Oman

Recovery will be delayed

D4

MEDIUM RISK for entreprise

  • Economic risk

  • Business environment risk

  • Political risk

  • Commercial risk

  • Financing risk

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GDP USD69.8bn (World ranking 67, World Bank 2015)
Population 4.49mn (World ranking 125, World Bank 2015)
Form of state Monarchy
Head of government His Majesty Sultan QABOOS bin Said
Next elections 2019, Consultative Assembly (shura)
  • Abundant energy (oil and gas) resources
  • Strategic location on the Straits of Ormuz and closeness to Gulf, Asian and African markets
  • Comfortable foreign exchange reserves (import cover of 8 months) as well as assets in the sovereign wealth fund
  • State commitment to industrialization, economic diversification and development
  • Modern infrastructures (roads, airports, sea ports, telecommunications)
  • Sultan Qaboos does not have an heir and the succession process is opaque
  • Energy dependence (oil and gas represent almost two thirds of export earnings) while proven reserves have a limited time horizon (15 years)
  • Closeness to regional conflict (Iran, Yemen)
  • Twin deficits
  • Export dependence on China which accounts for 39% of total Omani exports (a rebalancing in China could have adverse effects on Oman’s trade balance)

Depressed growth outlook

The collapse in global oil prices has significantly impaired Oman’s economy in 2016, with GDP growth losing -1.7pp to +2.5% (Figures 1 and 2). Sluggish nonhydrocarbon activity is forecast to further pull down growth to a six-year low of +1.5% in 2017. Mounting fiscal strains will indeed bear a considerable weight on households’ purchasing power and corporate earnings, as private consumption is usually a key growth driver. Moreover, the extension of the OPEC deal to limit oil production until March 2018, announced in May 2017, will impede oil-related growth.

Tax changes to restore fiscal balance

The Omani government raised the corporate tax rate to 15% from 12%, removed various tax exemptions and extended the withholding tax to dividends and interests in February 2017. These austerity measures aim to cope with the steep contraction in fiscal revenues on the back of the oil price crisis. The fiscal account shifted from an average annual surplus of +6% of GDP into deficit in 2014. The shortfall bottomed out at -20% of GDP in 2016 (Figures 1 and 3). The modest recovery in oil prices in 2017 (average USD54/bbl YTD, compared to USD45 in 2016) should help to improve state revenues and to narrow the fiscal deficit to about
-9% of GDP. Still, public debt will rise further to 35% of GDP or so in 2017 (up from just 5% in 2014).

Inflation returns, peg is here to stay

After four years without price pressures, inflation is forecast to increase to an average +2.5% in 2017, the highest level since 2012, mainly reflecting energy price rises. The authorities are likely to maintain the peg of the Omani rial to the US dollar, even though US Fed rate hikes will intensify speculations about a potential unpegging.

International bond issue to restore current account balance

Oman’s current account balance moved from a large surplus (+5.8% in 2014) to an even larger deficit (-18% in 2016) because oil export revenues plummeted as oil accounts for 56% of total exports. The situation will gradually improve in 2017-2018 in line with the moderate recovery in oil prices.

Despite a few years of high external deficits, external liquidity and financial stability risks will be contained, thanks to comfortable FX reserves held by the Central Bank (USD20bn, providing 8 months import cover) and the SWF (USD24bn). Moreover, the Omani government was able to almost complete its foreign borrowing plan for this year by issuing USD5bn of international bonds in March 2017.

Trade structure by destination/origin

(% of total)

Exports Rank Imports
China 46%
1
37% United Arab Emirates
United Arab Emirates 9%
2
8% India
Korea, Republic of 6%
3
7% China
Japan 5%
4
6% Japan
India 4%
5
5% United States

Trade structure by product

(% of total)

Exports Rank Imports
Petroleum, petroleum products and related materials 61%
1
17% Road vehicles
Gas, natural and manufactured 9%
2
8% Petroleum, petroleum products and related materials
Organic chemicals 5%
3
6% Other industrial machinery and parts
Non-ferrous metals 3%
4
5% Iron and steel
Metalliferous ores and metal scrap 3%
5
4% Specialised machinery

  • Low

  • Medium

  • Sensitive

  • High

  • Payments

  • Court proceedings

  • Insolvency proceedings

Contact

Contact Euler Hermes

Economic Research Team

research@eulerhermes.com

Contact Manfred Stamer

Senior Economist for Emerging Europe and the Middle East

manfred.stamer@eulerhermes.com 

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