III. ECONOMIC TRENDS AND OUTLOOK Major Trends and Outlook According to provisional data from the Ministry of Finance and National Economy, GDP at current prices (not discounted for inflation) increased by 5.36 percent in 1991. The crude oil and gas sector, which accounted for over 16 percent of the GDP, registered an increase of 1.8 percent. Despite the war to free Kuwait in the first quarter of the year, other sectors of the economy registered higher economic growth in 1991 as measured by GDP in current prices including manufacturing, which increased by 4.5 percent; transport and communications by 37.5 percent; and non-financial trade and services by 14.0 percent. Estimates of real GNP growth (discounted for inflation) are difficult, as the consumer price index appears consistently to understate the actual rate of inflation. Thus 1990-91 per capita GNP growth of 1.55 percent at current prices, while ahead of the 0.9 percent growth in the consumer price index, may reflect at best a static situation, and more likely a slight decline in real per capita GNP. Principal Growth Sectors The Aluminum Sector: Using the advantage of relatively low energy costs, Bahrain began to develop its aluminum industry over 20 years ago. Over the years, the sector has expanded from basic smelting to a host of downstream operations, including a rolling mill, an extrusion plant, a cable plant, a factory producing aluminum powder, and two automobile wheel factories. Gulf Aluminum Industries, a Bahraini-Italian joint venture with capital of 32 million dollars, is expected to begin operations in 1994 of an extrusion plant which will produce 12,000 metric tons per year of heavy aluminum sections for use in the transportation sector. In November, 1992, the smelter operation, Aluminum Bahrain (ALBA) completed a 235,000 metric ton/year additional production line as part of a 1.5 billion dollar expansion plan which has more than doubled the plant's rated capacity from 184,000 metric tons per year to 460,000 metric tons per year. (Output from the plant has consistently been above rated capacity during the 18 years through 1993.) The Government is anxious to attract additional downstream investment in the aluminum sector, including a coke calcination plant and additional factories using molten aluminum supplied directly from ALBA's smelter. The Financial Sector: In the last twenty years, Bahrain has developed as a regional financial center for the Gulf region and much of the Arab world. Bahrain's financial institutions attract funds from the Gulf region and, unlike the situation in neighboring Saudi Arabia, there is no serious sensitivity to the use of interest in banking operations in Bahrain. As of the end of 1993 the assets of the 47 off-shore banks in the country totaled 60.2 billion U.S. dollars. As of the beginning of 1994, there were 19 full commercial banks, two specialized banks, 47 off-shore banking units, 38 representative offices, 22 investment banks, five foreign exchange and money brokers, and 25 money-changing companies registered in Bahrain. In order to maintain and promote Bahrain's pre-eminence as a regional financial center, the Ministry of Finance and National Economy has recently established a Capital Markets and International Financial Services Unit to develop and further diversify Bahrain's international financial services sector. The Petroleum Sector: Rising oil prices in 1994 are breathing new life into the oil sector of the Gulf region. While the business opportunities in this sector apply especially to companies using Bahrain as a regional sales and support center for the Gulf, Bahrain does have a domestic oil and gas industry, including a refinery which may soon undertake a major upgrade (see "Major Infrastructure Projects", below). Despite the government's attempts to diversify, oil and gas continue to play a dominant role in the island's economy, providing close to two-thirds of the Government's revenue. In addition, petroleum exports (including 100,00 barrels/day from an offshore field, Abu Sa'afa, shared with Saudi Arabia) constitute 66 percent of total exports in 1993. In the past decade, domestic crude oil production has been held steady at slightly more than 40,000 barrels per day of domestic production from the onshore Awali Field, with 40,753 barrels per day produced in 1993. Gas production in Bahrain in 1993 amounted to some 948 million cubic feet per day, compared to 911 million cubic feet per day in 1992. Bahrain uses all of the gas domestically, except for exports of liquified petroleum gas (LPG) and gas-derived petrochemicals. About a third of non-associated gas production is reinjected into the Awali Field to maintain pressure there. In addition to producing crude oil from the Awali Field, Bahrain is a major refining center for Saudi crude, which is transported from Saudi Arabia via pipeline. Bahrain's oil refinery, in operation since 1932, is one of the oldest refineries in the Gulf. It is owned and managed by the Bahrain Petroleum Company (BAPCO), a joint stock company owned 60 percent by the Government of Bahrain and 40 percent by the U.S. firm Caltex. The refinery had an average daily throughput of 247,301 barrels per day in 1993. Approximately 216,000 barrels per day consisted of Arabian Light crude oil imported from Saudi Arabia's Eastern Province, while the remainder came from Bahrain's Awali Field. Refinery output spans a broad range of products, and the refinery is known in industry circles for its production flexibility. In June 1994, BAPCO's board of directors took a decision to proceed with a scaled-down version of an earlier-approved refinery modernization project, which is expected to cost about 400 million dollars rather than an originally projected cost of up to 800 million USD. A starting date awaits decisions on financing. In 1991-93, a U.S. Company, Harken Energy Corporation, explored for oil both off-shore and on Muharraq Island, on the basis of a production-sharing agreement