Stimulus will not be enough for Bahrain

25 April 2011

The violent crackdown on protesters in recent months has undermined the Bahrain’s credibility with foreign investors

Manama is preparing to announce the details of a multi-billion dollar aid package, funded by the GCC and intended to breathe life into Bahrain’s flagging economy.

After two months of anti-government protests brought to an end by a campaign of intimidation and violence, the economy is in desperate need of support. Restaurants and hotels are virtually empty. Conferences are being cancelled. Businesses are putting investment decisions on hold and consumer confidence is low.

Coupled with that, the government is embarking on a witch hunt of all those involved in the protests. More than 1,000 people are understood to have been fired for supporting the opposition protests. The stimulus package should get the economy growing again, but it will not be enough to rescue Bahrain’s economy.

The country’s finances are supported by a higher oil price, but ratings downgrade by two notches has hit investor perceptions, and the government may find it tough to borrow from the capital markets before 2012.

Instead it will have to rely on the GCC aid package to drive growth. That will go some way to getting investment projects back on track and maybe even improving the rating. But the country risks shifting from a dynamic, diversified economy to one reliant on state-spending.

At the same time, Bahrain will struggle to create jobs for Bahrainis from capital expenditure alone. Most of the projects it is planning will create more jobs for low-skilled workers from the sub-continent, rather than the kind of well-paid jobs that Bahrain needs to create to solve its social problems. Job creation will also be difficult to achieve while the government is sacking anyone linked to the protests.

Unless it can repair its battered reputation Bahrain will struggle to compete for foreign direct investment, while stable centres like Dubai, Doha and Abu Dhabi look attractive.

A stimulus package is essential for Bahrain, but it will not compensate for the reputational damage inflicted over the past few months.

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