Dealing with Limited Growth: Bahrain's Economy Performed Better Than Expected after the Social Unrest of Early 2011, but It Remains One of the Weakest in the Gulf

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Bahrain's reputation as an investor-friendly business hub took a huge knock following the political turmoil that brought its capital to a halt in February 2011. But policymakers can draw some comfort from progress made over the past year.

The financial and tourism sectors suffered most as a result of the political unrest. The cancellation of the Formula One Grand Prix in 2011 represented a serious blow to the country's tourism ambitions and is estimated to have cost Bahrain more than $500m.

Banks, central to Manama's status as the region's leading offshore financial centre, continue to see a deterioration in asset quality, growth and profitability. The main vulnerabilities are among the investment banks, some of which have large exposures to the battered real estate sector.

Several major international banks have announced plans to shift their regional head-quarters from Bahrain, among them France's Credit Agricole, Japan's Nomura and Rotterdam-headquartered Robeco. More recently, the largest foreign bank in Bahrain, France's BNP Paribas, said it is opening a back office and wealth management office in Dubai, rather than …