Oman economy slows as oil prices remain low

Oman economy slows as oil prices remain low
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Published August 8th, 2016 - 12:00 GMT via SyndiGate.info

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Oman's economic growth is expected to slow in 2016 and 2017 to an average of 2 per cent. (File photo)
Oman's economic growth is expected to slow in 2016 and 2017 to an average of 2 per cent. (File photo)
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Oman's economy is showing signs of slowing with consumer confidence weakening, government projects being cut, and market conditions staying bearish, said a report.

The persistence of low oil prices will see Oman register substantial deficits in 2016 and 2017, increasing the urgency for fiscal consolidation, said the National Bank of Kuwait outlook for Oman.

Following reforms that had little impact on public finances in 2015, the government has come back with a slew of measures targeting excessive spending and better revenue collection. On the downside, these measures are expected to erode future income expectations for both consumers and investors. Credit growth is expected to slow as a result, it said.

Tightening liquidity in the banking sector, due to domestic government borrowing and declining deposits, further add to these concerns.

On the upside, recent government efforts show its resolve in divesting away from the public sector. Reforms supporting small and medium-sized enterprises and foreign investors hope to spark growth in the non-oil sector. Deepening ties with Iran may also be a boon for both the non-oil and financial sectors, the NBK report said.
 
Oil prices continue to impact  

While growth was healthy in 2015, at an estimated 3.5 per cent, it is expected to slow in 2016 and 2017 to an average of 2 per cent. Weakening consumer and investor confidence will be the primary drag. A survey by the National Center for Statistics and Information (NCSI) showed a sharp decrease in consumer confidence in 1Q16, stemming mainly from uncertainty over future income. These worries follow cost-cutting measures implemented by the Ministry of Finance in H1 2016.

As a result, the mood in the non-oil sector has been bearish. As of March, growth in real estate sales slowed to 6 per cent year-on-year from an average of 32 per cent in 2015; the number of newly registered vehicles retreated by 25 per cent during the month, down for the 13th consecutive month; hotel revenue growth dropped to 4 per cent, from a 2015 average of 15 per cent, the NBK report said.

Iran’s resurgence on the global economic stage may help offset the slowdown, with Oman set to benefit from Iran’s potential growth, while Iran will look to Oman as a conduit for trade. Oman’s neutral stance towards neighbouring Iran has allowed it to deepen its relationship following the nuclear deal. Bilateral investments are expected to increase. Several deals have been lined up since. An Iranian car manufacturer will be setting up shop in Oman, while talks of building a $1.5 billion hospital complex, financed by Iran, are underway. Iran’s close proximity will also help prop up Oman’s tourism sector, it said.

Domestically, Oman is looking to jump start its economy by pursuing its development plan, which will emphasise the role of the private sector in funding more than half of the OR41 billion to be spent on the plan. To that aim, Oman has passed legislation allowing for 100 per cent foreign ownership and has abolished minimum capital requirements for firms. The small and medium-sized enterprise sector, a pillar in Oman’s diversification strategy, is set to benefit greatly from these developments.

Government project spending will remain instrumental to Oman’s non-oil sector, but spending will be reserved to necessary projects, dampening its lift on growth. As of H1 2016, the value of awarded projects has decreased by 12 per cent compared to the same period in 2015. Focus will be given to infrastructure and power projects.

Oman is faced with an electricity supply gap, threatening its future growth prospects. Energy consumption has also grown rapidly, rising by 14 per cent y/y in March.
 
Fiscal pressures to persist
Fiscal pressures are expected to persist in 2016, but may soften in 2017. Low oil prices are expected to offset gains from the gradual implementation of reforms during 2016. A recovery in oil prices, coupled with increased compliance with reforms, may see greater fiscal consolidation in 2017, the NBK report said.

Official data shows the deficit at 17.1 per cent of GDP (OR4.7 billion) in 2015, surpassing official expectations. A similar deficit is expected in 2016, though oil prices are seen to be weaker, spending restraint will start to be felt on the gradual implementation of fiscal reforms.

In 2017, the deficit is expected to narrow, dropping to 8.4 per cent of GDP, as additional spending cuts and revenue measures are realised and oil prices begin to recover; a potential increase in gas production will also help.

The government has enacted a number of spending and revenue reforms in a bid to reign in on a widening deficit. Benefits, bonuses, and scholarships have been halted at all ministries and quasi-sovereign institutions. Spending restrictions have been implemented as well.

Ministries are also encouraged to look for new sources of non-oil revenue and improving revenue collection. So far, the Sultanate has seen an increase in the cost of vehicle license plates, air traffic fees, and its airport departure tax. Oman may also consider implementing a VAT in 2017, one year ahead of other GCC countries, given the difficult condition of its finances. These measures follow some less impactful reforms, such as the liberalisation of petrol prices and a subsidy adjustment for industrial power usage that have done little to reign in the deficit, it said. 

Copyright 2016 Al Hilal Publishing and Marketing Group

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