BMI View: We expect Bahrain's political crisis to rumble on over the coming months as a fundamental resolution continues to prove elusive. While the risk of ongoing public protests remains elevated we believe the government's firm grip on power should see its ability to form, pass and implement its own policy programme remain intact. Nevertheless it is our view that elevated risk aversion will continue to undermine growth within Bahrain's construction sector and keep a lid on foreign investment. Indeed, we expect gross fixed capital formation, and by extension the construction industry, to underperform the wider economy over the medium term as public spending constraints, inhibitive project financing conditions and a depressed tourism sector contribute to lacklustre growth. Having expanded by an estimated 3.9% in 2012, we are forecasting the construction sector to grow by a still relatively modest 4.0% in 2013 - well below the levels seen between 2001 and 2008.
Key developments in the sector:
- Although signals are relatively mixed at this stage, we expect fixed investment to lag over the coming quarters. On one hand, the latest data from the UN showing the value and number of Greenfield projects ticking higher in 2011 is an encouraging sign, particularly given the sharp drop seen in almost every other economy across the Middle East and North Africa in 2011. That said, data from the central bank shows a marked decline in the number of new construction permits issued in the latter stages of the year, which fell to their lowest level in our time series dating back to Q306. With reports from local real estate firms indicating that the market remains in a soft patch and unlikely to recover (particularly with the onset of Ramadan in July 2012), it remains to be seen if the sector will be able to provide much support to the wider economy over the coming quarters.
- The temporary loss of confidence in Bahrain as a stable location for offshore financial services has had a negative impact on the Kingdom's previously favourable reputation as an attractive environment for project financing. Credit growth in the economy continues to slow and funding from clients deposits is the lowest in the region. Indeed, we believe that commercial loans for multi-year construction projects will remain difficult to secure over the coming quarters, as ongoing political uncertainty and foreign capital outflows keep borrowing costs elevated. Moreover, with the kingdom's banking sector already heavily exposed to the construction and real estate sector - accounting for 30% of total banking loans - there may be reluctance to increase this exposure to long-term projects, while current levels of uncertainty persist.
- The tourism industry, which accounts for 6% of GDP directly and 14% indirectly showed few signs of recovery through H112. According to a survey by Ernst & Young, hotel occupancy rates in Manama came in at only 34% in June 2012. Average room rates also fell to BHD71 (US$188) at the end of H1, the third lowest level in our time series dating back to January 2009. As a proxy for foreign perceptions of underlying political stability, this latest data does not bode well for the outlook for the country over the near term and is likely to see demand for tourism-related projects, particularly hotels and resorts, remain muted.
- The government of Bahrain aimed to conclude its rail master plan by end-2012. The government's plan is in line with the estimated US$149bn being spent by Gulf countries to deploy new transport network. The alignment of the train network is being reviewed in Bahrain as the idea is to link Saudi Arabia with Bahrain, according to Transport Minister Kamal Ahmed. The government was due to decide the exact alignments and finalise them by end-2012. The government will work in collaboration with Saudi Arabia to evaluate the best procurement method to finance the project.
- A US$550mn social housing deal signed between the Bahraini government and local builder Naseej in early 2012 will generate some welcome new supply for the underserved low-income segment and provide a modest boost to the kingdom's subdued construction industry. The announcement reinforced our view that with credit growth weakening, amid elevated risk aversion, government involvement will be crucial to the sector. Of particular significance is the deal's structure, which is to be undertaken as a public-private partnership (PPP). BMI has long highlighted the potential for the PPP model to be used for the purpose of social housing delivery in the kingdom, given its traditionally stable banking sector and large housing waiting lists.