Sift through the catalogue of GCC economic growth forecasts from the International Monetary Fund (IMF), World Bank, Economist Intelligence Unit and others over the past year and the same pattern emerges: all of the six countries are recording stagnant growth but Bahrain and Oman are suffering the most.

Bahrain – the tiny island kingdom adjoining the biggest market in the Gulf via an ocean causeway to Saudi Arabia’s Eastern Province – has been labelled by the World Bank as “the most vulnerable” country in the GCC in the face of low oil prices, because of its meagre reserves and high debt levels.

Bahrain’s fiscal deficit is estimated at 12.6 percent of GDP, up from 3.3 percent in 2014. The figure for Oman is worse, at 19.5 percent, but the World Bank notes that the sultanate has more savings and has taken steps to finance its deficit, such as a $2.5bn sovereign bond issuance last June.

Bahrain’s government, meanwhile, is also dealing with an unstable political climate as social unrest continues, with security risks threatening to dampen investor confidence. Overall GDP growth is projected to slow to around 1.8 percent in 2017 from around 2 percent in 2016, according to the IMF and World Bank, while austerity measures, tightening regional liquidity and low oil prices take their toll on the economy.

In a crucial indicator, the World Bank estimates Bahrain’s fiscal break-even price was $107.2 per barrel in 2015, the highest among GCC states. Even though the country began a fiscal consolidation programme that year, including increasing taxes and fees and starting to remove meat and energy subsidies, this has so far failed to mitigate the impact of low oil prices given that hydrocarbons still comprise 86 percent of government revenues.

To add insult to injury, the three main rating agencies last year cut Bahrain’s sovereign rating to non-investment grade, affecting the cost of borrowing.

However, at the GCC Financial Summit in Manama last month, at which CEOs of key national agencies including the Bahrain Economic Development Board (EDB), Central Bank of Bahrain (CBB) and Bahrain Bourse spoke, little of this bleak background picture was sketched.

Bahrain Bourse is establishing a company that will offer new services with a start-up capital of $13m.

Instead, decision makers are highlighting a lesser known story about Bahrain: its rapidly accelerating non-oil economy. The non-oil sector accounts for 76 percent of Bahrain’s total GDP, according to the IMF, so if you strip out flat hydrocarbon growth from the headline growth figures, you have a rosier outlook. According to EDB’s latest Economic Quarterly report issued two weeks ago, non-oil growth reached 4.7 percent in the third quarter of 2016 (the last period for which figures are available), representing a rapid uptick from the 3.6 percent growth seen in the previous quarter.

A key factor underpinning momentum in the non-oil economy is an unprecedented pipeline of large-scale infrastructure projects, implementation of which has accelerated in the past year, EDB notes. Examples include state aluminium producer Aluminium Bahrain (Alba)’s $3bn Line 6 Expansion project – touted to give Bahrain the largest smelter in the world – a $1bn airport modernisation contract, and a $355m Banagas gas plant.

In total, the value of tendered projects has risen by 20.5 percent since the end of 2015 to more than $4.3bn – sufficient to stimulate short-term growth and foster long-term productivity gains for the kingdom, according to the EDB.

There have been several structural growth drivers including rising population and skilled human capital, while a number of regulatory reforms have been introduced in the past two years, providing a filip to Bahrain’s diversified economy. These include measures to cut the time to export goods to Saudi Arabia, Bahrain’s key trading partner, new rules to support the creation of investment limited partnerships, protected cell companies and trusts, and reduced minimum capital requirements for start-up businesses.

Overall, during the first three quarters of 2016, Bahrain’s economy expanded by a real 3.6 percent over the corresponding period in 2015, according to the EDB, compared to headline growth of 2.9 percent during 2015.

CBB governor Rasheed Mohammed Al Maraj forecasts 2017 non-oil GDP growth to be 3.5 percent – a drop from his projected 3.6 percent for 2016, the official figures for which have not been finalised, and a decline from the EDB’s own third quarter figure.

But Al Maraj told the forum the forecast still demonstrated an encouraging resilience. “The country has managed to adapt to new economic realities. The non-oil sector in Bahrain has been doing reasonably well, and economic diversification has made the country very resilient against the challenges we have seen in the last 2-3 years.”

