The Gulf states: an emerging competitor to the City?

Bahrain Manama Skyline Gulf States Panorama at Night

(Image credit: Getty Images)

published 31 October 2024

They rely purely on oil and gas. They don’t have much in the way of a domestic economy, nor do they have the depth of technical skills to compete in highly sophisticated service industries. Yet commerce hubs in the Gulf, such as in Bahrain, are emerging as genuine finance centres on their own terms. Most of the major European financial centres think they are competing purely with one another. But those in the Gulf could, in time, pose a real threat to Paris, Frankfurt and, of course, the City of London too.

On a visit to Bahrain earlier this month I was struck by how quickly the island kingdom is developing as a finance centre. “Financial services are already the largest sector of the economy, overtaking oil and gas in 2020,” Khalid Ebrahim Humaidan, the governor of the central bank, told me. One of the country’s advantages, he believes, is that both monetary policy and regulation are combined in the central bank, allowing it to maintain flexibility and ensure stability while promoting growth.

“We have been working to make the country far more innovative, and to encourage start-ups, especially in financial services,” says Abdulla bin Adel Fakhro, the minister for trade and commerce. Likewise, the Development Board is pressing ahead with developing its finance industry, with its own fintech hub, and lots of emphasis on digital banking and cryptocurrencies.

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Four big Bahrain trends

True, Bahrain is not a huge place. The total population is only 1.5 million people, and only half of those are Bahraini. It ranks 76th in the GFCI global ranking of finance centres. Even so, it has more than 400 financial institutions operating on the island, finance accounts for 16% of GDP, and, along with its better-known neighbour, Dubai, it’s not just a domestic finance centre, but one that is also doing business with the rest of the world. Bahrain has four big trends on its side.

1. Flexible regulations. As Humaidan, from the central bank, points out, the island is working hard to make sure its regulatory environment favours innovation and investment. Fintech and crypto are just as important as traditional banking, insurance and trade finance, and growing all the time. That is not just a coincidence. Start-ups have been actively encouraged, and not just tolerated as they are in most European finance centres.

2. Huge investment in modern infrastructure. Bahrain has only recently opened a glittering new airport and, of course, the facilities in Dubai, Qatar and Abu Dhabi are just as good. The region’s airlines have modern fleets and quick connections to the rest of the world. It is an easy place to operate a business.

3. Low or zero taxes, especially on capital and wealth, combined with strong economic growth. Bahrain levies no income tax or capital gains tax, and although it will introduce a corporation tax, mostly to comply with the OECD’s new global minimum rate, that will only apply to domestically generated profits. The same is true of most of the Gulf states. Meanwhile, their economies continue to thrive. Even with a relatively low oil price, and little prospect of higher prices any time soon – there is too much shale oil in the world, and even if they do rely on subsidies, renewables are growing fast – Bahrain will expand by more than 3% this year, and the whole of the United Arab Emirates by 3.4%.

As taxes rise across Europe, especially in both France and the UK, those zero rates are going to become more and more attractive over time.

4. An increasingly skilled workforce. Most of the Gulf states have high levels of education, and the more liberal ones have brought plenty of women into high-level positions. They have turned into a magnet for young talent from all around the world, not least because the tax regimes, alongside the quality of life, are more attractive than the countries from which the immigrants come. Sure, there are plenty of challenges. The region is politically unstable and will remain so as long as Israel is at war with its neighbours.

The huge number of expatriates and foreign workers may not always be available to keep the economy running. Oil and gas may not be as crucial to the Gulf economies as they once were, but they remain the foundation on which the region’s prosperity was built, and as the rest of the world switches to renewable energy its value will keep on falling. The next two decades may easily prove a lot tougher than the past two. Even so, the region is still racking up some of the fastest growth rates in the world, and with every year that passes more and more of that growth is coming from manufacturing, tourism and, perhaps most of all, finance.

A refuge from rising taxes

We think of places such as Bahrain or Dubai as purely regional financial hubs. They have a niche handling all the wealth that the oil and gas industry generates, but not much else. We certainly don’t think of them as having the experience or expertise to compete on their own terms. And yet that view is surely becoming very dated. Europe is suffocated by high taxes and cumbersome regulations. Unlike New York, or Singapore, or Shanghai, the Gulf is in virtually the same time zone, and it is only five or six hours by aeroplane from most European capitals.

There are a growing number of highly skilled expatriates, fleeing endlessly rising taxes in their own countries. It may not be long before start-ups decide to base themselves in the region, or companies choose to list their shares in one of the Gulf states. Add it all up and one point is clear. Emerging finance centres such as Bahrain are turning into a threat to complacent European finance hubs, and especially London – a threat that the City should start taking seriously.

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Matthew Lynn is a columnist for Bloomberg, and writes weekly commentary syndicated in papers such as the Daily Telegraph, Die Welt, the Sydney Morning Herald, the South China Morning Post and the Miami Herald. He is also an associate editor of Spectator Business, and a regular contributor to The Spectator. Before that, he worked for the business section of the Sunday Times for ten years.

He has written books on finance and financial topics, including Bust: Greece, The Euro and The Sovereign Debt Crisis and The Long Depression: The Slump of 2008 to 2031. Matthew is also the author of the Death Force series of military thrillers and the founder of Lume Books, an independent publisher.