Oman: Risk Assessment
Country Risk Rating
Business Climate Rating
- Strategic location on the Strait of Hormuz
- Increasingly diversified economy (petrochemicals, port operations, tourism)
- Solid banking system and openness to foreign investments
- Significant tourism potential
- Exposure to oil price fluctuations; production cutbacks
- Shortages of qualified local labor, leading to 20% youth unemployment and reliance on imported external expertise
- Ongoing uncertainties around succession to Sultan Qaboos
- Income inequalities exacerbated by cuts to social subsidies
Towards a Return to Growth
Low oil prices and the commitment to a 5% cut in production, as agreed with OPEC, have not been offset by the 2.5% growth in the non-oil and gas sectors, leading to a virtual standstill in growth in 2017. Growth is, however, expected to be positive in 2018, thanks to an upturn in the oil and gas sector, and the continuation of a moderate growth rate in other sectors. The slight upwards movement in barrel price, investments aimed at reducing the breakeven point for oil production – which is the highest of the Gulf producing countries at USD 73 per barrel -, and, above all, the Khazzan Project managed by BP and Oman Oil Company Exploration & Production that is set to boost the country’s gas output by 25%, will together likely offset the restrictions on oil production. Exports should improve with the restarting of trade with Iran, and the ongoing Qatar diplomatic crisis could help Oman recover market share in the trade and tourism industries.
However, the rate of growth in the non-oil and gas sectors is largely dependent on public spending. The reduction in oil revenues, which in 2016 accounted for 70% of State revenues, necessitated the implementation of budgetary consolidation measures:
- a reduction in energy subsidies, in public employee wages, and in security and defense spending and pension;
- the scheduled imposition of VAT in 2018, jointly with all the other Gulf Cooperation Council, and an increase in corporation tax (from 12 to 15%).
These measures will likely have a negative impact on investment and household consumption. In addition, the introduction of a 5% VAT rate, as well as the slow rise in the price of oil and in basic commodities, is set to stimulate inflation, increasing the pressure on the pegging of the Omani rial to the dollar. As part of the ninth five-year plan (2016-2020), huge investments have been made in education and the creation of public sector jobs (a plan to create 25,000 jobs was announced in October 2017) as part of the fight against unemployment (17.5% at the end of 2016) and a dependence on foreign labour. The Tanfeedh Program, launched in 2016 with the aim of enhancing economic diversification, focuses on developing tourism, industrial manufacturing, and logistics. The reforms are thus aimed at attracting foreign investment and improving bureaucratic processes.
Scale of Twin Deficits Generating Risk of Instability
The fall in oil revenues caused a worsening in public deficit to the worrying level of -19% at the end of 2016, compared with a budget surplus that was almost 5% before 2014. The budget consolidation, together with increased tax revenues, will likely make it possible for the Sultanate to reduce the deficit, but not to achieve the target of 10% of GDP in 2018. These factors have placed question marks against public investment projects, as well as the state’s ability to provide aid to the banks, which could face liquidity pressures and an increase in credit risks because of the budget consolidation. As a result, the three leading credit rating agencies have downgraded Oman’s rating to one level above “junk”, with a negative outlook. Part of the finance for the deficit comes from currency reserves (28%) and the rest through increased recourse to international bank loans (67%).
The current account deficit reflects the country’s overexposure to fluctuations in oil and gas export revenues. The balance of trade highlights the level of dependency on oil and gas to offset imports of consumer and capital goods. The country’s currency reserves have improved, following a number of years of decline, and should hold steady in 2018 at around eight months of imports, which is adequate to support the balance of trade and guarantee the dollar pegging. Although there remains a risk of speculation, and despite the decision not to apply the uplift in the key lending rate by the US Federal Reserve in June 2017, monetary policy will remain restrictive (rates are expected to be raised gradually) and the pegging of the Omani rial to the dollar will continue in 2018.
Fragile Political Stability in a Menacing External Context
Although there are no immediate political dangers, there are genuine concerns around the stability of the Sultanate. The fragile health of Sultan Qaboos, the keystone of the regime, is again generating questions regarding his succession. The context of economic slowdown and budget consolidation also gives rise to dangers in the social arena, echoing the raised social expectations of 2011, with youth unemployment at 20% in a country in which 40% of the population is under 25. On top of this, the country is in an increasingly hostile regional situation, with the worsening of events in Yemen constituting a direct threat to its internal security.