Oman's economic prospects look favourable due to improving energy outlook and diversification

Like other GCC states, Oman’s economy is largely driven by oil and gas activity. However, with fewer and more complex hydrocarbons reserves than its neighbours, it is under greater pressure to diversify its economic base. The scale of this challenge was highlighted by recent falling oil prices, which resulted in lower revenues from the petroleum sector and a nominal GDP contraction of 14.1% in 2015, causing the largest fiscal deficit in more than a decade. However, a combination of government reforms, increased diversification efforts and a recovery in oil prices means that the sultanate’s economy is showing improvements across most major indicators for 2019. The government is therefore well positioned to continue with its most ambitious reform agenda since the original modernisation phase in the 1970s.

Fiscal Matters

The oil price decline that began in late 2014 and the muted price levels which persisted until late 2017 had a deleterious effect on Oman’s public finances. During this period the sultanate ran twin deficits, with the budget deficit expanding to 22% of GDP, or OR5.3bn ($13.8bn), in 2016 before making a modest recovery to 13% of GDP, or OR3.5bn ($9.1bn), in 2017. The current account deficit, meanwhile, stood at 18.8% in 2016, as the value of oil exports fell sharply. Firming oil prices since 2017 have led to an improved fiscal scenario, and the 2018 budget anticipated that oil and gas revenue would increase by 9% over the previous year’s total. The final result is likely to be higher still – the budget was based on an assumed oil price of $50 per barrel, whereas for most of 2018 the price of Brent crude – a primary industry bench mark – has traded at above $70 per barrel. As income from oil and gas sales accounts for around 70% of total projected revenue, the sustained rise in oil prices will have a positive effect on the government’s total revenues for the year. Even on the basis of the government’s cautious oil price estimate, Oman’s total revenues for 2018 were anticipated to reach OR9.5bn ($24.7bn) – an increase of 3% over the previous year.

The more favourable economic conditions allowed the government to ease its grip on spending and formulate a mildly expansionary budget for 2018, with total expenditure for the year projected to rise by OR800m ($2.1bn) over the 2017 level. The difference between the projected and actual figure, however, remains to be seen; spending overruns are not uncommon in Oman, and the 2018 projected expenditure is in fact 2% lower than the actual government spend of 2017. In establishing its 2018 spending priorities the government has sought to balance the need to fund parts of the economy that will provide growth in the long term with its short-term spending obligations.

Capital expenditure on large infrastructure projects stands at OR1.4bn ($3.6bn), almost unchanged from the 2017 budget, while spending on health, education and housing has increased to account for 38% of total public spending. Defence and security spending is another expansionary area of the 2018 budget, rising by 3%. More worryingly for government planners, the interest the sultanate pays on the debt it has been compelled to raise to meet its fiscal deficit over recent years was projected to rise by 81% in 2018, to reach OR480m ($1.2bn). This has placed the fiscal deficit at the heart of the national conversation surrounding the sultanate’s public finances.

Bridging the Gap

In 2018 the total budget deficit is expected to amount to OR3bn ($7.8bn), compared to the previous year’s OR3.5bn ($9.1bn). One way in which the government can meet this shortfall is to dip into the reserves it has placed in the domestic banking sector. This approach, however, carries a cost in the form of reduced system liquidity and the reduction of the banking sector’s ability to fund the development projects on which the sultanate’s future economic growth rests. In recent years, therefore, the government has developed a debt programme that has enabled it to meet its spending commitments without placing undue pressure on the sultanate’s banking industry. In October 2015 Oman issued its first sovereign sukuk (Islamic bond), aimed at domestic fund managers, banks and other sophisticated investors. The instrument was listed on the Muscat Securities Market (MSM), and therefore served the dual purpose of raising funds for the government and providing a benchmark for Omani institutions to issue Islamic bonds of their own.

