Download Abu Dhabi has made significant progress Bahrain: political pressures put

SPECIAL
FOCUS
ECONOMIC INSIGHT
MIDDLE EAST
QUARTERLY BRIEFING Q2 2013
Abu Dhabi has made significant progress
towards diversification, but there’s still some
way to go
Abu Dhabi has taken important steps towards reducing
its reliance on oil exports. Financial services are a
growth sector for the emirate, accounting for 6%
of GDP in 2011, up from 4% in 2005. The country
entered the Global Financial Centres Index (GFCI) for
the first time in 2012 and had moved nine places up
the rankings by 2013, as shown in table 1. The creation
of a financial zone, the Abu Dhabi World Financial
Market, should accelerate this trend over the next few
years and attract multinational financial businesses to
the area by offering exemption from rules on foreign
majority ownership; hopefully replicating the success
of the Dubai International Financial Centre.
The emirate is also expanding its tourism offer,
developing attractions including the Louvre Abu Dhabi
and Guggenheim Abu Dhabi. This should provide
a further boost to the hospitality sector – the total
revenue of Abu Dhabi hotels increased by 15% year
on year in the first quarter of 2013, as the number of
guest-nights rose 23%. Manufacturing activity has also
expanded quickly, and this rapid growth is likely to
continue as the government encourages industries to
cluster – for example, the establishment of downstream
aluminium companies in the area around the Emirates
Aluminium plant.
However, there is still some way to go in this process.
Although the proportion of real GDP accounted for
by the production of fossil fuels fell from 59.3% to
52.4% between 2005 and 2011, petroleum products
still account for more than half of Abu Dhabi’s GDP. By
continuing to push policies favouring diversification,
the emirate can secure strong GDP growth. We expect
that Abu Dhabi will continue to grow more quickly
than the UAE as a whole, as shown in Figure 9.
Figure 9: Real GDP growth forecasts for Bahrain,
UAE and Abu Dhabi
%
8
7
6
5
4
3
2
1
0
Abu Dhabi
2010
UAE
2011
Bahrain
2012
2013
Source: Central Bank of Bahrain, Statistics Centre Abu Dhabi, Cebr analysis
icaew.com/economicinsight
cebr.com
2014
Bahrain: political pressures put
diversification strategy at risk
The limited success of diversification in Bahrain
demonstrates the danger posed by political instability
across the region. Bahrain had initial success in
developing financial services, entering the GFCI
in 2008. Since then, however, it has slipped in the
rankings, as illustrated in table 1.
Table 1: Rankings in the Global Financial Centres
Index 2008-2013
Dubai
Qatar
Riyadh
Abu
Dhabi
Bahrain
2008
24
47
n/a
n/a
39
2009
23
46
n/a
n/a
43
2010
24
36
69
n/a
41
2011
28
30
70
n/a
49
2012
29
38
70
48
57
2013
23
30
33
39
64
Source: Z/Yen Group
Bahrain was the GCC state most affected by political
protests in 2011 and consequently its status as a
safe haven has come under increasing pressure. The
combined assets of the country’s investment and
offshore banks have fallen by a quarter since the end
of 2010. The value of financial services dropped by 1%
in 2011 – a rough landing for a sector which expanded
by more than 7% the year before, illustrating the
importance of domestic stability when developing new
industries.
Bahrain’s other main diversification strategy was the
promotion of tourism, particularly through hosting
Formula 1 races. Although the investment in building
the circuit paid off by raising its profile, political turmoil
in 2011 soon damaged the country’s reputation,
leading to the cancellation of the 2011 race. The
country’s hospitality sector shrunk by 17% between
2010 and 2011 as visitors stayed away. Although
the industry has bounced back and manufacturing
expanded quickly through 2012, further policy support
is needed to secure economic diversification for the
future.
Civilian tensions in Bahrain have now eased, but the
government remains constrained in its policy choices
by the need to avoid popular discontent. Subsidies on
everyday items, including food and fuel, are expected
to cost almost US$4 bn in 2013, making Bahrain the
only GCC country with a fiscal deficit. As a country
with small oil reserves, it now requires a crude oil price
of about $120 a barrel to break even, according to
recent IMF research. Costly consumer subsidies can
only ever be a temporary solution to the country’s
problems. In the long run, the country’s fiscal health
and political stability can only be secured through
successful economic diversification and the resulting
job creation.
ECONOMIC INSIGHT – MIDDLE E A ST
Q2 2 013