Oman

Risk on the rise

B2

MEDIUM RISK for entreprise

  • Economic risk

  • Business environment risk

  • Political risk

  • Commercial risk

  • Financing risk

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GDP USD73bn (World ranking 71, World Bank 2017)
Population 4.64mn (World ranking 125, World Bank 2017)
Form of state Monarchy
Head of government Sultan and Prime Minister QABOOS bin Said Al-Said
Next elections 2019, legislative
  • Sufficient energy (oil and gas) resources for at least 10 more years
  • Strategic location on the Straits of Ormuz and closeness to Gulf, Asian and African markets
  • Adequate foreign exchange reserves (import cover of 5.5 months, though down from 8.3 months in mid-2016) as well as assets in the sovereign wealth fund
  • Modern infrastructures (roads, airports, sea ports, telecommunications)
  • Energy dependence (oil and gas represent almost two thirds of export earnings) while proven reserves have a limited time horizon (10 years)
  • Closeness to regional conflicts (Iran, Yemen)
  • Huge twin deficits which are likely to persist for longer
  • Sharply rising public and external debt since 2015
  • 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)

Subdued growth outlook

Oman is a relatively small energy producer and it is not a member of OPEC, though, as a member of the GCC, broadly follows the oil group’s policy stance and production trends. Unlike its neighbors, Oman’s oil reserves have a limited life span, with current rates of extraction (1mn bbl/day in H1 2019) providing just over 10 years of further output.  Natural gas reserves provide a further 15-20 years of production at prevailing extraction rates. 

In the medium term, Oman’s dependence on oil and gas and associated vulnerability to volatile global energy markets remain key risks. Oil accounts for around 40% of GDP directly and 80% of government receipts. The collapse in global oil prices in 2014-2016 has significantly impaired the economy and recurrent deals by OPEC and non-OPEC members (called OPEC+) to limit oil production thereafter have impeded oil-related growth.

In 2017, the first period of oil production cuts led to a contraction of the Omani economy by -0.9% (after +5% growth in 2016). As those cuts were cancelled in June 2018, oil output increased markedly until the re-imposition of the cuts at end 2018. In mid-2019, OPEC+ announced an extension of the production cuts until March 2020. As a result of these seesaw changes, Oman’s real GDP growth is estimated to have recovered to +2.1% in 2018 but is forecast to decelerate to +1.3% in 2019, before edging up to +1.7% in 2020. This is well below the 10-year average of +3.1%. Downside risks to these forecasts include the uncertain global economic outlook (notable trade tensions) as well as increased geopolitical risks in the Middle East region. It also should be mentioned that national accounts data for Oman are provided with a long delay and often revised markedly.

Exchange rate and price stability likely to be maintained

Oman has a fixed exchange rate system, with the Omani rial (OMR) pegged to the US dollar at OMR0.38:USD1. Despite pressures on the currency in the low oil price period 2015-2017, and speculation about unpegging as the U.S. raised interest rates during 2016-2018, the authorities have maintained the peg and are likely to continue to do so over the next few years. Although Oman’s foreign exchange reserves are much smaller than those of its GCC neighbors (except for Bahrain), they are currently sufficient to defend the peg, if needed. In the worst case – i.e. should reserves fall markedly at some point and potentially threaten the peg – Saudi Arabia and some other neighbors are likely to be ready to support Oman, not least because of contagion fears. However, progress towards a full Gulf monetary union has been limited and we do not envisage the introduction of an effective GCC single currency in the next five years or so.

Meanwhile, Oman is experiencing its seventh year without price pressures in 2019. A planned VAT introduction at the end of the year or in early 2020 would likely push up annual average inflation from an expected 0.4% in 2019 to about 3% next year, which would still be a comfortable rate.

Fiscal and external imbalances pose increasing risks

The collapse in global oil prices 2014-2016 has led to a substantial and sustained deterioration of Oman’s fiscal and external accounts. The country has experienced huge twin deficits and sharply rising public and external debt levels since 2015. When oil prices began to increase again in 2017 and the Omani government introduced some austerity measures (e.g. corporate tax rate raised to 15% from 12%, removal of various tax exemptions), there were some early signs of improvement, but these have not materialized over a longer term and a further deterioration is now likely ahead against the background of a weakening global environment. In particular, a lack and will for further fiscal consolidation (the introduction of a 5% VAT was several times delayed) has raised concerns over fiscal sustainability in the medium term.

As a result, persistently huge fiscal deficits of around -8% of GDP are expected in 2019-2020 while rapidly rising public debt should reach approximately 60% of GDP, up from just 5% in 2013.

Moreover, current account deficits are also high, forecast at about -6% of GDP in 2019-2020, and total external debt has surged to around 67% of GDP currently (from just 14% in 2013).

Yet, in the near term (until mid-2020 or so), Oman has the ability to finance its fiscal and external deficits with relative ease from a variety of sources.

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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