Central bank governor Al Maraj.

The anticipated marginal recovery in oil prices to above $60 per barrel this year is expected to lend it further growth momentum, he added. Unsurprisingly, Bahrain is looking to this comparatively bouyant segment of the economy to keep its head above enduringly choppy waters ahead.

In an interview with Arabian Business, the EDB’s chief economic adviser, Dr Jarmo Kotilaine, says the government has identified five non-oil industries expected to drive Bahrain’s future growth, and that is where it will prioritise investment promotion efforts. The five areas are financial services, industrial and manufacturing, logistics, tourism and information communications technology (ICT).

“These are sectors where you have investible assets, more or less ready infrastruture, human capital and an attractive regulatory environment. They are clusters, or sub-sectors, that are consistent with the country’s value proposition,” he says.

Financial services is an established sector in Bahrain with a ready pool of high-skilled people “and it makes sense to build on your strengths”, Kotilaine says. “In some ways, Bahraini banks were better positioned for this [global] economic downturn than some of their regional peers because their loan-to-deposit ratios were lower and there was a fair bit of spare liquidity in the system, which, now growth has strengthened and confidence has increased, has been progress-ively mobilised.

“Banks are beginning to look at alternative ways of raising capital and meeting customers’ needs, which is a positive process.”

With huge strategic projects such as Alba’s Line 6 expansion, further developing Bahrain’s industrial and manufacturing sector is an obvious step, Kotilaine says. “Manufacturing is another established sector and has logical opportunities in terms of modernisation or potential for more value chain capture.

Bahrain Bourse’s Sheikh Khalifa.

“Related to manufacturing is logistics, and Bahrain can capitalise on this further because its geographical location in the Gulf means it is a natural logistics cluster offering a range of different modes of transportation.”

Tourism has been perceived as an important sector, again because of Bahrain’s location and welcoming culture. It has always attracted “substantial” visitor flows from the rest of the region and there is scope to promote its appeal to tourists further afield, Kotilaine says.

“It’s also an interesting sector as it offers opportunities for entrepreneurship; you do not need to build a big, expensive refinery to be a player in the tourism sector, and of course, the country has some significant and unique assets because of its history and archaeology.”

Finally, ICT is an “up-and-coming sector that, by investing in, you can help every other sector to grow faster”, he says. For example, EDB CEO Khalid Al Rumaihi revealed at the summit that Bahrain is devising plans for a pilot blockchain project. It wants to become a pioneer in the burgeoning ‘fintech’ space, which is “disrupting” the whole of the financial services sector, Al Rumaihi explained. National adoption of blockchain technology, an electronic transaction processing and public ledger system that allows parties to record information without the need for third-party verification is a key enabler of this.

Meanwhile, real estate, although a cyclical sector with higher structural risk, is showing promising signs of uptick and could help to leverage growth. CBRE Middle East director of research and consultancy James Lynn says: “Local and regional developer activity has notably increased in Bahrain across residential, retail, industrial and hotel sectors since mid-2016 and this trend is expected to continue through 2017 – with a degree of caution for the short-to-medium term future.

“Government spending on improving nationwide infrastructure is scheduled to reach $32bn by 2020 with transport, power, water and housing projects in the pipeline, and this has undoubtedly helped raise investor confidence in the local property market.

“In addition, growing demand for product from an expanding resident population at 3.3 percent per annum and an inbound tourist market of circa 15 million in 2016 have combined to reignite real estate development across multiple sectors.”

Bahrain Economic Development Board CEO Khalid Al Rumaihi.

For example, he says, residential sales prices for mid- and high-end apartments and villas across key urban districts on average achieved a steady 4.5 percent growth year-on-year in 2016, demonstrating a positive market trend, while retail rents across regional stock remain stable despite increasing supply and competition from convenient community shopping centres in residential neighbourhoods.

Real estate schemes set for completion in 2017 include the Wyndham Grand hotel in Bahrain Bay, The Avenues retail cluster at Bahrain Bay Corniche, Bahrain Financial Harbour and Bahrain World Trade Centre. In the mixed-use segment, the Bahrain Marina scheme is expected to complete by 2020, while the 6-metre square foot Investment Gateway at Hidd by Manara Development has just completed the first phase, bringing to market a new slice of logistics and light industrial real estate. The second phase is scheduled for completion in 2018.