More significantly, Oman has also managed to secure external funding, despite a deteriorating sovereign credit rating. In the summer of 2016 the sultanate went to the international bond market for the first time since 1997, offering $1bn of five-year bonds as well as $1.5bn worth of 10-year bonds. Another round of debt raising was staged in the first quarter of 2017, and in January 2018 the sultanate issued its largest-ever bond, a $6.5bn offering in three tranches of five, 10 and 30 years that attracted $1bn worth of orders. The enthusiastic response to the issuance came in spite of a ratings downgrade by credit rating agency Fitch the month before, illustrating the sustained demand for emerging market debt and rising confidence in the Omani economic outlook on the back of rising oil prices. The policy of raising debt and preserving domestic reserves was therefore sustained in 2018. The majority of the 2018 fiscal deficit, at 84%, is expected to be financed from borrowings, with drawdowns of government’s reserves accounting for the remaining amount.

Cutting Costs

The obvious consequence of this approach is a rising and increasingly costly debt burden. According to the Central Bank of Oman (CBO), the external government debt-to-GDP ratio increased from a low of 1.9% in 2014 to 20.1% in 2016 and further to 31.8% in 2017. While this remains low by global standards, the steepness of the trajectory is a matter of concern to some economic observers. The IMF foresees external debt rising to 40.3% of GDP by 2023, and has encouraged the authorities to continue with their reforms aimed at narrowing the fiscal deficit. Cutting costs has therefore become a salient theme in the government’s economic strategy. In 2017 the CBO reported that the sultanate had reduced its subsidy and transfers bill by 20% over the previous three years, from OR562.3m ($1.5bn) in 2013 to OR451.5m ($1.2bn) in 2016. Among the most significant reductions were a fuel subsidy cut in 2016 and a reduction in the electricity subsidy for corporate customers in early 2017. According to the CBO, the government managed to reduce its spending by 5.8% in 2016 and 4.9% in 2017.

In 2018, however, the cost-cutting trend reversed. The total subsidy bill for the year, according to the budget, is OR725m ($1.9bn), compared to OR395m ($1bn) in 2017. Total projected spending for 2018, meanwhile, is OR12.5bn ($32.5bn), compared to OR11.7bn ($30.4bn) for the previous year. While the projected figures may differ from the final accounts, the expansionary budget reflects confidence that rising oil prices will allow Oman to relax its austerity drive without exacerbating its fiscal deficit problem.

Boosting Revenue

The government has also responded to lower oil prices by seeking alternative sources of revenue, such as taxation, which had previously been minimal. There is no personal income tax for residents or foreign nationals, and until 2016 companies outside the hydrocarbons sector paid a modest 12% on income over OR30,000 ($77,900). Capital gains are taxed as ordinary income, and gains on the sale of listed shares are exempt from taxation. There is no payroll tax, and stamp duty applies only to purchases of real estate, and is levied at 3% of the sale value. The social security system also follows a business-friendly model, for instance employers must contribute an amount equal to 10.5% of the monthly salary of its Omani employees to cover pension, disability and death benefits, as well as 1% of the monthly salary to go towards industrial illnesses or injuries.

In February 2017 significant changes were made to this framework to secure more taxation revenue from the corporate sector. These measures included an increase of the basic corporate income tax rate from 12% to 15%, the introduction of a 3% rate of income tax for small businesses and the elimination of the tax exemption for the first OR30,000 ($77,900) of taxable profits. The 10% withholding tax, which had previously been applied to royalty payments, management fees and a small number of other activities has been extended to include dividend payments, interest and payments for services.

Despite these changes, slowing economic activity meant that total tax revenue declined by 5.7% in 2017. The 2018 budget anticipates a similar level of tax income to 2017, although higher than budgeted oil prices over the year will likely see a gain in revenues. Improving economic conditions and more taxation changes will also help Oman to boost revenues further in the short term. The introduction of a 5% value-added tax, which was expected to buoy tax income in 2018, has been rescheduled for implementation in 2019 to give Oman’s businesses time to make the necessary preparations. When introduced, it is expected to generate between OR300m ($779.1m) and OR400m ($1bn) per year for the government. More revenue will be gleaned from a new excise tax on harmful goods and luxury items, also slated for implementation in 2019.

