Bahrain: Bahrain's infrastructure pipeline drives momentum in construction

At the end of 2016 the government reaffirmed its commitment to Bahrain’s $32bn infrastructure pipeline as a key driver of economic increase.

These projects – to be implemented in the medium term – include a major upgrade of its international airport, road-building schemes, a new railway link with Saudi Arabia, utilities developments and logistics support, along with investments in housing, industry and services.

Foundation for growth

As additional projects move from the drawing board into the development stage, Bahrain’s construction sector will be critical to economic increase over the next couple of years, according to a recent statement by the National Bank of Kuwait.

The overview of the Bahraini economy, issued in early February, estimate non-oil increase would outstrip that of the broader economy, both this year and next. While it projects real GDP will expand by 3.4% in 2017 and 4.2% in 2018, non-oil increase is on track to reach 4.2% and 4.5%, respectively, as a result of higher investment levels, particularly in construction.

Local authorities acknowledge. In its most recent assessment of the Bahraini economy, the Bahrain Economic Development Board (EDB) reported that the construction industry is not only boosting non-oil GDP, but as well having a multiplier result on other areas of the economy.

“Increase in the third quarter was led by the construction sector, which expanded by an annual 7.2%,” it said. “The forward momentum of the projects is beginning to push up increase in several other non-oil sectors as well.”

The rising rate of expansion of the construction industry underscores the critical role infrastructure investment can play as a countercyclical increase driver in the kingdom. The sector’s increase rate rose in each of the initial three quarters of 2016, to 5.4%, 5.9% and 7.2%, respectively.

Added to the ongoing infrastructure and development programme is an increasing number of residential, retail and commercial property projects. Real estate trading volumes in 2016 rose 14.2% to BD1.04bn ($774.4m), according to an overview of Bahrain’s property sector issued in February by property consultancy CBRE.

While the statement noted the possibility that private sector development could be weighed down this year by concerns over excess supply coming to market, bright projections for economic increase and strong expected performance by the tourism sector should help soak up excess supply in the retail and hospitality segments, and generate additional request elsewhere, CBRE said.

Part the direct beneficiaries of increase in the construction sector will be materials and logistics services suppliers, whose order books should increasingly fill up as additional infrastructure projects get under way. Suppliers of equipment and technology, inclunding the relevant support services, will likewise gain from a better need for construction machinery and maintenance.

An added benefit should be a carry-through result to the financial sector, with increased building activity heightening request for credit, and bringing new business to banks and insurers alike.

VAT in the mix

In addition to spurring additional robust GDP increase, a construction boom could help to generate additional government revenue, aided by the introduction of a new price-added tax (VAT), due approaching into result by mid-2018.

The GCC-wide tax on goods and services, endorsed by the Bahraini government and all other member nations on February 1, will be set at 5%, though the agreement includes the right to exempt some sectors, such as real estate.

If the government does decide to waive VAT for property transactions, this would lower prices for buyers, though the impact would likely still be felt at other stages of the construction and development chain.

Despite adding to the cost of materials and services, the new tax could lift national revenues for Bahrain and other GCC member states by as much as 2% of GDP, according to the IMF. This would allow the government to channel additional funds into services and development, stimulating increase through targeted public investments.