Country Report Oman
Economic growth is expected to maintain its momentum in the medium term underpinned by strong domestic demand and economic diversification. However, the increase in current government spending challenges fiscal sustainability.
This Country Report is the outcome of an internship by Saskia Moser at the Country Risk Research team at Rabobank Nederland.
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
(-) 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. Growth is expected to maintain its momentum
In 2013, economic growth reached 4.2% after 5.7% in 2012, mainly driven by the non-hydrocarbon sector. This sector grew by 10.6 % last year – driven, in particular, by a 6.9% increase in activity in the services sector. However, despite the government’s ongoing diversification efforts, Oman’s economy remains highly dominated by the hydrocarbon sector, especially the oil sector, accounting for about 50% of GDP in 2013. Although oil prices on global markets eased slightly in 2013, this was more than offset by an increase in the production from Oman’s fields: crude oil production rose from about 915,600 barrels a day in 2012 to about 941,700 barrels a day in 2013. However, oil export growth remained minimal as domestic consumption during the first half of 2013 increased with more than 5% compared to the same period in 2012. This can be explained mainly by lower economic growth in the Asian region, the primary market for Oman’s oil exports. Government consumption grew by 19.7% in 2013 compared to 19.2% in 2012 and is expected to increase during 2014-2017. On the supply side, as of February 2013, the government announced that it will curb foreign workers to 33% of Oman’s total population to increase the employment of Omani citizens. However, Oman’s ruler Sultan Qaboos bin Said acknowledged that a large number of foreign workers are needed for skilled jobs in the oil, construction and services industries which makes it difficult to restrain the amount of foreign workers. Although the hydrocarbon sector remains very volatile, high domestic demand and gains in particular the service sector will ensure that economic growth remain robust, averaging 4% in 2013-2017.
2. Economic concessions challenges fiscal sustainability
In 2013, public debt amounted to only USD 3.5bn or 4.4% of GDP in 2013. However, this amount is expected to increase slightly during 2014-2015 as in March 2013, the government planned to issue sovereign bond of USD 519m in 2014.
A closer look at the budget balance in 2013 shows that higher oil and gas prices resulted in government revenues being 25% higher than expected. Nonetheless, the budget surplus narrowed to 0.9% of GDP in 2013 compared to 1.8% of GDP in 2012, principally owing to an increase of total public expenditure. The actual expenditure on subsidies and labour participation in the private sector amounted to USD 2.5bn in 2013, which was higher than budgeted by nearly 9%. Over half of this amount was spent on subsidizing oil products. However, these energy subsidies were offset by a higher than expected revenue due to increased oil and gas prices during 2013. Furthermore, as inflation is constrained by an extensive subsidy system, strong growth in domestic demand has increased government expenditures on subsidies as well. However, as of July 2013, the government announced reforms towards a more cost-reflective tariff for business users, leading to an increase in energy prices. Finally, from July 2013, expenditures on wages to increase labour participation in the private sector increased as well: the minimum monthly wages for Omanis working in the private sector was raised by about 60% to USD 844 in 2013. Coupled with strong domestic demand, inflation is expected to be pushed up to 2.2 % in 2014 and 2.6% in 2015. Investment expenditure increased by 8% in 2013, where a large share of investment spending was made in oil and gas production. Although investment in expanding crude oil production reached 2.3% in 2013, the EIU forecasts that the growth rate during 2014-2017 will decelerate. Furthermore, income from investments fell by nearly 30% from USD 2bn to USD 1.4bn, resulting in diminished tax revenues.
During 2013, the government continued pursuing reforms aimed at diversifying the economy away from oil and gas and promoting non-oil exports as well as creating jobs for the Omanis. To facilitate this, in November 2013 the government announced that more than USD 50bn worth of development projects are planned for the next five years. Improvements in the infrastructure are expected to account for about USD 20bn of expenditure. Furthermore, USD 13bn of the budget is earmarked to invest in the manufacturing sector. Although the government seeks to promote growth in other sectors, USD17bn of the budget is earmarked for new energy plants to upturn the hydrocarbon production.
However, aware of the unsustainable expenditures that challenges to finance the fiscal deficit, the government called to cut energy subsidies and consumption in October 2013.
Oman is a small high income economy that is heavily dependent on its 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 industrialisation, privatisation 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 "Omanisation" 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.