Inflation & Monetary Policy

To date, Oman has been able to carry out its process of fiscal reform in a benign inflation environment. The average inflation based on consumer price index for the sultanate rose to 1.6% in 2017 from 1.1% during 2016 and 0.1% in 2015. This is a modest gain which can largely be attributed to firming international commodity prices, a depreciation in the US dollar exchange rate and a reduction in subsidies – particularly those on electricity. Imported inflation remains the principal driver of Oman’s headline inflation, reflecting the sultanate’s relatively high degree of integration with the global economy and its currency peg arrangement. The Omani riyal has been pegged to the US dollar since 1986, at a rate of $1:OR0.3849. While a floating exchange rate would result in more stable fiscal revenues in nominal riyal terms, as an oil exporter the dollar peg enables Oman to build stable trade relations. The peg to the world’s reserve currency has also removed the risk of speculative bubbles in the domestic currency to which small countries are generally exposed. In April 2018 Tahir Al Amri, governor of the CBO, reiterated the government’s determination to maintain the currency peg, and added that “We will try to make sure that we have ways and means of defending our fixed exchange-rate policy”.

Despite the recent period of challenging economic conditions, Oman continues to defend its currency successfully. Gross foreign currency reserves stood at nine month’s worth of imports, or $19.6bn, in January 2018. Oman’s ability to maintain its foreign currency reserves is greatly enhanced by the fact that most of the revenue it receives from oil, its biggest export, is in US dollars. Oman has implemented its subsidy cutting programme without inflation spikes, and their associated political and economic risks. However, as the new taxation measures take hold, inflationary pressure will rise. According to the World Bank, inflation in Oman is expected accelerate to 3.2% by 2020 as indirect taxes are introduced.

Hydrocarbons

Despite their potential inflationary effect, Oman’s tax reforms remain a key part of its fiscal rebalancing effort. The effects of taxation changes, however, are limited by the dominant role that hydrocarbons revenues continue to play in government finances. Firming oil prices in 2017 meant that the hydrocarbons sector’s contribution to nominal GDP increased to 29% at current prices from 27.4% in 2016, according to the National Centre for Statistics and Information. Hydrocarbons revenues accounted for 72.9% of total government revenue income in 2017. For the past decade Oman has continued to expand its crude oil production, with daily output rising from 653,000 barrels per day (bpd) in 2007 to 908,000 bpd in 2016. In 2017 production fell off modestly to 883,900 bpd, as a result of quota-cutting by the Organisation of the Petroleum Exporting Countries (OPEC) in response to falling oil prices.

Non-oil Sectors

Maintaining, and even increasing, production is important not only in terms of oil’s revenue contribution, but also because oil and gas extraction underpins many of the activities by which Oman intends to diversify its economy, including the production of petrochemicals and aluminium, power generation and water desalination. These segments form the core of the sultanate’s manufacturing base, the second-biggest contributor to GDP after hydrocarbons. The Oman Vision 2020 strategy has set a target of raising the manufacturing base of the country to 15% of GDP from the 5% level that pertained at the outset of the plan’s implementation. The manufacturing sector’s average annual growth was 10.3% during the period 2009-2013, and by 2017 it accounted for 10.2% of total GDP.

The wholesale and retail trade was the third largest contributor to GDP in 2017, accounting for 8.1% of the total, despite declining consumer sentiment as a result of subsidy cuts. Like other GCC markets, Oman’s retail landscape is being transformed by the arrival of large retail complexes that combine leisure and shopping, such as Avenues Mall, Oasis Mall and Panorama Mall. The sector is also attracting significant volumes of foreign investment. Dubai-based developer Majid Al Futtaim has signalled its intention to invest around $1.3bn in Omani retail developments by 2020.

Financial intermediation accounted for 6.3% of total GDP in 2017. Oman’s banking, investment and insurance institutions have rapidly expanded since 1972, the second year of Sultan Qaboos bin Said Al Said’s reign and the beginning of the sultanate’s economic renaissance. At the outset of 2018 a total of 16 conventional commercial banks and six financing and leasing companies were operating in the Omani market, which also included two rapidly growing sharia-compliant institutions. The market is also served by 21 insurance companies, 11 of them national firms, and a takaful (Islamic insurance) segment that accounts for 10.1% of gross direct premiums.

