Bahrain stumbles on road to recovery

Economy resumes growth, Formula One is back, but banks flee, Shiites simmer as "Arab Spring" unrest threatens regime, business interests.

By DAVID ROSENBERG / THE MEDIA LINE
September 7, 2011 17:58
Anti-gov't protesters near Saudi embassy, Bahrain.

bahrain protesters_311 reuters. (photo credit: REUTERS)

 
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King Hamad bin Isa Al-Khalifa has chalked up some successes in the past weeks in his drive to steady his island country after the shocks of mass unrest and a violent crackdown, but analysts say business stands no chance of getting back to usual without deep political reforms.

The kingdom reported on Sunday that its economy grew by 1% quarter-on-quarter in April-June after shrinking in the previous three months during the peak of the turmoil. Two days earlier, Bahrain was awarded a slot in the global Formula One schedule in 2012, a boost for the country’s key tourism industry and a vote of confidence after this year’s race was cancelled because of the unrest.

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But for every advance, Bahrain has had to contend with a setback. In the space of two days in mid-August, one French lender Credit Agricole was reported to be moving its regional headquarters out of Bahrain while another, BNP Paribas, was said to be dispersing some of its back-office operations around the Gulf -- twin blows to a country that prides itself as the region’s first financial center.

“The situation will never stabilize itself until there is a political solution. We don’t even have the makings of that at this time,” Salman Shaikh, director of the Brooking Doha Center on Qatar, told The Media Line. “The problem with this situation is that the longer it goes on, the more difficult it will be to control the protest movement.”

In an event that pointed out the fragility of Bahrain’s political situation nearly six months after Saudi and United Arab Emirates (UAE) forces put down protests at King Hamad’s request, the kingdom was briefly shaken by street fighting between demonstrators and police after the alleged killing of a 14-year-old boy last week.

Bahrain has been the only Gulf country to be swept up in the Arab Spring turmoil. It is a tiny, oil-poor country, but is of key concern to its neighbors and to the US, which bases the Navy’s Fifth Fleet there, because it is located in the waters between Saudi Arabia and Iran. Its mixed population of Sunnis and Shiites makes it a flashpoint in the sectarian cold war between the two Muslim sects.

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Since he imposed martial law and brought Saudi and UAE forces into the country, King Hamad has made some gestures of political reform, creating a National Dialogue Commission to discuss change with the country’s majority but marginalized Shiites. Also, at the end of August, he announced pardons for many political protesters while urging workers who had been sacked from their jobs for joining demonstrations to be reinstated.

But the severity of the crackdown – which left about 30 dead and led to the arrest of some 1,400 people, many of them still in prison – has left many Bahrainis feeling alienated and disillusioned. Small-scale clashes between police and mostly Shiite demonstrators have become nightly events since King Hamad lifted emergency rule in June.

Last Tuesday a group of Bahraini doctors on trial on charges of terrorism began a hunger strike to protest their treatment, including claims of torture. A day later, 14-year-old Ali Jawad died after he was shot in the head, opposition activists said, setting off 24 hours of street fighting.

The government has hired the Washington public relations firm Qorvis Communications, which counts Saudi Arabia among its clients, to upgrade its image abroad. But Shaikh said not enough was being done to create an inclusive domestic political structure.

“We see an increasingly radicalized youth. Young Shiite radicalized youth in Bahrain is not a movie you want to play over and over again,” said Shaikh. “Even if the opposition is somewhat disunited, there has been some ingenuity in keeping the protest alive. You’re seeing hunger strikes and flash protests taking place in the villages.”

Industry and Commerce Minister Hassan Fakhro told Bloomberg News on August 22 that consumer and business confidence is almost back to normal. He said the number of new companies registering with the ministry in May-July was 30% higher than the same time last year, while the number of shoppers at City Center, Bahrain’s biggest shopping center, was up 8.5% in July from a year ago.

But the moves by Credit Agricole and BNP Paribas could set off a run of banks, undermining Bahrain’s status as a regional banking and finance center. Some $10 billion in mutual funds are managed in the kingdom and its banks hold assets of about $211 billion.

Meanwhile, the economic news reported earlier in the week wasn’t all positive. While quarter-on-quarter growth resumed, gross domestic product marked its sixth quarterly year-on-year slowdown in a row even as higher oil prices lifted Bahrain’s key energy sector.

“The main drivers seem to be manufacturing and oil. Financial services were flat, which is better than people expected because there was a lot of talk about services going to Dubai,” Said Hirsh, Middle East economist at London-based Capital Economics, told The Media Line. “But the entire services sector is still at risk.”

Hirsh said he expected government spending would compensate for tepid growth in the private sector. Saudi Arabia has committed to giving Bahrain $1 billion annually over the next decade, equivalent to 5% of GDP. In July, Central Bank Governor Rasheed Al-Maraj forecast the economy to expand by 3% this year.

Analysts said Bahrain’s stability will be tested by two political events in the coming weeks – September 24 elections for seats in parliament to replace lawmakers from the Al-Wefaq party, who resigned last February, and the final report of the Bahrain commission of inquiry due out October 30.

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