Oman's economy in early stages of recovery but growth will be marginal in 2019: report

The economic outlook for Oman looks challenging in 2019, with oil production curbs and oil price volatility weighing on incomes and sentiment. According to ICAEW’s latest Economic Insight report, Oman’s economy is still in the early stages of recovery and is expected to experience modestly weaker growth of 2.8% this year, down from an estimated 3.3% in 2018 but up from the 0.9% drop in 2017.

Economic Insight: Middle East Q2 2019, produced in partnership by ICAEW and Oxford Economics, says oil prices have again become less supportive for Oman’s economic outlook as the current oil price forecast stands at $67pb for 2019, 5.6% below the 2018 average. This, alongside lower oil production levels, should drive down oil revenue, which contributes about 60% of total budget revenue.

According to the report, both domestic demand and the external sector face persistent headwinds, the latter reinforced by the fractious US-China trade relations. Renewed pressure on oil prices complicates fiscal adjustment, as the overall thrust of policy remains expansionary. Additionally, the ramp-up in gas output over the past 18 months has partly compensated for lower oil production, cushioning oil sector performance.

Despite being a non-OPEC country, Oman has adhered to the OPEC+ oil quotas, cutting output to just above 970,000 b/d in January-April, 25,000 b/d below the average for Q4 2018. It is looking increasingly likely that the current round of cutbacks will be extended into H2 2019, which would further weigh on the contribution of the oil sector to GDP growth this year. Looking ahead, natural gas exploration will be a more significant driver of oil sector growth.

Maya Senussi, ICAEW Economic Advisor and Senior Economist for Middle East at Oxford Economics, said: “The slump in oil prices has put significant pressure on Oman in the last year – oil revenue still amounts to 60% of the nation’s total budget revenue. There is a dire need for an improvement in the non-oil sector and delaying the introduction of VAT has had a significant effect on the fiscal deficit. Oman must continue with its economic diversification efforts to drive growth in its economy.”

According to ICAEW, non-oil activity in Oman remains tepid, though it should improve, anchored by economic diversification efforts and infrastructure spending under the country’s Vision 2020 plan.

Despite increased state spending, domestic demand remains under pressure, reflected in slowing private sector credit uptake. The increase in non-oil revenue has been generally slow to materialise – for example, VAT implementation does not feature in the 2019 budget and will probably be delayed until 2020. In the absence of fiscal consolidation, debt dynamics will continue to deteriorate, with public external debt seen reaching 56% of GDP at the end of 2019.

The real estate market remains on a downward trend, with the value of sold properties falling by 12.2% in Q1 from a year earlier, while vehicle registrations continue to register double-digit y/y declines. Tourism has been the bright spot, showing a jump in the number of visitors in the first four months of the year, accompanied by a strong uptick in revenues.

However, the public sector budget’s heavy reliance on energy receipts will continue to limit the authorities’ room to support spending and activity. The report forecasts slower GDP growth but wider fiscal shortfall this year, entrenching accumulation of external debt further above 50% of GDP. Despite increased state spending, domestic demand remains under pressure, reflected in slowing private sector credit uptake.

Running large deficits has done little to strengthen employment prospects for the local population. Notwithstanding the expat hiring freeze, now extended to a larger number of professions, the private sector created just 13,444 jobs for Omanis in 2018, short of the 25,000 target, and a further 5,780 in January-April. Coupled with slow progress on addressing the underlying skill mismatch, labour market dynamics will continue to constrain consumption and the overall outlook in the coming months.

2019: A challenging year for Middle Eastern economies

The Middle Eastern economy is expected to slow down from an estimated 1.5% last year to about 0.6% in 2019, the slowest in almost a decade. According to the report, the Middle East GDP growth forecast slowdown is primarily driven by a deeper-than-expected recession in Iran, one of the region’s largest economies. In the GCC, the burden of generating economic growth and employment is expected to fall more on the non-oil sector in 2019. Lower oil prices pose a challenge for a number of GCC countries that rely heavily on hydrocarbon receipts to balance their budgets, notably Bahrain and Oman.

Oil producers in the Middle East will also see limited growth in the oil sector, the traditional engine of economic growth and a primary source of government revenues, given the anticipated extension of the output cuts by OPEC+ to balance the international oil markets. Oil prices are forecast to average around US$67pb in 2019, down by some 5.6% from the average of US$71pb last year.

In 2019, the non-oil sector will continue to be supported by various pro-growth government initiatives, expansionary budgets and fiscal stimulus plans, especially in Saudi Arabia and the UAE, the two largest GCC economies. The non-oil sector in the GCC is expected to accelerate from an estimated 2.3% last year to 2.6% in 2019.

Michael Armstrong, FCA and ICAEW Regional Director for the Middle East, Africa and South Asia (MEASA), said: “The outlook for Middle Eastern economies remains challenging for the rest of 2019 as global developments continue to be of crucial importance to the region. Growth prospects for the Middle Eastern economy have deteriorated as geopolitical risks, involving Iran especially, have risen in the last year. Continued uncertainty in the global oil market means increasing non-oil revenues is vital for regional economies – governments in the region have been proactive, but they must continue to support their economies with pro-growth initiatives.”

The full Economic Insight: Middle East report can be found here:

www.icaew.com/technical/economy/economic-insight/economic-insight-middle-east 

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© Press Release 2019