The MSM provides another source of funding for Oman’s expanding businesses, and at the outset of 2018 was home to 112 listed companies. Other key GDP components include transport, storage and communication (which accounted for 6% of GDP in 2017) and real estate and business activities (5.1%). These, and smaller GDP contributors such as fishing (0.8%), hotels and restaurants (1%), and mining (0.5%), are expected to play a more salient role in the economy as Oman continues to pursue diversification.

Strategy

While recovering oil prices in 2018 have been a welcome development for Oman’s economic planners, the long-term stability of the sultanate’s economy rests on its ability to diversify its economic base and reduce its dependence on oil revenues as a source of national income. This effort is currently being undertaken according to a strategy laid out in the ninth five-year development plan (FYP), which runs from 2016 to 2020, the final component of the Oman Vision 2020 strategy which has steered the sultanate’s economic development since 1996. The ninth FYP seeks to shift the economy to a more private sector footing by developing small and medium-sized enterprises, public-private partnerships (PPPs) and improving the investment climate. The plan also establishes a privatisation programme that will grant the private sector numerous opportunities to acquire, finance or manage government projects. In terms of broadening the economic base of the country, the ninth FYP envisages both vertical expansion of the sectors dependent on oil and the development of non-oil sectors such as manufacturing, transportation and logistics, tourism and mining.

Over recent decades Oman has, like other oil-producing states around the Gulf, had limited success regarding economic reform. In the past, oil price declines have prompted new diversification initiatives, but their implementation has been patchy and often abandoned when oil prices recovered. The most recent oil price shock, however, has persuaded the government of the need to establish a strategic structure by which the government’s reform efforts can be coordinated and monitored. The result is the National Programme for Enhancing Economic Diversification, or Tanfeedh (which translates to “implementation”), a programme established to identify the responsibilities, resources and timeframes needed for Oman’s strategic initiatives. The key objective of Tanfeedh is to ensure public and private sector participants efficiently implement the government’s diversification strategy. The programme establishes clear standards and key performance indicators for the government’s objectives and provides periodic reports on the progress of the reform effort.

The first phase of the Tanfeedh initiative covers three of the sectors that are included in the ninth FYP: tourism, manufacturing and logistics. It also focuses on two enabling sectors: the labour market and employment; and finance and creative financing. Crucially, the government has co-opted the private sector, as well as representatives from academia, civil society and the sultanate’s youth, in its development of the programme. These stakeholders were consulted during a series of workshops held in 2016, which resulted in a framework of various solutions and interventions aimed at realising the government’s primary strategic objectives. In 2018 the Tanfeedh programme published its first major progress report, a document that provided Omanis with a granular view of the government’s reform and diversification drive. While progress against specific targets varied widely, the report revealed the breadth of Oman’s reform effort, as well as the government’s determination to see its initiatives through to completion.

Private Momentum

The privatisation component of the sultanate’s development strategy will, if implemented fully, result in a significant reduction in the government’s role in the economy. Around 70 government-owned entities are currently distributed across a wide range of sectors. According to the Implementation Support and Follow-up Unit, the body charged with ensuring the timely execution of the Tanfeedh initiatives, many of these bodies have become inefficient, showing reduced profits over recent years. As part of the Tanfeedh process all government holding companies were asked to submit a five-year privatisation plan to the Ministry of Finance. The plan establishes an aspirational target of OR700m ($1.8bn) for the value of state-owned enterprises transferred to private sector owners by 2021, and in 2017 a privatisation committee was established to drive the process. Consequently, over the coming years prominent state-owned enterprises such as the Oman Tourism Development Company, Oman Food Investment Holding Company, Electricity Holding Company, Oman Global Logistics Group and Oman Oil Company may be opened to private sector investment. The sultanate’s energy sector, which has been held closely by the government since the discovery of commercially exploitable quantities of oil in 1962, is also a target of the privatisation effort. In 2017, Mohammed bin Hamad Al Rhumy, minister of oil and gas, revealed that the sultanate was considering privatising parts of the state-owned downstream energy infrastructure, including Salalah Methanol Company and a drilling operation. The first significant privatisations, however, are likely to occur in the utilities sector. The sultanate has appointed advisors for the sale of two electricity companies, set to take place in 2019 – Oman Electricity Transmission and Muscat Electricity Distribution, which between them hold assets worth $3.2bn.

