The global climate in 2014 still contains downside risks, but Oman’s stable economy is in a strong position to withstand them.
As we enter 2014, Oman can look forward to the new year with confidence. While growth may be slightly lower than in 2013, it should remain robust, underpinned by public investment, Oman’s pro-business stance, and a sound financial sector.
Oman’s GDP will grow by 3.4 per cent in 2014, according to the International Monetary Fund (IMF) in its World Economic Outlook published in October, slowing from 5.1 per cent in 2013. The slowdown is likely to be led by somewhat lower growth in the hydrocarbon sector and an external environment that remains rather cool. Nonetheless, growth should remain fairly robust. Indeed, the government is more optimistic about the outlook, forecasting 5 per cent GDP expansion in its 2014 budget. Moody’s Investors Service, the ratings agency, said that it expected a rate of 4.1 per cent in a report on Oman published in August. The report confirmed Oman’s sovereign rating as A1 – upper-medium investment grade – with stable outlook, thanks to the progress in diversification (non-hydrocarbon sectors have grown more quickly than the oil and gas industry in recent years), strong fiscal buffers thanks to years of running a surplus, a stable financial sector, and – importantly – Oman’s open stance on trade and investment.
The 2014 budget foresees expenditure of RO13.5bn, up 5 per cent on 2013 – not including the RO800mn-900mn that it will cost to implement the Royal Decree standardising and raising salaries for public sector workers, a vital plank in the government’s policy of sharing the proceeds of the country’s economic success.
The increase in spending against slower revenue growth will create a budget deficit forecast at RO1.7bn – 6 per cent of GDP and 15 per cent of overall revenues. This will mean that the government will be less likely to be able to channel resources into the State General Reserve Fund (SGRF), the country’s sovereign wealth fund (SWF), which has grown an average 8 per cent per year to RO14bn and can play a central role in Oman’s diversification drive, as well as building up the country’s assets internationally with an eye on providing long-term revenues.
On the other hand, the Sultanate is currently using some of the reserves that it has stored up over years of fiscal prudence to make investments in infrastructure that should stand it in good stead in the longer term.
A number of major projects are underway that will support diversification and growth well into the future. Among them is the development of the Duqm Special Economic Zone (SEZ), a vast project covering 1777 sq km that is expected to attract as much as $20bn in investment in the long term in manufacturing, transport and logistics, construction, oil refining and tourism. Next year should also see the first stages of construction on the Sultanate’s $15bn railway network, which will link to a broader regional system also being planned, and could substantially strengthen the country’s position as a regional trade and logistics centre. Additionally, it will also enable it to capitalise on its position outside the narrow and geopolitically sensitive Bab el Mandib and Straits of Hormuz, with unimpeded access to the Indian Ocean.
Other major projects include the Batinah Expressway, an important regional link that will support the expansion of Sohar as an industrial centre.
While these investments are being welcomed by foreign investors and local businesses alike, the growth of the deficit may well raise concerns, highlighted by the likes of the IMF and Moody’s, that Oman’s current fiscal position is unsustainable over the longer term. The IMF points out that spending grew by 70 per cent between 2010 and 2012 is urging the government to move towards a balanced budget so as not to run down valuable fiscal buffers and to ensure that the Sultanate can resist potential downward shocks to the global oil price.
“A sustained fall in oil prices could exhaust available buffers and necessitate borrowing to maintain the projected capital spending,” the Fund has said.
With the US Federal Reserve expected to start a tapering of its quantitative easing (QE) programme in December or the first half in 2014, there is an expectation that oil prices may trend downward in 2014. Other factors will also come into play – unrest in Libya has curtailed supply, putting upward pressure on prices, and demand may rise from an improving global economic climate, while signs of a rapprochement between the United States and Iran work in the other direction, pulling oil downwards. Oil prices are notoriously difficult to second-guess, but they remain perhaps the most significant factor in Oman’s economy, both because, like much of the rest of the region, oil exports are the single most important export earner and contributor to government coffers, but also because Oman’s oil tends to be more difficult and expensive to extract – on average, it earns lower margins.
The IMF’s concerns are probably a little premature – Oman has ample reserves and some important priorities that justify high levels of public spending. With debt exceptionally low, in single figures as a proportion of GDP, the government is in a very secure fiscal position. Nonetheless, over the longer term, spending will need to be kept in check, or revenues from other sources increased.
Naturally enough, continuing diversification will also help reduce the exchequer’s reliance on oil earnings – another reason why investments being made now are justified, expensive though they may be.
Enhanced Oil Recovery
Aside from the major projects mentioned above, expect to see interesting developments on a number of fronts in 2014 and beyond. In the hydrocarbons sector, use of enhanced oil recovery (EOR) techniques is expanding as the Sultanate looks to maintain output above 900,000 bpd in the medium term. Oman, and specifically Petroleum Development Oman (PDO) and its international partners, has become one of the world’s leading pioneers of EOR, which will increasingly be necessary to extract oil from complex geological formations.
December 2013 saw a landmark event in the gas sector, with the government and global supermajor BP inking a $16bn, 15-year deal for the development of the Khazzan tight gas field. BP estimates that the field could produce up to 1bn cubic feet (bcf) of gas a day at full capacity, boosting the Sultanate’s gas supply by a third. Oman has made huge progress in tapping its natural gas supplies over the past two decades, but domestic demand has been growing strongly, driven by industrial use and power generation. As a result, it is in the position of both importing and exporting gas. The Khazzan development, from which production should start in 2017, could make a major contribution to industrial development by ensuring the continuing supply of lower-cost domestic gas, as well as bringing billions in investment over the next decade and a half.
Of the non-hydrocarbon sectors, tourism remains one of the most promising, capitalising on the Sultanate’s natural beauty and diversity and a thriving national culture. The country’s strengths as a destination should be enhanced by the eventual opening of Muscat’s new airport in 2014, and a number of new hotel and resort openings that will broaden its offerings.
In the utilities sector, growing demand is expected to see the continued roll-out of new independent power and water plants. Oman has one of the region’s most liberal approaches to investments in the sector, allowing private and foreign investors 100 per cent ownership of assets and generous take-off agreements. And this is indicative of one of Oman’s great strengths – its increasingly attractive foreign investor appeal. The global climate in 2014 still contains downside risks, but Oman’s stable economy is in a strong position to withstand them.