There is no doubt that we are living in an era marked by an abundance of historic events. Yet abundance is not a word used often these days, especially not to in a positive context. We are still living in the aftermath of the financial crisis as the world economy appears to be teetering on the brink of recovery, still highly vulnerable to financial setbacks brewing in various corners of the world. To our relatively small but open economy, all this means there may be more bumps on the road ahead.
Mirroring this uncertainly, most equity markets around the world have been highly volatile in the recent past. The local bourse, being no exception, is 18 per cent in the red year to date (as on October 20, 2011), making it the second worst performing market among its GCC peers. The general index is currently trading at 11 times its trailing earnings, which is slightly below the five-year average price to earnings (PE) ratio of 12 times. Financials have severely lagged the general index recording a 25 per cent loss year to date, while the services and industrial sectors are in negative territory by 11 per cent and 19 per cent respectively.
However, while the US was busy spurting rounds of quantitative easing, and Europe was dealing with the possibility of a regional debt crisis, and China raised interest rates all the while trying to avoid a hard landing, Oman managed to spend itself out of an economic slump posting real GDP growth of 4.1 per cent in 2010.
Over the first eight months of this year, Oman's budget surplus widened to RO737mn, around three per cent of GDP, headline inflation stabilised at around 4.1 per cent and money supply grew at its fastest pace in 24 months this July, indicating renewed spending appetite. This combined with a flurry of tendering activity, a hefty government spending budget of RO12bn over the next five years and 16 per cent growth in banking sector credit over the first nine months promises a bright future for Oman.
Despite such promises, Oman remains vulnerable to external shocks. The first ripples of such external shocks impact Oman's economy via oil prices. Rising concerns of a worsening eurozone sovereign debt crisis and fears of a slowdown in US growth led oil prices to hover around US$80 a barrel over the second half of the year.
While the government disclosed that a balanced budget is expected for 2011, in the current oil price scenario we expect a slight tightening of Oman's surplus over the remainder of the year, especially as the government follows through with its planned spending. An oil price scenario below US$80 a barrel would be a cause for concern, as alluded to by the government.
The social unrest witnessed in February is proof that shocks to the economy can come from within. Protestors took to the streets to unearth a number of structural problems ailing Oman's economy, the most pervasive of which is the rapidly rising level of unemployment among Omani nationals. Structural unemployment persists despite stringent private sector Omanisation rules set forth by the government.
Perhaps one of the main reasons for this unemployment is that the skill level of the Omani workforce remains well below what is expected and required by the private sector. While spending on education in Oman as a percentage of GDP is relatively high in a global comparison, the government's efforts have only been partially successful in bridging the labour force skills gap.
The latest available facts and figures from the erstwhile Ministry of National Economy indicate that 70 per cent of the national workforce in the private sector is in low-wage jobs earning an average salary of RO230 per month, around 65 per cent of the national workforce in the private sector is under 30 years of age and most Omani workers are at the secondary education level while most expat workers hold university degrees. Therein lies the problem.
The government must work hand-in-hand with the private sector to increase the calibre of the national labour force. On the public front, the next phase of the government's investment in education should focus on enabling access to and promoting higher education in Oman. In this respect, total spending on education under the Eighth Five-Year Plan amounts to RO300mn, and investment in the education sector accounts for five per cent of the development budget over the plan period.
Around 75 per cent of the total spending on education will be allocated toward higher education through internal and external scholarships and the establishment of vocational training centres. This provides optimism that the government is moving in the right direction.
Yet even with heavy investment in education to bridge the skill gap, the fact that expat labour is viewed by the private sector as the cheaper, more productive and more flexible source of labour remains a major factor contributing to structural unemployment in Oman. The government must create a level playing field by closing the salary differential between expats and nationals and make national labour more flexible in order for its long-term plan to be successful.
On the private front, private sector organisations can play a role by providing on-the-job training to develop young Omanis with high potential. The government can provide monetary incentives to encourage the private sector to do so. In a swift response to the demands of protestors, the government announced an extra RO1bn of current spending on social handouts, thus ramping up this year's budgeted expenditures to RO9.2bn.
In order to avoid further burdening the government's balance sheet, the government must couple this incremental increase in current spending with long-term capital investment in all facets of the economy with an aim to create more jobs and improve the standard of living. As indicated earlier, the Eighth Five-Year Plan describes an extensive investment programme to that end.
Therefore, when considering the long-term ramifications of the events of late February, the more fitting question is whether the government's investments will be channeled effectively to achieve higher employment among Omani nationals. Matching the jobs created and the skills such jobs require with the skills offered by the national labour force is key to meeting this objective.
With a plan to address Oman's structural challenges already in place, the government refocused on awarding projects in other areas of the economy, leading to a flurry in tendering activity over the second half of the year. According to MEED, the total value of projects awarded year to date amounts to RO1.8bn and expects RO3.8bn to be awarded in 2012, the majority of which is directed towards power, transport and construction.
This brings us to another challenge that Oman may face en route towards a stronger economy: a widening gas supply shortage. Oman's gas supply is largely used for power generation, industrial activities and for enhanced oil recovery initiatives, all of which are expected to increase dramatically going forward in line with a growing population and planned investments in the industrial sector. According to EIU estimates, this is expected to exacerbate the supply-demand imbalance going forward.
Oman has been importing gas from Qatar since 2008 to meet its growing domestic demand. Qatar supplies this gas at much lower prices as compared to international markets. With persistently high gas prices seen over the recent past, a question arises as to whether regional gas giants like Qatar will continue to supply gas to neighbouring countries at such low prices when realisations are much higher elsewhere.
As such, a possibility exists that Oman's gas imports will become increasingly more expensive in the future. It is unlikely that the government will discontinue subsidising gas or gradually increasing prices as this would result in accelerated inflation and would counteract the government's efforts made elsewhere to maintain price stability. Moreover, higher gas prices would make many industrial projects planned by private sector players not feasible, which may stifle economic growth.
The path of the global economy remains clouded in uncertainty. Against this backdrop, governments and businesses alike continue to keep an eye focused on foreign events, hurriedly planning strategies to avoid riding the ripple waves, while the other eye continues to scout for investment opportunities in the local market.
© businesstoday 2011