Diversification Targets

The Tanfeedh programme provides private sector investors with a useful guide as to where the government’s strategic focus will lie over the coming years. The relatively well-developed manufacturing base is an obvious starting point, and Tanfeedh has established four sub-sectors for development: petrochemicals, including the expansion of joint stock company OCTAL’s polyethylene terephthalate plant and the construction of an ammonium fertiliser facility; non-metals, such as cement production; and food, including dairy farms, date production and the processing of vegetables.

In tourism, the sultanate starts from a more challenging position. Tourism’s contribution to GDP averaged 2.2% between 2010 and 2015. The country is ranked as fifth among the six GCC countries for tourism arrivals with an overnight stay, welcoming just 4% of the 49m visitors to the region in 2014. This is despite Oman’s strategic location, connecting three continents, a wealth of natural attractions – including conservation sites, natural caves, sand dunes, mountain trails, islands and springs – and a rich cultural heritage most visible in its forts, mosques, souqs and historic cemeteries. The government has therefore set about a wholesale reform of the sector. Nature and heritage sites are to be privatised, and adventure activities that capitalise on Oman’s varied landscape developed. Business tourism is to be tapped through the development of Oman’s calendar for events in the meetings, incentives, conferences and exhibitions segment, while the leisure segment is to be expanded through the creation of food and beverage precincts and the establishment of large, integrated tourism complexes, hotels and themed attractions. This is to be facilitated by an overhaul of regulations such as licensing and permissions, which had previously hindered the sector’s growth.

Oman’s strategic location also makes it a viable global logistics hub, according to government planners. The sultanate’s logistics sector showed an average growth rate of just over 8% between 2010 and 2015, and this is expected to accelerate with the implementation of a raft of planned logistics projects. On land, these include rail connections to mining fields and the construction of new roads linking the sultanate with Saudi Arabia. Air transport will be enhanced through the Air Cargo Village project at Muscat International Airport – which will facilitate freight import, export, re-export and storage – and an overhaul of Customs and cargo procedures. The sultanate’s marine capacity, meanwhile, will be boosted by new services in Oman’s ports, the Port of Salalah expansion and the establishment of bonded warehouses in strategic sites such as Sohar and Salalah to facilitate re-export activity. “Although exports have been limited in the past, we are now working to provide Omani companies with the capabilities and security required to export goods globally,” Imaad Al Harthy, CEO of Credit Oman, told OBG.

Supporting Sectors

The manufacturing, tourism and logistics projects that are the government’s first priority in the short term are being supported by further reform initiatives derived from the Tanfeedh workshops. These focus on areas which broadly facilitate economic development in the sultanate. One of the key reforms is a drive to broaden the funding sources available to new and ongoing projects. This effort involves encouraging the greater use of the stock exchange as a funding platform, the creation of real estate investment trusts, establishing two project management corporations to oversee large government projects and the fostering of new PPPs. Oman also intends to further improve the general business environment, and will track its progress according major global indices such as the World Bank’s ease of doing business index, the World Economic Forum’s Global Competitiveness Report, the UN Development Programme’s human development index, and the Index of Economic Freedom from the Heritage Foundation and The Wall Street Journal. In the World Bank’s “Doing Business 2019” report, perhaps the most influential of the global surveys, the country ranks relatively well in areas such as paying taxes (12th out of 190 countries), starting a business (37th), and registering property (52nd). Areas of weakness are obtaining credit (134th), protecting minority investors (125th) and resolving insolvency (100th). The first of these challenges is being tackled by the effort to encourage the diversity of funding sources, while the latter two are being addressed through new legislation (see analysis).