with BANOCO. The first two wells, one on Fasht Al-Jarim, a shallow reef north of Bahrain, and one on Muharraq, were "dry holes." Seismic data is being studied to determine a site for a possible third well. Government Role in the Economy The Government of Bahrain has set out to make the country into the Singapore or Hong Kong of the Gulf, and, hopefully, of the whole Middle East plus South Asia. Although at present wholly or partially government-owned enterprises dominate the economy, laws and regulations have been seriously overhauled and rationalized in recent years, particularly since 1990, to make the business climate as welcoming as possible to free enterprise and to attract foreign companies. Foreign investors are welcome to set up industries here, with 100-percent foreign ownership in industrial and warehousing/distribution projects permitted. With government encouragement, Bahrain has long been established as the principal banking and financial center of the region. The Bahrain Marketing and Promotion Office, an office set up under a special board with interministerial and joint public and private membership, coordinates efforts to attract and assist businesses and investors. Balance of Payments Situation Bahrain's trade statistics for 1993 indicate that the country suffered a balance of trade deficit of 135.9 million dollars, a considerable improvement from the 1992 deficit of 795.8 million dollars. Trade and Investment Barriers Standards: Processed food items imported into Bahrain are subject to strict shelf-life and labeling requirements. Pharmaceutical products must be imported directly from a manufacturer which has a research department and must be licensed in a least two other GCC countries, one of which must be Saudi Arabia. Investment: The government actively promotes foreign investment and has in recent years promulgated regulations permitting 100 percent foreign ownership of new industrial establishments and the establishment of representative offices or branches of foreign companies without local sponsors. However, most other commercial investments are subject to government approval and generally must be made in partnership with a Bahraini national controlling 51 percent of the equity. Except for citizens of Kuwait, Saudi Arabia and the U.A.E., foreign nationals are not permitted to purchase land in Bahrain. The government encourages the employment of local nationals by setting local-national employment targets in each sector and by restricting the issuance of expatriate labor permits. Government Procurement Practices: The government makes major purchasing decisions through the tendering process. For major projects, the Ministry of Works, Power and Water extends invitations to selected, prequalified firms. Likewise, construction companies bidding on government construction projects must be registered with the Ministry of Works, Power and Water. Smaller contracts are handled by individual ministries and departments, and are not subject to prequalification. Customs Procedures: The customs clearance process is used to enforce the boycott of Israel. Although it is no longer government policy to enforce most of the secondary and tertiary aspects of the boycott, this changed policy has not completely filtered down to all working-level government agents, and goods produced by blacklisted firms may be denied customs clearance or encounter delays in clearance; such incidents have, however, become the exception rather than the rule. The Customs Directorate also enforces Bahrain's Foreign Agency Law. Goods manufactured by a firm with a registered agent in Bahrain may only be imported by that agent or, if by a third party, upon payment of a commission to the registered agent. Labor Force: The Bahraini labor force as of the end of 1993 totalled about 235,000, of whom nearly two-thirds were expatriates. Half of the roughly 80,000 Bahraini workers were government employees, and women made up slightly more than one-sixth of the Bahrainis in the workforce. Because modern education developed here roughly a generation or more earlier than in other Gulf countries, Bahrainis are the most highly-educated of the Gulf state nationals, and, since relatively low oil income has not allowed the Bahraini government to provide the same level subsidies as other states in the region, Bahrainis tend to have a relatively better-established work ethic as well. Bahrainis can be found working at all levels of the economy, from bank and factory managers to cab drivers, filling station attendants, grocery check-out clerks, and clothing factory workers. Bahraini employees can be found throughout the Gulf in almost as great an array of positions, where being working Gulf Arabs gives them a cultural advantage in the employment market. Major Local and Third Country Competitors in Specific Sectors: In aircraft sales, the only real competitor to U.S. firms is the European Airbus consortium, which in 1993 outsold Boeing (the only U.S. company to sell large civilian passenger aircraft here). Gulf Air's fleet had been all U.S. aircraft until the first Airbus A-320 was delivered in 1992, but the majority of the airline's fleet will be Airbuses after delivery of aircraft currently on order. Japan overwhelmingly dominates the motor vehicle market, with 54.7 percent of the passenger car market in 1992, compared to 18.1 percent for the U.S. Germany was in third place with 17.2 percent, followed by South Korea with 2.1 percent. The picture was even worse in most other motor vehicle categories in 1992, with the Japanese selling the majority in nearly every category and the U.S. usually ranking between third and fifth, with South Korea and/or the U.K. ahead in trucks, pick-ups, buses, and all-terrain vehicles. In the U.S.