MANAMA // Cranes stand idle over the skyline of Manama. Stalled projects line the city's waterfront, where many completed skyscrapers have struggled to attract tenants.
Compared with the flurry of construction activity elsewhere in the Gulf, the sense of lethargy is palpable - as is the frustration of the kingdom's businessmen with the economic malaise.
"We're currently going through a phase," said Hisham Alrayes, the chief executive of Gulf Finance House, an Islamic investment bank that agreed on a US$110 million (Dh404m) restructuring with creditors last week. "Hopefully, things are evolving to reach a better political environment in Bahrain."
Bahrain's government recognises that recent unrest has exacerbated the difficulties in convincing investors to return as the Middle East seeks its way out of the global financial crisis, said Sheikh Abdulaziz bin Mubarak Al Khalifa, a government spokesman.
"The events of last year haven't been helpful," he said. "But people have realised that no matter what, doing business in Bahrain is still bona fide and credible."
The kingdom hopes to lure investors back by highlighting its legal and regulatory strengths, alongside a free-trade agreement with the United States that went into effect in 2006.
Nonetheless, foreign direct investment in Bahrain plunged during the past few years as overseas investors fled. Investment peaked at $1.79 billion in 2008 before falling as low as $155.7m in 2010, according to the latest available data from the World Bank.
Bahrain's economic development board estimates that foreign direct investment rose to about $300m last year, in spite of the unrest.
In an effort to address the funding shortfall, the GCC last year pledged $10bn to Bahrain over a 10-year period, the first round of which is now being disbursed.
Last year's unrest resulted in a number of projects being placed on hold, with developments resuming only now, said Jean-Christophe Durand, the chief executive for the Middle East and Africa at BNP Paribas.
"Certainly, it has slowed down the economy for a period of six months. Projects were delayed and investors were wary, and the second part of the year was a bit slower," he said. "If you look at the figures, Bahrain hasn't gone into recession. It's because of the support of the other countries from an investment and development level."
Bahrain battled through recent unrest to host the Formula One Grand Prix last month. Despite the $500m in economic benefits that the government says the three-day race brings, that is hardly enough to hold together an economy.
As it fell back on its strengths in oil and aluminium production, Bahrain has been hammered by the effects of the global financial meltdown that has returned to focus because of renewed worries surrounding the future of the euro zone.
European banks have cut lending to Bahrain's banking sector in an effort to boost their capital buffers. Some European banks, including France's Société Générale and Crédit Agricole, have withdrawn in favour of Dubai.
The difficulty in obtaining fresh funding has already forced Arcapita, an Islamic investment bank, into seeking bankruptcy protection in the US, after it failed to secure a renegotiation of its debts to hedge-fund creditors.
Meanwhile, Gulf Finance House announced a restructuring of its $110m sukuk last week.
Even in the energy sector, some projects may have to do more to attract financing from banks in the current climate, said Abdul Hussain bin Ali Mirza, Bahrain's energy minister.
"If there's a project which is economically viable and has high returns, I don't think the banks will hesitate in providing the funds," he said. "But maybe if the projects are marginal, they will have second thoughts."
The total assets of international banks in the kingdom - which includes loans as well as investments booked offshore - have fallen 26 per cent to $154bn between the peak of the boom in 2007 and the end of March this year, according to the latest data from Bahrain's central bank.
In the first quarter of last year, when political unrest brought business activity in Bahrain to a standstill, international banks decreased their assets by $19.05bn, the same data shows.
"Compared to 2007 or 2008, it's difficult - much more difficult - to raise financing, and only good projects get funding," Mr Alrayes of Gulf Finance House said. "Before, you could obtain financing or commitments over the phone and you could conclude a deal in under seven days' time - which isn't healthy."
With many banks leaving for Dubai, Bahrain's residents now invite comparisons with the political paralysis of Lebanon - which itself lost its crown as financial capital of the Middle East during the sectarian strife and civil war of the 1980s.
Amid a crisis of confidence, the challenge now is to rebuild Bahrain's financial sector as one of many in the Gulf with a focus on specific niches, with new competition from Qatar and Abu Dhabi, said Kamal bin Ahmed Mohammed, the acting chief executive of Bahrain's Economic Development Board.
"We cannot just continue with generic banking - we think we have the potential now and the advantage when it comes to Islamic banking, fund management and insurance," he said. "We need to do more to retain as well as attract."
Bahrain faced a "tough" year in 2011, but the economy still grew by 2.2 per cent, he added.
"The economic fundamentals of Bahrain's economy remain and are still strong, and this is why we can see growth even in 2011," he said. "We think the outlook for 2012 will be 4 per cent growth."
That growth target is double the IMF's forecast of 2 per cent. The fund expects Bahrain's growth to underperform all other Gulf states this year as bad debts rise across the banking sector.
But other areas of the kingdom's economy are showing signs of stabilisation. Trade volumes were returning and tourist numbers were expected to increase in the year ahead, said Marco Neelsen, the chief executive of APM Terminals Bahrain, which operates the country's container ports.
"In 2011, we saw only a very minimal increase in volumes, and it's started to recover slightly in 2012," he said. "Bahrain is coming out of this lethargy a little bit."
APM processed 375,000 shipping containers last year, a 2 per cent increase over the previous year, and expects to report 10 per cent growth in container volumes during the year ahead.
Early bookings of cruise ships are also expected to lead to a "significant increase" on the 12 or so liners that docked last year, he added.
Cargoes of building materials have also increased, as the government tries to stir the construction market with large social housing projects.
Bankers are giddy with excitement that this project will kick-start growth in the financial sector, allowing it to regain its profitability.
Gulf Finance House is planning investments in construction materials production in an effort to take advantage of an economic revival, a move some analysts warn will be sharply constrained by higher costs of financing.
"We have a saying in Arabic: real estate becomes sick, but never dies," Mr Alrayes said.
The year ahead will be a major test of whether Bahrain can accelerate into recovery.
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