Oman: Risk Assessment
Country Risk Rating
|B||Political and economic uncertainties and an occasionally difficult business environment can affect corporate payment behavior. Corporate default probability is appreciable.|
Business Climate Rating
|A4||The business environment is acceptable. Corporate financial information is sometimes neither readily available nor sufficiently reliable. Debt collection is not always efficient and the institutional framework has shortcomings. Intercompany transactions may thus run into appreciable difficulties in the acceptable but occasionally unstable environments rated A4.|
The economy will begin to feel the negative impact of low oil and gas prices in 2016
In 2015, the non-oil and gas sectors contributed to the vitality of activity by offsetting the decline in oil revenues. Growth is, however, likely to slow in 2016. The authorities will gradually limit support for the economy to mitigate the shock from shrinking oil GDP. The development plan aimed at increasing diversification within the economy will continue, but public investment expenditure will be reduced. Oil output will increase during 2016 and thus help offset the decline in profits from the sector, but investments will be deferred. The authorities are nonetheless intending to proceed with the planned pipeline between Oman and Iran. Household consumption, whilst resilient, is not able to sustain activity to the same extent. Firstly, household confidence has declined and any reform of the system of subsidies will reduce purchasing power. Secondly, substituting local production for imports will only be of limited effect as, whilst diversified, local industry is not in a position to satisfy the demand. Inflation will continue at around 2% in 2016. Despite rising property prices, downward deflationary pressures on the rial are likely to persist in 2016, in view of the scale of the current account deficit and the continuation of a strong dollar (c. f. rise in US interest rates).
Finally, credit proved buoyant in 2015, despite the slowed growth of deposits, particularly those of the public sector, which account for 30% of all deposits. The proportion of non-performing loans remains low and the level of bank capitalization is high in conformity with the Basel III recommendations.
Deepening twin deficits
As of 2014, the Sultanate has had to deal with the emergence and deepening of twin deficits, whose levels reached a critical threshold in 2015. The decline in oil revenues, which make up 85% of budget revenues, and the extension of public spending in 2015 led to a significant increase in the public deficit. The authorities are likely to extend their expansionist budget policy into 2016, which will further increase the size of the public deficit. Investment spending will be prioritized but current expenditure will be held at previous levels. Nevertheless, the authorities are intent on limiting what has been rapid wage growth in the public sector in recent years. Whilst the deregulation of the price of gas supplied to companies came into force in 2015 and has already helped reduce the cost of subsidies, further cuts in food and energy subsidies for households could also be implemented. The government has plans for the privatization of a number of publicly owned companies in the oil sector. The low level of debt will allow the Sultanate to cope with the scale of the deficits incurred since 2014. The Omani central bank in 2015 carried out a 600 million rial bond issue on the financial markets and is planning to repeat the operation in 2016.
In 2015, the current account entered into negative territory under the combined impact of low oil and gas prices and increased domestic demand for oil, which reduced the oil for export. The weakness of the oil market in 2016, which will result in a price per barrel below the prices needed to balance the external accounts, would suggest that the current account deficit will deepen further in 2016. Non-oil and gas exports, however, should increase with the upswing in trade with its Iranian neighbor but remain limited because of the appreciation of the Omani rial, tied to the dollar.
The risk of imported inflation and the reduced competitiveness of its exports as a result of the over-valuation of the rial could lead to an ending of the dollar peg, although the authorities have re-affirmed their desire to maintain the fixed parity.
Slow pace of institutional reform after social unrest in 2011
The economic and political reforms initiated by Sultan Qabous ben Said in response to the protests that began in early 2011 have met some of the social and political demands of the population. The institutional reforms that have emerged have included in particular the granting of legislative powers to the Majlis al-Choura (Consultative Council), for which an election by universal suffrage was held on 25 October 2015 with a turnout of 56%.
Although no serious political risk has materialized in the short term, there are real uncertainties around the future of the regime personified by Sultan Qabous. He remains the only ruler of a Gulf state without children or a designated heir. On top of this, Oman suffers from high unemployment, especially among the young, with the government struggling to implement its policy for the “Omanization” of jobs. The business climate does, however, remain favorable for foreign companies.