-dominated field of airconditioning and cooling equipment, the closest but distant competitors are, in order, are Japan, the U.K. and Germany. South Korea, however, dominates the domestic refrigerator field, with a 28.7 percent share in 1992 versus the U.S., in second place with 17.1 percent. The British firms lead American firms in gas and oilfield equipment and refinery parts, with the Japanese lagging but still significant. In the principal furniture category, the U.S. was narrowly in first place in 1992, with 23.6 percent share, followed by Italy (21.2 percent), Taiwan (6.9 percent), France (5.5 percent), and the U.K. (5.1 percent). In carpeting, the U.S. dominates, with 56.7 percent of 1992 imports of 13.2 million dollars, with closest competitors being Belgium (8.6 percent), Saudi Arabia (7.1 percent), and the U.K. (6.2 percent). Infrastructure Situation re: Goods/Services Distribution Bahrain has a highly developed infrastructure, including a state-of-the-art domestic and international telecommunications system and good roads connecting the various population centers. The Bahrain International Airport is in the final stages of a major expansion and modernization, and, although the commercial seaport at Mina Sulman is adequate for current volumes of sea-borne freight, there are plans to construct a second port, with significantly larger facilities for container handling, to allow for continuing industrial development. Major Infrastructure Projects Underway: New Container Port/Free Zone: In November, 1993, the government announced that it intended to proceed with plans submitted to the Directorate of Ports in 1992 by the Bahraini/Portuguese joint venture consulting firm, Al Zayani-Profabril, for a new deep water container port for Bahrain to be located off Al-Hidd (on the southern tip of Muharraq Island), near the ASRY dry docks. The new port is to be co-located with an industrial free zone area to be built on a filled site, which will be created in part by the dredging required for the new port. The port is expected to be able to accommodate large ocean vessels which cannot be berthed at the existing facilities at Mina Sulman port due to its shallow draft. A decision on project timing will be primarily determined by the availability of financing for the project. The total cost of the project is expected to be 266 million U.S. dollars at current prices. Depending on how soon sufficient financing can be assured, completion could be by the end of the decade. Water Desalination/Electricity Generation: In 1993, four international consultants, including two U.S. firms, were asked to re-submit their bids, originally submitted in 1990, for the design of two 15-million-gallon/day desalination plants to be constructed in Jannusan and on Muharraq. The two plants are expected to cost up to 160 million dollars each. As of June, 1994, the Jannusan plant appeared to be on indefinite hold, while plans moved ahead slowly for the Muharraq plant, now expected to have a 20-million-gallon/day capacity and to be built in conjunction with a new 400 megawatt electricity generating plant, with total costs of the combined project estimated at 500 million dollars. Scarcity of funds has delayed the Muharraq project as well; construction, now expected to begin in late 1994, would be completed within three years. The Muharraq project is expected to be run as Bahrain's first privately-owned power station, under the government's privatization scheme, with British Gas negotiating provisions under which it could run the plant in a joint venture with the Bahraini private sector. The lead agency for this project is the National Bank of Bahrain. Hospital Construction: The Ministry of Health is planning a 500-bed hospital to be built on Muharraq, at a cost of 30 million dollars. The main consultant for the project is Ace Consultant Engineering, a joint venture between an American company and a Lebanese firm. The project is expected to proceed in two phases, each consisting of 250 beds. The first phase will be an obstetrics unit, and the second, a general care unit. The Muharraq project is expected to be completed around the end of 1994. A major expansion of Manama's Salmaniya Hospital is in progress, again with Ace Consultant Engineer as the consultant. Expected completion date for the 31 million dollar project is mid-1995. Aside from the two government hospital projects, a group of Bahraini businessmen and doctors announced plans in February, 1993, to set up a 30 million dollar specialized hospital in Bahrain. The new hospital is to be a prominent center in the Middle East, staffed by highly qualified doctors, specialized in diagnosing major internal, gynecological, and pediatric diseases and providing appropriate treatment. Khalifa Town Project: The Ministry of Housing is planning to build a new town in the Askar area, south of the ALBA aluminum smelter, with 8,000 housing units, five schools, and two clinics. An American firm has been appointed as consultant in the project. Aside from financial considerations, timing of the project was dependent on the completion of 250 million dollars in pollution-abatement projects at the smelter. As of 1993, ALBA had already reduced emissions of gas and dust from the plant by 99 percent. In principle, the Khalifa Town project is to be completed within the next four to five years. BAPCO Expansion: The Bahrain Petroleum Company (BAPCO) refinery, which has a capacity of around 260,000 barrels per day, is the preeminent industrial establishment on the island. Plans for a complete modernization of the refinery, parts of which date back to the 1930's, have been under study for a number of years. In June, 1994, BAPCO's board of directors took a decision to proceed with the project, subject to financing availability. The project is expected to be divided into two stages, the first of which involves the installation of two new 180,000 barrel per day distillation units, a new continuous catalytic reformer, an upgrade of the refinery's existing catalytic cracker, and other improvements yet to be decided to improve the refinery's product yield. The total cost of the project is expected to be approximately 400 million dollars.