Oman: Progress – and threats – to growth

Higher-than-forecast oil revenues should allow Oman to sustain economic growth for the rest of the year, as well as put its budget into the black. There is, however, a serious caveat. A weakening of global markets and any delays to the state’s efforts to strengthen its economic base could negatively impact year-end figures.

On June 12 Hamoud bin Sangoor Al Zadjali, the executive president of the Central Bank of Oman, said the Sultanate would be able to shrug off the effects of the European debt crisis, with GDP on track to post growth of between 5% and 6% this year.

“The outlook for 2012 remains positive as [is] evident by some lead indicators, such as credit growth, money supply, and so on,” Al Zadjali said in an interview with financial news agency Zawya Dow Jones. “The momentum of growth is likely to be sustained in the second half of 2012 despite adverse global developments.”

Many Omanis seem to share Al Zadjali’s upbeat outlook, with the most recent MasterCard Worldwide Index of Consumer Confidence showing that the Sultanate – along with Qatar – had the highest levels of optimism for the Middle East. The MasterCard report, released in late May, showed Oman’s consumer confidence index standing at 93.6 – well above the regional average of 85.7 – with 50 being given as a neutral baseline and 100 as highly optimistic. The results of the survey reflected Oman’s robust economic performance and growing GDP per capita, the report said.

One factor helping to bolster consumer confidence could be an easing of Oman’s inflation rate, which fell back to 3.5% for the first quarter of 2012, according to data issued on June 12, down from the 3.8% recorded in the same period in 2011, and below the central bank’s forecast of 5% for 2012.

Despite these positive indicators, some analysts have suggested the government may need to be more proactive in broadening the economic base. In late May, ratings agency Standard & Poor’s (S&P) said it had concerns regarding the economy’s vulnerability to shocks, the slow pace of implementing fiscal reforms and the risk of further social unrest. S&P said these issues could see the agency downgrade Oman from A, adding that another concern was that the Sultanate had yet to receive any of the financial aid promised by its GCC partners.

In March 2011 the GCC agreed to extend funding of $10bn to Oman to back efforts that will strengthen the domestic economy, create employment and respond to calls to improve social services.

According to Dima Jaradneh, an S&P sovereign ratings director, the negative outlook currently assigned to Oman “reflected our view of the likelihood of a downgrade if latent political risks re-emerged and could not be appeased by the planned increases in spending”.

While the exact timing of the aid from other GCC members remains unclear, Oman still posted a budget surplus at the beginning of this year without the additional funding. On May 13, the Ministry of Finance released data showing the surplus for the opening two months of 2012 was $2bn.

This was booked despite increasing state spending of 23% over the 2011 figure, with much of the higher outlays being directed towards boosting jobs growth, infrastructure and social development projects.

However, it may become more difficult for Oman to maintain this pace, if international oil prices continue their downward trajectory. The strong results for the early months of the year came on the back of crude prices averaging just over $109 per barrel, whereas by mid-June they had retreated to around $95.

While this is still well above the break-even rate of $75 per barrel, which is factored into the current budget, this lower rate would certainly eat into Oman’s end-of-year surplus, possibly reducing funding for the planned economic and social schemes that are central to maintaining growth levels.