Labour Market

Oman’s labour market has also been established as a key supporting sector by the government. A number of important short-term goals have been set in this area, to be met by 2020, including an unemployment rate not in excess of 3%; 67,000 new jobs in tourism, marketing and logistics; and the provision of at least 30,000 jobs for Omanis, only as specialists, technicians or skilled workers. Meeting these targets means addressing the gap between the demands of employers and the skills of the workforce, which involves measures such as the development of a national qualification system, training programmes for middle and senior leaders, and a strengthening of the governance of vocational training institutes. The SME sector is identified as a promising source of future employment opportunities, and the Public Authority for SME Development is tasked with providing technical support to viable businesses. These initiatives, however, are more likely to produce results over the medium to long term.

In the shorter term, Oman is deploying a strategy that many GCC states have turned to in their attempts to create a more sustainable future economy – the replacement of a large, expatriate workforce with its citizens. The long-standing Omanisation programme – by which the government aims to raise the percentage of nationals in the workforce – has gathered pace. In January 2018 a six-month ban was introduced on the recruitment of non-Omani manpower in over 80 professions, and in the following month the government cancelled deals with 199 companies because they did not employ enough local citizens. The authorities have also taken steps to make the domestic workforce more flexible. In 2017, new regulations were published for part-time employment which have made it easier for women, students and retired people to participate in the labour market.

Foreign Interest

Much of Oman’s reform effort has been formulated with a view to attract an increasing amount of foreign direct investment (FDI). Over the past decade this effort has been largely concentrated on the establishment of free zones, including the Sohar Port and Freezone, Salalah Free Zone and Al Mazyunah Free Zone, which allow for 100% foreign ownership and full repatriation of profit and capital, as well as offering a range of tax exemptions. In addition, the Public Establishment for Industrial Estates, recently rebranded as Madayn, has operated since 1993, and currently oversees nine sites which offer incentives such as exemptions from income tax and Customs, as well as government loans for agriculture, health and traditional handicraft activities.

In more recent times, Oman’s long-standing determination to populate the more remote parts of the country is resulting in yet more FDI magnets. The coastal city of Duqm is the most prominent example of this trend. Located some 500 km from the capital, the development plan for the city is centred on a seaport that will seed a large special economic zone, acting as the economic locus of the new metropolis. The site is already populated with a number of five-star hotels, villas, shops and supermarkets, and when fully developed will incorporate a large refinery, industrial zones, schools and colleges, an airport, and a modern housing and tourism district.

The large scale of the Duqm development may help to broaden the targets of FDI inflows, which have remained relatively unchanged in recent years. Leading the stock of FDI investments at the end of 2016, according to the CBO’s most recent data, was the oil and gas sector, which accounted for around 49.1% of the total, followed by financial intermediation (17.7%) and manufacturing (13%).

The enhancement of Oman’s business environment is an obvious facilitator of FDI flows, which have followed a positive trend over recent years. FDI inflows increased by 28.8% in 2017, to reach OR1.12bn ($3.1bn). Foreign portfolio investment jumped by a similar amount, 29.6%, largely due to the success of the government’s Eurobond and sovereign sukuk issuances. Further impetus to FDI growth is coming from Oman’s strengthening of the legislative framework which supports investment in the country (see analysis). One of the most important legislative initiatives in the pipeline involves the formulation of a comprehensive PPP platform to replace the relatively loose framework that currently governs PPP activity. A key test for any new legislation will be its ability to broaden the PPP arena beyond the energy and utility sector within which it has been largely contained – a characteristic of economies around the Gulf.

Capital Investment Law

The government is also in the process of introducing a new foreign capital investment law to replace legislation which was introduced in 1994. The most significant change proposed by the new law, the final draft of which has been in circulation since 2016, is the opening up of some parts of the economy to 100% foreign ownership. This development is likely to result in a significant increase in FDI flows. Lastly, the lack of a comprehensive bankruptcy law has been a concern to foreign companies operating in Oman, and is therefore another focus of government legislative reform. A draft of the legislation was circulated in 2012, and its final promulgation promises to transform the bankruptcy process from a simple liquidation approach to one which safeguards the rights of investors and also provides potential for viable companies to be able to return to operation.