Planned infrastructure development, including $700m worth of pipeline road and bridge construction schemes, will serve to support a reviving real estate sector. Three of the four projects earmarked for completion by Bahrain’s Committee for Stalled Real Estate have been kickstarted – another positive indicator.

With so much new commercial activity, Bahrain also performed well in terms of foreign direct investment (FDI) last year. The total amount of FDI in 2016 stood at $280m, according to EDB – double the figure for 2015. A total of 40 foreign companies invested in the country, including Swedish furniture giant Ikea, foam insulation company Armacell, Amazon Web Services and Mastercard. Together they are set to generate 1,647 jobs over three years.

A report by Oxford Business Group (OBG) last month highlighted Bahrain’s appeal for foreign investors, noting that it has continued to rise up the World Bank’s international ranking for ease of doing business despite competition from GCC peers. Bahrain ranked 63rd in 2016, up from 66th in 2015 and beaten in the GCC only by the UAE, which ranked 26th.

“While Bahrain has had to cut public spending and reduce subsidies to accommodate a widening fiscal deficit, the country’s strengths, which include an educated workforce and established regulatory framework, make it an attractive draw for investors. The kingdom’s longer term prospects look bright,” OBG CEO Andrew Jeffreys says.

However, barriers remain to growing Bahrain’s non-oil private sector. Analysts warn that too many businesses are operating at a “suboptimal scale”. They are either start-ups and small-to-medium-sized businesses (SMEs) struggling to secure the resources to scale up and grow their market share, or large corporates, foreign or Bahraini, but there is little in between.

Bahrain Economic Development Board is responsible for attracting investment into the kingdom.

“Bahrain has a vibrant culture of SMEs but the ecosystem is incomplete,” says the EDB’s Kotilaine. “The fact that we have [a growing number of] SMEs does not mean we are getting the full economic impact from it.

“The government needs to put in place initiatives to encourage risk and make it easier to scale up and expand your business, particularly overseas, as looking outward is a good way to overcome one of the key limitations of the Bahraini market, which is, that it is small.

“There are a lot of ‘lifestyle’ investors here, operating one or two coffee shops, for example. Even if they managed to cross the bridge [the King Fahd Causeway] and establish a presence in the Eastern Province, you are talking about a market five times the size.”

There is also no established market for private corporate capital and no objective base for company valuations. There is therefore little incentive for consolidation or mergers and acquisitions, Kotilaine warns. “Discussions over [acquisitions] are usually quite fruitless because it turns into a shouting match: ‘I may like your company but I’m not going to pay you $5m for it when I think it’s worth $1.5m’.”

He says the planned introduction of a value-added tax (VAT) may help to eradicate these sorts of problems, because it will force SMEs to be more forward looking and produce accounts in a consistent and transparent fashion. During the forum, Sheikh Khalifa Bin Ebrahim Al Khalifa, CEO of national stock exchange the Bahrain Bourse, told delegates measures were being devised to encourage more of the country’s family businesses to list, in an attempt to professionalise them and help them scale up.

Of course, there are plenty of other global economic challenges to be navigated, not least any negative impact from the Trump administration in the US – although Bahrain’s leaders claimed last month this was not something they were worried about. Bahrain is one of the few countries in the world with a full free trade agreement with the US, and it intends to take greater advantage of this.

Bank of America Merill Lynch’s Macro Monthly report in February showed Bahrain’s foreign reserves dropped by $170m between June and November, 2016 to $2.6bn, despite the issuance of $2bn in international bonds in October. “This suggests external headwinds remain,” the report said.

But if the smallest Gulf state can successfully leverage on its existing and emerging strengths, in particular the huge pipeline of nascent infrastructure projects, it may well be able to turn around its flailing economic growth trajectory.

“This infrastructure narrative is one that has a lot to give. We are talking about an overall investment pipeline that is twice the country’s GDP, and even when we look at just the priority projects it is equal to national GDP. This is a game changer,” Kotilaine says.