For now, the banks and other financial institutions headquartered in the country are staying put and the local stock exchange is again trading. But the government risks driving them away by rejecting the political reforms that analysts say would go a long way to ensuring calm.
“It’s certainly not back to normal. They have set the political reform process back at least 10 years if not 20 years,” Jane Kinninmont, a senior research fellow in the Chatham House Middle East and North Africa Program, said.
Together with oil, financial services are a pillar of the Bahraini economy, accounting for a fifth of its gross domestic product.
But more than oil, the industry is reliant on foreign institutions and expatriate talent that are sensitive to political risk.
Last week, Crown Prince Sheikh Salman bin Hamad Al-Khalifa said in a televised address that the kingdom’s economy had seen “painful losses” of hundreds of millions of dinars during the weeks of unrest.
“The main challenge for which we must join our efforts for is to work for the continuation of the process of building, modernizing and development in this country and a better future for all of us,” he said.
Days earlier, however, Barclays Capital revised downward its outlook for Bahrain, saying real gross domestic product will expand 1.4 percent, down from a previous forecast of 4.3 percent, Barclay’s Capital senior economist Alia Moubayed said in an e-mailed report last Wednesday. The same day, Capital Intelligence cut the country’s long-term foreign and local currency ratings and lowered its short-term foreign and local currency ratings. It assigned it a negative outlook due to political unrest.
“There’s no telling when things will really turn around for Bahrain. It’s a very fluid situation. Things are going on as we speak, but the economy is beginning to come back and there is some activity,” Nancy Fahim, an economist based in Dubai for Standard Chartered Bank, said.
She said it was too early to revise her forecasts for the economy’s outlook, but pointed to some counterbalancing factors — higher oil prices that will lift the country’s limited but critical oil revenues as well as $10 billion in aid pledged by GCC members.
That’s a lot of money for the country’s $30 billion economy, but its impact depends on the terms under which it is given.
“There are a lot of unknowns - when it will be disbursed, how it will be disbursed,” Fahim said.
More critically, Bahrain’s long-term health depends on keeping its financial institutions. But Kinninmont of Chatham House, said Crown Prince Sheikh Salman bin Hamad, the heir to the throne who had led the drive to turn Bahrain into a business center, had lost influence to the country’s prime minister, Khalifa bin Salman Al-Khalifa, who is much more concerned with seeing off the perceived threat to the country’s monarchy than economics.
The government imposed a severe crackdown in March to break up protests.
“They clearly have made a calculation — it’s not clear they have a strategy — that security is their priority. That reflects power shifts inside the government,” Kinninmont said. “I think they will suffer economically.”
Bahrain has little oil but it enjoyed stable government. But its business-friendly policy has more recently been mimicked by others, posing new competition.
“There are winners coming out of the political turmoil and one of which is Dubai as a strong center and safe haven. Other winners are Abu Dhabi and Qatar,” said Standard Chartered’s Fahim.
“But Dubai is the only one that poses a strong competitor at the moment.”
Economists said they know of no financial institutions to have announced moving plans.
Gus Freeman of the Arabian Research Bureau in Oman said he remained confident that Bahrain would holds its own, warning that the Arab Spring that had shaken the Middle East is far from over.
“At the margins, I’ve heard of some people — but not banks yet — switching locations,” he said.
“As a financial center, I don’t think it’s going to quickly disappear.”