Exports

As well as attracting more capital inflows, Oman is also seeking to bolster its economic position by increasing the outflow of merchandise from its shores. As an open economy that relies on revenues from exporting crude oil, the sultanate’s trade balance is subject to the vagaries of the global oil market. In 2017 oil sector exports accounted for 49% of total merchandise exports, while the export of oil and gas together accounted for 58.3% of the total. The sultanate therefore benefitted from the firming of oil prices over the year, with the merchandise trade surplus surging by 40% to reach OR3.4bn ($8.8bn). The improving trade surplus was instrumental in reducing Oman’s current account deficit for the year, and was a reminder of the continued centrality of the oil sector to the nation’s fiscal position.

However, the sultanate’s non-oil exports also rose substantially in 2017, aided by a rapid expansion in the exports of mineral products, which increased by 78.2%, as well as manufactured plastic and rubber articles (45%), chemicals (39.8%), foodstuffs, beverages and tobacco (32.9%) and base metals (22.8%). According to the central bank, the GCC countries increased their imports of Omani non-oil exports by more than 50% over the year, to reach OR1.6bn ($4.1bn), a trend which was underpinned by their economic revival as well as a relaxation of fiscal consolidation policies. The UAE remained Oman’s biggest destination for non-oil exports, followed by Saudi Arabia, India and China – a ranking which has remained unchanged since 2015. The most notable alteration to trading patterns for the year was the 160% growth of non-oil exports to Qatar, which was the result of increased demand in that market due to an economic blockade imposed by its GCC neighbours. Notably, Qatar replaced the US as Oman’s fifth-largest export market as a result of this.

Trade Agreements

While external factors bear heavily on Oman’s ability to boost both its traditional and emerging export lines, the sultanate has some tools with which it can foster trade expansion. One of the most influential of these is the Export Credit Guarantee Agency of Oman (Credit Oman), an independent legal entity fully funded by the government. Since 1991 it has promoted non-oil exports through its credit insurance, guarantee and financing services, which it makes available to Omani exporters of any size, operating in any industrial, commodity or service sector. Credit Oman insures exports to 108 countries, and has paid claims to exporters for their buyers to such countries as the US, the UK, Italy, France, South Africa, Kuwait, Jordan and India. Oman’s trade diversification is also aided by its membership of a number of important global trading arrangements, including the GCC Customs Union, the Greater Arab Free Trade Area, the GCC-European Free Trade Association agreement, and the GCC-Singapore Free Trade Agreement. Through its membership of the GCC, the sultanate also stands to benefit from any arrangements resulting from ongoing negotiations between the region and Australia, China, India and Japan.

Outlook

Oman’s efforts to expand non-oil activity will continue into 2019, most visibly through the Tanfeedh initiatives and policy efforts such as the development of a comprehensive PPP framework and the enactment of new foreign investment and bankruptcy legislation.

Oman’s fiscal performance over the short to medium term will largely be dependent on the direction of worldwide crude prices. In late September 2018 global oil prices hit a four-year high of $81.20 per barrel after OPEC reached an agreement to maintain production quotas, and the markets anticipated supply shortages resulting from outages in Venezuela and fresh sanctions on Iran. The US Energy Information Administration, meanwhile, anticipates that Brent spot prices will average $72 in 2019, and that West Texas Intermediate crude oil prices will average about $7 per barrel lower that year.

The improvement of the oil price scenario means that Oman will have little difficulty in meeting its projected budget targets and strengthening its overall fiscal position. The sultanate will also receive a boost to its economy over the medium term from the further development of the Khazzan gas field, a reserve that is expected to be able to support the nation’s energy needs for decades to come. The first phase of its development commenced in September 2017, and the field is now producing at design capacity of around 1bn cu feet of gas per day. The second phase is expected to come onstream in 2021, and will deliver an additional 500m cu feet of gas per day. Total production is expected to amount to 10.5trn cu feet of gas and around 350m barrels of condensate through the end of concession.

The IMF has anticipated that Oman’s GDP growth will increase by 1.9% in 2018 and 5% in 2019, although downside risks to economic growth over the medium term include a tightening of global financial conditions and uncertainty about oil prices in the context of an expansion of alternative fuels and an increase in supply from countries outside the quota agreements reached by both OPEC and non-OPEC producers.