Global Investment House – Kuwait – Economic & Strategic Outlook– Oman - Macroeconomic Profile - Economic growth has been consistent for the past three years in the Sultanate. Policymakers in Oman have initiated reforms that aim for economic diversification and structural reforms. The robust performance of the economy is partly a reflection of the government’s sound macroeconomic policy towards creating an increasingly market-friendly economic environment. Examples of this conducive approach include the passing of the new Tax Law in September 2003 and a new Privatization Law in July 2004. The government also opened key economic sectors such as Telecommunications, Power, Utilities and Tourism for private sector participation. The strength of the Omani economy, measured by a brisk expansion of GDP, rising per capita income, widening budget surplus, low inflation, rising public and private sector investment and an active capital market signifies that Oman is now poised for a more aggressive pace of structural reforms.
The remarkable growth of the Omani GDP in 2006 has been a product of high international oil prices in general and specifically the increase in the average prices of Omani crude which increased by 22.7% to reach an average price of 61.69US$/bbl. This has provided liquidity which improved the Sultanate fiscal position. To take advantage of this opportunity, the Omani government has introduced a wide range of structural reforms. Such efforts over the past few years have strengthened competition in many sectors of the economy and has fostered above average growth trends in the vital non-oil sector. In addition, an economic diversification program aimed at the development of its gas resources is well under way with massive investments in key projects. Citing the government’s healthy fiscal position and the prospects for gas-led industrial growth, Standard & Poor’s (S&P), in 2007, has given Oman a stable rating of A on sovereign risk, currency risk, banking sector risk, and economic structure risk.
Oman's Gross Domestic Product (GDP) registered a double digit growth of 15.6% in 2006, as opposed to a much higher 24.6% in 2005. This has reflected buoyant world oil prices and the government’s firm commitment to diversify the economy away from oil. Hence progress has been made mainly with large gas-based industrial projects, which has included new liquefied natural gas facilities. Growth is expected to accelerate in 2007 as the liquefied natural gas export capacity increases and high oil prices boost revenues. Domestic demand should remain fairly robust due to firm growth in government spending, which should, in turn, encourage private consumption.
Net government revenues for 2006 were at RO5.02bn, an y-o-y increase of 11.5% over the previous year. Net oil revenues for 2006 were at RO3.2bn and continued to be the major source of government revenues. On the expenditure side, there was increased spending on investment and infrastructure projects in recognition of the government’s role as the major employer and the initiator of capital projects in the country. Total public expenditure during 2006 amounted to RO4.9bn as compared to RO4.2bn during 2005. Current expenditure constituted 71.5% of the total expenditure and investment expenditure constituted 24.3% of the total expenditure. The budget surplus declined by 70% in 2006 to reach RO91.1mn, mainly due to an increase in government subsidies to the private sector.
The emphasis on foreign direct investment has subtly come into the spotlight in Oman due to the realization of its important role in strengthening the domestic economy. Tentative steps towards privatization have been taken as part of the structural reform program to support the country’s development strategy and to make the Omani economy more attractive to investors. These include lifting impediments to foreign direct investment in most sectors, streamlining business regulations and adopting a one-stop investment center policy. The main thrust of privatization efforts is evident in telecommunications, power and transport sectors. The privatization objective received a significant boost with the issuance of the Royal Decree No. (77/2005) ratifying the privatization policies and regulations of the country. There have been a number of mega projects at different stages of implementation that have already been planned. These projects involve large investments from the private sector and they range from fertilizer, power, petrochemical, aluminum, iron, steal, and tourism among other sectors. Oman’s recent economic openness is evident by its commitments under the WTO through the bilateral relations it is pursuing with a number of countries like the USA. This will pave the way for Oman to further improve its economic efficiency and establish itself as an investment hub for local, regional and international investors.
The monetary agency in Oman had to juggle the sustained surplus liquidity and ensuring a better alignment of the domestic interest rate structure with the USA interest rates due to the fixed peg of the OR to the US$. Effective liquidity management in the face of what has preceded has been a challenge for the CBO. The inter-bank rate, while should have been constrained by the limits set forth by the CBO CD rates at which surplus liquidity is absorbed, and the ceiling rates on repos with the CBO at which liquidity is injected, has remained generally lower than CBO CD rates. This has constrained the ability of the CBO to transmit its policy rates into the market. The weighted average RO deposit rates increased by 0.6% to reach 1.85% in 2006. CBO’S CD rates increased by as high as 3% in to reach 3.6% in 2006 reflecting an alignment with the Fed Funds Rates. Expansion in money supply remained strong in 2006, consistent with the robust growth in GDP. Broad money (M2) expanded by about 24.9% in 2006, and narrow money M (1) expanded by 9%. Quasi money achieved a y-o-y growth 32.2% on the back of an increase in the foreign currency deposits which increased by 58.6% in 2006. The share of foreign currency deposits in total deposits is an indicator to the extent of the dollarisation in the banking system. It more than doubled from 13.4% in 2002 to 28.8% in 2006, highlighting a better alignment of RO deposit interest rates with the USD deposit rates in order to be able to contain and reverse the dollarisation trend.
Muscat Securities Market achieved good returns in the year 2006, with the MSM general index growing by 14.4%. Most GCC securities markets witnessed a sharp mid-year correction in 2006 following a rise of share prices in the previous two years. Despite the downward trend in the region, the MSM ended the year with notable recovery to higher levels. This was due to the significant performance of Oman’s economy, high oil prices, enhanced disclosure and transparency norms, improvement in the profitability of listed companies and increased investor confidence in the market.
Recent data indicates that Oman market continued the rise in 2007 where MSM 30 rose by 87.7 points or 1.4% in Jul-07 on M-o-M basis. It ended the month at 6,426.7 points. With this rise, the market has registered YTD gain of 845.1 points or 15.1% at the end of Jul-07. The market capitalization of the exchange reached to US$15.1bn, recording a monthly gain of 2.8% in Jul-07.
The Omani economy is expected to continue its growth in 2007, but at a slower pace. Nominal GDP is expected to grow by 7% in 2007, compared with 15.6% in 2006, which is expected to be driven by non-oil activities. The budget for 2007 is a growth oriented budget that is expected to boost investments and create more jobs in line with the growth sustainability target of the Seventh Five Year Plan (2006-2010). The 2007 Omani budget stressed on enhancing the economic and financial fundamentals of the country to stay abreast of the global economic advancements. It targets infrastructure projects, increase in gas production, and other diversification steps that lead to growth. Oil activities are expected to witness negative growth due to an expected decline in oil production. Government revenue is estimated to be about RO4, 490mn in 2007 as compared to RO3, 587mn for fiscal 2006. The overall public expenditure, on the other hand, for the fiscal 2007 is estimated to be about RO4, 890mn relative to RO4, 237mn for fiscal 2006.
The outlook for Omani economy looks bright in the short-to-medium term underpinned by healthy international oil prices, higher Liquefied Natural Gas (LNG) exports, investments in new petrochemicals, power, telecom and tourism infrastructure projects and ongoing efforts to encourage foreign direct investment. A number of projects are in the pipeline involving large investments, which could change the structure of Oman's economy once these projects come fully into operation. The vast potential of tourism as a major source of diversification is also being tapped in addition to the existing infrastructure. Oman has made the most judicious use of oil revenue for expanding the non-oil sector, which is expected to make the growth and development process in Oman more sustainable in the long run.
© 2007 Al Bawaba (www.albawaba.com)
