Financial Market Assessment Bahrain Essay Example | Topics and Well Written Essays - 2000 words

Financial Market Assessment Bahrain - Essay Example The Index of Economic Freedom measures countries against a list of 50 independent variables divided into 10 broad factors of economic freedom. Low scores are more desirable. The higher the score, the greater the level of government interference in the economy and the less economic freedom a country enjoys. These 50 variables are grouped into ten categories: Trade policy, Fiscal burden of government, Government intervention in the economy, Monetary policy, Capital flows and foreign investment, Banking and finance, Wages and prices, Property rights, Regulation, and Informal market activity. As shown in Table 1, Bahrain ranked 20th of 155 countries (North Korea is 155th). Using the table, we can make a quick comparison of Bahrain and Hong Kong (HKG), the country with the highest economic freedom, and the United Arab Emirates (UAE), Bahrain's closest competitor for the title of the Middle East's financial capital. As Table 1 shows, Bahrain had the same scores as HKG in five out of ten categories, but in one of these (Fiscal burden), it scored higher (meaning, it performed worse) than the UAE, which is developing Dubai to compete with Bahrain. Since our paper is a study of Bahrain's competitive weaknesses in financial markets, we have a tool we can use to know what it should fix if it wants to win the competition with Dubai. The comparison with the United States gives us a better idea of how Bahrain fares in economic freedom. The U.S. is ahead only by a margin of two: better in three categories: Trade policy, Government intervention, and Informal market; worse in one: Fiscal burden; and tied in the rest. We now look briefly at where Bahrain did well. Then, by focusing on those where it scored badly, we can come out with the basic tools to analyze the degree of openness of Bahrain's financial sector. Bahrain's Good Points1 Bahrain scored well in four areas: monetary policy, banking and finance, wages and prices, and property rights. The main reasons for these are: Monetary Policy. Measured on the basis of the weighted average annual inflation rate of 0.04 percent, Bahrain is stable. Banking and Finance. Bahrain's banking and finance sector has very few restrictions. It is relatively easy to establish a bank; there are few, if any, restrictions or requirements on new banks; and foreign banks are welcome. At the end of 2003, there were 25 commercial banks, mostly foreign, and foreigners and Bahrainis alike have ready access to credit on market terms. The banking system is sound and undergoes examination and supervision by the Bahrain Monetary Agency (BMA), which has a solid international reputation. Efforts are being made to increase the liquidity of the Bahrain Stock Exchange (BSE), which opened in 1989. The government allows Gulf Co-operation Council (GCC) nationals to own 100% stakes in firms listed on the BSE and increased the proportion that could be owned by other foreigners to 49%. The Minister of Commerce has announced that ownership for non-GCC nationals will be increased to 100% by end-2005. Wages and Prices. Bahrain, despite issuing a minimum wage law, improved its wages and prices regimes in the past year, reducing its influence over setting of domestic prices. It liberalized its telecommunications sector, where it had monopoly power, and reduced state power over