Economic analysis
Oman

Oman

Population 4.1 million
GDP per capita 17128 US$
B
Country risk assessment
A4
Business Climate
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Synthesis

MAJOR MACRO ECONOMIC INDICATORS

 

Main economic indicators 2016 2017 2018 (e) 2019 (f)
GDP growth (%) 5.0 -0.9 1.9 4.2
Inflation (yearly average, %) 1.1 1.6 1.5 3.2
Budget balance (% GDP) -20.9 -13.7 -5.0 -3.5
Current account balance (% GDP) -18.7 -15.1 -6.9 -5.9
Public debt (% GDP) 32.5 46.9 49.5 49.5

 

(e): estimate  (f): forecast

STRENGTHS

  • Strategically located on the Strait of Hormuz
  • Increasingly diversified economy (petrochemicals, port operations, tourism)
  • Sound banking system and openness to foreign investment
  • Significant tourism potential

WEAKNESSES

  • Exposed to hydrocarbon price fluctuations
  • Shortage of local skilled labour leading to high youth unemployment and reliance on imported external expertise
  • Ongoing uncertainties around the succession of the sultan
  • Income inequalities exacerbated by cuts to social subsidies

RISK ASSESSMENT

Growth rebound for an economy that is struggling to diversify

The growth rebound that began in 2018 will intensify in 2019 thanks to the briskly-expanding hydrocarbon sector. At the heart of the country’s economic model, oil and gas represented 60% of export revenues and 75% of budget revenues in 2017. Indeed, despite the decline in oil reserves, hydrocarbon activity will continue to enjoy effective techniques to optimise extraction. The sector will also benefit from increased gas production, boosted in particular by development of the Khazzan field. The discovery of natural gas deposits will support the sector in the years to come.

At the same time, since the late 1990s, the authorities have been working to diversify the economy into sectors such as transport, logistics and tourism. Accordingly, 2019 growth will also be driven by the non-oil and gas economy, which now accounts for more than two thirds of GDP. As part of the five-year (2016/20) Tanfeedh Diversification Plan, tourism is set to benefit from the expansion of Duqm and Muscat airports, as well as the development of Oman Air. Likewise, the easing of visa formalities will be a boost to tourism. Structural reforms to encourage investment, including FDI, have already been put in place, and more measures are expected in 2019.

Household consumption will suffer from an inflationary pick-up following further cuts to subsidies, in particular on fuels, as well as the introduction of a value added tax (VAT), scheduled for September 2019.

 

Reducing the large twin deficits

In 2015, the fall in oil revenues caused the twin deficits to widen. In 2019, further fiscal consolidation and the favourable oil market environment should help to reduce their size. Ministries and public administrations will be called upon to reduce their operating costs, and subsidies are to be cut. But in an unstable regional context, defence spending, which accounted for 13% of GDP in 2017, will remain substantial. In parallel, the authorities are looking to diversify their revenues, notably through the introduction of a regional VAT in GCC countries. In addition, if oil prices remain where they are, oil revenues, the main source of revenue, will go up. However, in the face of these austerity measures, public discontent could cause the government to retreat again. The decision to raise the minimum wage threshold for fuel subsidies in August 2018 illustrates the risk of fiscal slippage for 2019.

Despite an increasing trade surplus (12% of GDP in 2017), the current account deficit will remain high in 2019. The slight upturn in oil revenues will benefit the trade balance despite the slowdown in Chinese growth, China being the largest importer of Omani oil. However, the current account deficit will not shrink significantly, as imports, linked in particular to infrastructure projects, are also set to go up. The current account deficit is mainly due to the income deficit (14% of GDP in 2017), which in turn is linked to expatriate workers in Oman. The inflow of foreign investment, chiefly portfolio investments, will contribute to financing the current account deficit. However, foreign exchange reserves, which stood at more than five months of imports in July 2018, are deteriorating rapidly. This is a worrying trend given the sultanate’s growing external debt, with total external debt, which represented 35% of GDP in 2014, exceeding 80% of GDP in 2017. The pegging of the rial to the US dollar, in a setting of rising interest rates in the United States, could put additional pressure on the foreign exchange reserves.

 

Domestic political uncertainty in an unstable regional context

Even if political risk is unlikely to materialise in the short term, the fragile state of health of Sultan Qaboos ben Said is creating real uncertainty about the future of the regime. The ruler’s succession raises questions, as he is now 77 years old and has no heir. Often absent from the national and regional political scene, he may still have to face the population’s dissatisfaction amid ongoing fiscal consolidation efforts. However, as power is concentrated in the sultan’s hands, the parliamentary elections scheduled for 2019 are not expected to upset the political situation.

The sultanate is striving to remain neutral in the conflict between Qatar and the United Arab Emirates, Saudi Arabia, Bahrain and Egypt. However, the country has taken military action in Yemen alongside Saudi Arabia to fight Iran-backed Houthist rebels, which pose a threat to the country’s internal security. Oman can count on the support of the United States, which is helping to maintain security in the border area.

According to the 2017-2018 Human Development Index, Oman ranked 48th out of 189 countries, joining the other GCC countries in the category of “countries with a very high level of development”.

 

Last update: February 2019

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