road, Light Rail, 18

19 More is needed to turn productivity into a growth driver 19

20 Corporate paradigm shift OLD MODEL Maximize profits by capturing the margin offered by low input costs A strong bias toward laborintensive activities (in a capitalrich region) Labor law made it fairly easy to adjust labor inputs Productivity secondary, and typically stagnant or declining NEW MODEL Margins are less predictable and under a squeeze A growing need to achieve productivity gains and therefore pay much more attention to: governance organization management Rent-seeking Productivity-led STATIC DYNAMIC 20

21 Unleashing the potential of entrepreneurship Key indicators of SME contribution, % % % 20 0 NO OF COMPANIES EMPLOYMENT GDP GLOBAL BAHRAIN Source: Ministry of Industry, Commerce and Tourism, World Bank 48% 21

22 Most companies are inward-looking Sector distribution of Bahraini SMEs Arts, entertainment, sports and recreation Human health and social work activities Education Administrative and support service activities Professional, scientific and technical activities Information and communication Accommodation and food service activities Personal service activities; Repair Activities MINING AND QUARRYING Agriculture, animal production, and fishing Mining and quarrying Electricity, gas, steam and air conditioning Water supplysupply; Manufacturing sewerage, waste management and remediation activities Construction Transportation and storage Sale/Trading Activities; repair of motor vehicles and motorcycles Source: Ministry of Industry, Commerce and Tourism 22

Energy diversification Natural gas consumption in Bahrain, mmcf 800000 700000 600000 500000 400000 300000 200000 100000 0 1999 2000 2001

23 Energy diversification Natural gas consumption in Bahrain, mmcf Manufacturing Power Reinjection Source: National Oil and Gas Authority 23

24 Where do we go from here? Human Capital Educational outcomes consistently exceeding GCC averages Experienced workforce across all sectors of the economy Strategic Location Long history and international reputation as a significant hub Small size of the country creates a natural cluster of logistics-related facilities Convenient overland access to GCC markets and oversea access to regional markets Business & Living Environment Mature and predictable regulatory environment Companies registered locally are treated as GCC companies in the broader region Foreign investors benefit from 100% foreign ownership 24

EMPLOYEES UNDER LABOUR CONTRACT AND GROSS AVERAGE WAGES AND SALARIES, THIRD QUARTER OF 2017

EMPLOYEES UNDER LABOUR CONTRACT AND GROSS AVERAGE WAGES AND SALARIES, THIRD QUARTER OF 2017 According to the preliminary data of the National Statistical Institute (NSI) at the end of September 2017 the