Country Report Oman
Social unrest remains present in Oman, albeit only on a small scale, but the recent limiting of the freedom of speech is a worrisome development. The increase in current government spending is a concern for the longer term. Succession risks remain, as long as Sultan Qaboos bin Said al‑Said fails to appoint a successor.
Strengths (+) and weaknesses (-)
(+) Strong external position
Oman's continuously high oil export revenues have resulted in years of subsequent external surpluses and a significant amount of FX-reserves.
(-) Weak labour market
The education level in Oman remains low and results in a poorly skilled Omani workforce and high dependence on expatriate workers.
(-) Authoritarian regime limits democratic progress
While political changes to appease the protesters have been made since 2011, the authoritarian tendencies of the government limit real democratic progress.
(-) Narrow economy is too dependent on the oil sector
The economic structure of Kuwait is very weak with the high dependence on oil export revenues resulting in a very high vulnerability to fluctuations of global oil prices.
1. Small scale protests continue
Over two years after the Arab Spring protests hit Oman, increased spending as well as promised and implemented reforms appeared to have successfully appeased Omanis. However, keeping the population content with just these policies will be challenging. Sultan Qaboos made some constitutional changes to placate those calling for political reform, increased economic benefits for Omanis and pledged to create thousands of new jobs. While this has rendered the majority of the population content, the authorities also started to crack down on freedom of speech, with numerous arrests of bloggers and activists. To mark Renaissance day on July 23rd, Sultan Qaboos pardoned 215 prisoners, and then pardoned 14 more the following day. These 14 had been sentenced to prison terms for their roles in the violent protests in early 2011. Previously, in March, the Sultan had already pardoned a number of other arrested activists. The policy of handing out charging and convicting people and then issuing pardons by royal decree has become a frequent practice in Oman. With it, the authorities seek to maintain control and send a clear message to the people without appearing too heavy-handed. This policy is likely to continue, but increasingly limiting freedom of speech is a negative development. Especially since in the majority of Arab Spring-hit countries, the authoritarian rule was one of the causes for the protests. While Oman, and other Middle Eastern countries, have done well by introducing (limited) democratic reforms, it is very unwise to revert the higher sense of democratic freedom for the population.
2. Current spending increases are a concern
In the first five months of this year, despite higher oil output, fiscal revenues edged down, while expenditure continued to climb. This emphasizes that Oman is increasingly vulnerable to larger fiscal deficits if oil prices were to decline. The 2013 budget assumes that total spending will reach USD 33bn, which would represent a decrease of around 5% compared with the 2012 outturn. However, expenditure in 2013 so far has continued to grow, rising by 3.6% yoy in the first five months. At the same time, in this period, total revenue declined by 1.5% yoy. We expect that this year’s fiscal deficit will be larger than in 2012, reaching around 2.5% of GDP.
Although Oman has been successfully expanding its oil output in recent years and this trend is continuing in 2013, the pace of the increase has slowed (up by 2.8% yoy in 13Q1). Given slower oil output growth and ageing oil fields, there is a need to consolidate government spending. In 2012, government expenditures were 36% higher than initially budgeted for, mostly in the form of increased current spending such as public sector salaries and unemployment benefits, meant to stem the social unrest. For the medium term, we believe that Oman will have no problem to finance small annual fiscal deficits and will be able to maintain its very low level of public debt (4% of GDP at end-2012). However, for the longer term, high and growing levels of current spending, combined with Oman's current heavy dependence on oil revenue, would pose a major challenge to the government in the event of a protracted and steep fall in oil prices.
3. Succession risks remain
Although Oman's ruler, Sultan Qaboos bin Said al‑Said, appears to be in good health despite his diabetes, he will turn 73 in November and has yet to appoint a successor. Although abdication is not without precedent in Oman—Sultan Qaboos's father, Said bin Taimur, assumed power when his father, Taimur bin Faisal, abdicated in the early 1930s—it seems an unlikely option, as there is no obvious heir. Although briefly married in the mid-1970s, Sultan Qaboos has no children. Sultan Qaboos's decision not to publicly identify a successor may be a deliberate move to reduce the chances of being ousted in a coup. The succession is of particular importance in Oman because of the almost total power wielded by the sultan; who appoints all the ministers, approves all legislation, and holds the posts of prime minister, defense, finance and foreign affairs. In the hands of an effective and popular ruler—Sultan Qaboos is locally and internationally generally regarded as both—this arrangement has served Oman well for many years. Sultan Qaboos successfully unified a country riven by civil war and tribal and ideological divisions, and built a well-respected international reputation for the sultanate. However, the generations that were grateful for stability, peace and relative economic prosperity are giving way to a rapidly growing younger generation who has no memories of the almost medieval conditions of pre-1970 Oman. This lack of historical perspective coupled with far greater global awareness fuelled by the growth of the Internet, satellite television, and social media is understandably resulting in ever louder calls for greater participation of the population in the political process. However, as long as Sultan Qaboos’ plans remain shrouded in mystery, succession risks remain.
Oman is a small high income economy that is heavily dependent on oil resources. It is a small member of the OPEC oil-cartel with a share of 0.4% of the world’s proven oil stocks and 1% of world production. Aware of dwindling oil reserves (less than 17 years of 2012 oil production), the government actively pursues a development plan that focuses on industrialization, privatization and diversification away from oil, with the overall objective of reducing the oil sector's contribution to GDP to 9% by 2020. However, oil is gradually being replaced by natural gas, which was discovered in large quantities since the late 1980s. Diversification plans now are de facto limited to stimulate the export of liquefied natural gas (LNG) and gas-based industries, such as petrochemicals. However, by shifting oil for gas, the dependence on external demand for hydro-carbons in China and other Asian markets (two-thirds of all exports) is unlikely to be reduced in the coming decade. Agriculture is not a priority in terms of diversification efforts; it contributes only 2% to GDP in spite of the vital role it plays in employment. Among services, tourism is being promoted and is a successful key component of the diversification strategy. Just 40 years ago, Oman was almost totally isolated from the global economy. But over the years, the sultanate encouraged foreign involvement, particularly in tourism, information technology and manufacturing to speed up economic growth. Efforts to liberalize the business environment are aimed towards the protection of national interests via programs such as "Omanization" of ownership and the weak labour market. Thus, the business environment is far from ideal, but red tape, slow decision making and political interference in the legal system and corruption are common, are at lower levels than in most other Arab countries.