Economic studies
Oman

Oman

Population 3.7 million
GDP per capita 20,927 US$
B
Country risk assessment
A4
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Synthesis

MAJOR MACRO ECONOMIC INDICATORS

  2013 2014 2015(f) 2016(f) 
GDP growth (%) 4.7 2.9 4.1 1.8
Inflation (yearly average) (%) 1.2 1.0 0.4 2.0
Budget balance (% GDP) 3.2 -1.5 -17.7 -20.0
Current account balance (% GDP) 6.6 6.4 -14.0 -16.8
Public debt (% GDP) 5.1 5.1 9.3 12.2

 

(e)Estimate  (f) Forecast

STRENGTHS

  • Strategic situation
  • Economy undergoing diversification (petrochemicals, steel making, port activity and tourism)
  • Political stability and institutional development in progress
  • Sound banking system, open to foreign investment

WEAKNESSES

  • Reduced reserves of hydrocarbons and increased exposure to their price fluctuations
  • Inadequate qualification of local labour, hence the private sector's dependency on foreign labour
  • Notable unemployment amongst nationals, particularly young people
  • Productivity and business climate could be improved

RISK ASSESSMENT

The economy will begin to feel the negative impact of low oil and gas prices in 2016.

In 2015, the non-oil and gas sectors contributed to the vitality of activity by offsetting the decline in oil revenues. Growth is, however, likely to slow in 2016. The authorities will gradually limit support for the economy to mitigate the shock from shrinking oil GDP.  The development plan aimed at increasing diversification within the economy will continue, but public investment expenditure will be reduced. Oil output will increase during 2016 and thus help offset the decline in profits from the sector, but investments will be deferred. The authorities are nonetheless intending to proceed with the planned pipeline between Oman and Iran. Household consumption, whilst resilient, is not able to sustain activity to the same extent. Firstly, household confidence has declined and any reform of the system of subsidies will reduce purchasing power. Secondly, substituting local production for imports will only be of limited effect as, whilst diversified, local industry is not in a position to satisfy the demand. Inflation will continue at around 2% in 2016.  Despite rising property prices, downward deflationary pressures on the rial are likely to persist in 2016, in view of the scale of the current account deficit and the continuation of a strong dollar (c.f. rise in US interest rates). 

Finally, credit proved buoyant in 2015, despite the slowed growth of deposits, particularly those of the public sector, which account for 30% of all deposits. The proportion of non-performing loans remains low and the level of bank capitalisation is high in conformity with the Basel III recommendations.

 

Deepening twin deficits

As of 2014, the Sultanate has had to deal with the emergence and deepening of twin deficits, whose levels reached a critical threshold in 2015. The decline in oil revenues, which make up 85% of budget revenues, and the extension of public spending in 2015 led to a significant increase in the public deficit. The authorities are likely to extend their expansionist budget policy into 2016, which will further increase the size of the public deficit. Investment spending will be prioritised but current expenditure will be held at previous levels. Nevertheless, the authorities are intent on limiting what has been rapid wage growth in the public sector in recent years. Whilst the deregulation of the price of gas supplied to companies came into force in 2015 and has already helped reduce the cost of subsidies, further cuts in food and energy subsidies for households could also be implemented. The government has plans for the privatisation of a number of publicly owned companies in the oil sector. The low level of debt will allow the Sultanate to cope with the scale of the deficits incurred since 2014. The Omani central bank in 2015 carried out a 600 million rial bond issue on the financial markets and is planning to repeat the operation in 2016.

In 2015, the current account entered into negative territory under the combined impact of low oil and gas prices and increased domestic demand for oil, which reduced the oil for export. The weakness of the oil market in 2016, which will result in a price per barrel below the prices needed to balance the external accounts, would suggest that the current account deficit will deepen further in 2016. Non-oil and gas exports, however, should increase with the upswing in trade with its Iranian neighbour but remain limited because of the appreciation of the Omani rial, tied to the dollar.

The risk of imported inflation and the reduced competitiveness of its exports as a result of the over-valuation of the rial could lead to an ending of the dollar peg, although the authorities have re-affirmed their desire to maintain the fixed parity. 

 

Slow pace of institutional reform after social unrest in 2011

The economic and political reforms initiated by Sultan Qabous ben Said in response to the protests that began in early 2011 have met some of the social and political demands of the population. The institutional reforms that have emerged have included in particular the granting of legislative powers to the Majlis al-Choura (Consultative Council), for which an election by universal suffrage was held on 25 October 2015 with a turnout of 56%. 

Although no serious political risk has materialised in the short term, there are real uncertainties around the future of the regime personified by Sultan Qabous. He remains the only ruler of a Gulf state without children or a designated heir. On top of this, Oman suffers from high unemployment, especially among the young, with the government struggling to implement its policy for the “Omanisation” of jobs. The business climate does, however, remain favourable for foreign companies.

 

Last update: January 2016

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