Have diversification efforts been effective? Oman’s CEOs weigh in

While the core questions we ask the CEOs we survey for the Oxford Business Group Business Barometer essentially remain the same, enabling us to produce both regional and global analysis, we do change them a little to ring the changes, so to speak. 

You would be forgiven for thinking that including oil prices in the top external factors that could impact the sultanate’s economy was rather a cop-out, and on one hand you’d be right. However, on the other it’s a very interesting indicator of how efforts to diversify the economy are being perceived. 

Some 73% of the Omani CEOs surveyed identify oil prices as the single biggest factor that could impact the local economy in the short to medium term, showing that hydrocarbons remain front and centre the most important part of the economy. So much for diversification, I hear you cry. 

Of course, diversification has been a mantra of policy-making for many years now – indeed, it is a central tenet of Oman Vision 2020. However, Oman – and in fact all of the Gulf – evidently still has some way to go in this regard.  

At the same time, the process of building new, commensurately valuable revenue streams was never going to be easy. The steep plummet in 2014, which saw oil prices reduce dramatically, highlighted not only the continued reliance of Gulf economies on oil receipts, but also that no other sectors were yet stepping up to contribute anywhere near comparably. 

That said, the non-oil economy is growing at a fair clip – 3.9% in 2017 up from 2.6% during 2016, according to figures from the Central Bank of Oman. Much of this is interestingly generated by the services sector, which from a policy perspective has the additional fillip of providing employment. 

Regional volatility came second as a factor that could weigh on the economy – albeit at 22% and considerably behind oil prices. Oman is of course famously a country that tends to act as a peace broker in various disputes, maintaining ties with the many and varied factions within the region. Rarely has it been embroiled or negatively impacted itself by doing so, and it is perhaps for this reason that regional volatility is lower down the list of concerns. 

The sultanate’s economy does have one of the weaker financial positions in the Gulf, even though in 2019 GDP is expected to increase to 3.5% or higher by some analyst estimates. This is largely down to increased receipts on the back of the higher oil prices seen in 2018. The sultanate is not a member of the Organisation of the Petroleum Exporting Countries, though did increase output after the cartel’s Vienna meeting in the summer.  

Exactly what position Oman will take vis-à-vis production, as producers come under pressure from US President Donald Trump to increase production, despite prices dropping in recent weeks, remains to be seen. What is clear though is that the sultanate’s economic health continues to be reliant on it. 

The GCC was set to introduce value-added tax (VAT) in 2018, though the UAE and Saudi Arabia were the only countries to do so. Oman delayed implementation, citing the impact it could have on spending and the need to allow more time for preparatory measures. 
Taxation is of course largely novel in the region. Some 89% of the CEOs we surveyed rate the sultanate’s current tax environment as competitive or very competitive. However, this may well change as and when the government does introduce VAT. 

As I have written before, VAT is not only a useful source of additional revenue, but also a mechanism by which the authorities can generate useful data about consumption and spending via VAT-registering businesses and points of sale. 

Although by no means universally the case, this sort of transparency and scrutiny is very familiar to many businesses around the world, and it’s an important factor in the sentiment of both foreign and local investors. 

According to our findings, Omani CEOs by and large perceive transparency in the local business environment to be high or very high – at about 65%. That said, 25% identify it as low, and given the government’s stated aim to increase foreign investment and improve the environment for private sector enterprises, this is something they will no doubt be keen to address. 

I think one of the most interesting findings in this survey has been what sectors Omani CEOs identify as most influential in terms of the sultanate’s diversification strategy. 

Over 50% cited tourism as the sector with the greatest potential. Given the country’s natural attributes, it is clearly an area with huge potential – and one that Omanis themselves value. This is in line with national carrier Oman Air’s bold expansion plan for 2018, which saw the airline add new routes and acquire new aircraft.

Widely perceived as a high-end destination, visitor numbers have fluctuated, but the broad trajectory is positive. It seems identifying the right price point to continue to appeal to increasingly cost-conscious Western travellers, as well as those from new Asian markets, will be key to growing the sector.  

Some 19% of respondents identified manufacturing as the most influential to diversification, supporting the sector’s notable expansion in recent times. Manufacturing grew by 17.8% year-on-year in the first quarter of 2018, building upon growth of 9.2% in 2017. 

Manufacturing was closely followed by transport and logistics at 17%. These two are of course closely aligned – manufacturing is a key value addition sector, but is only able to reach its full potential if the goods being made can easily be exported and supply chains are competitive. 

Overall, the survey results showed that CEOs in Oman have a clear idea of the areas they see as having the highest potential for diversification, but also realise the continuing centrality of hydrocarbons. This recognises that government investment will continue to be a major driver of growth – and strategy – for a long time yet.