Economic Update

The lifting of a rating agency’s temporary cloud over the Oman economy and a healthy forecast for GDP growth have combined to create an air of optimism in the Sultanate. On July 20 Standard & Poor’s removed Oman from CreditWatch, with the country’s long-term local and foreign currency rating at A, and the short-term rating at A-1.

The exit from the CreditWatch list, which is used to warn bond issuers of the need to address negative factors that could affect their credit ratings, confirms that the country is recovering well from the unrest that affected the region in the first few months of the year.

Sultan Qaboos bin Said Al Said responded quickly when Omanis took to the streets demanding more jobs and a higher minimum wage, as well as seeking tougher measures to fight corruption among government workers. The state increased the minimum wage for nationals working in the private sector by 43% to $520 per month and dismissed several government officials, widely praised actions that seem to have met the demands.

“We have removed the ratings from CreditWatch Negative in light of immediate political pressures easing,” Standard & Poor’s said in a statement. “Aside from an isolated killing in Sohar the protests were largely peaceful, and the quick response of Sultan Qaboos bin Said Al Said to protestor demands appears to have eased tensions.”

The statement said that ratings could stabilise at their current level if reforms continue to ease tensions and if the foundations supporting economic growth are further strengthened, which it said would largely be based on the diversification of the economy.

In further good news, Oman’s GDP is expected to expand this year at the very healthy rate of 4.4%, after hitting 4.2% in 2010. While there have been large increases in public spending to expand some social programmes, higher oil prices have increased the country’s spending power.

It was also announced by the UN in late July that Oman was one of the only countries in the Economic and Social Commission for Western Asia (ESCWA) region not to be affected by the average 15% drop in foreign direct investment (FDI) that hit most members in 2010. Of the 14 ESCWA states – which include Egypt, the UAE, Saudi Arabia and Jordan – Lebanon was the only other unaffected country.

“FDI flows to the ESCWA region dropped by 15% from $67bn in 2009 to $57bn in 2010,” Abulgasim Abdullah, the chief of financing for development at ESCWA, told Lebanese media in late July. Abdullah added that many countries in the region had put major projects on hold due to lack of FDI.

The removal from the CreditWatch list was announced just before the 41st anniversary of Sultan Qaboos’ rule on July 23 and reinforced the Sultanate’s status as an economically and politically resilient nation. Oman’s social and economic development over the past four decades has been widely praised, particularly in light of high rates of literacy, urban development and primary school enrolment.

In an interview with Business Excellence magazine in July, Henk Pauw, CEO of Sohar Aluminium, identified the government’s social initiatives as responsible for the relatively muted response of the Omani people to the regional unrest. “There is some dissent in Oman,” Pauw said, “but the government is much more progressive here than in many Arab countries. There are already plenty of plans and initiatives in place to improve living conditions for the Omani people.”

Recently, more focus has been placed on creating jobs and diversifying the local economy, which has historically been dependent on oil revenue. The Vision 2020 development plan lays out a strategy for reducing crude oil’s share of GDP from 40% in 1995 to 9% in 2020.

The largest single contribution to this goal will come from industry, where investment is set to increase from 7.5% of GDP in 1995 to 29% in 2020. The government has invested in several projects in steel and aluminium production, for example, which are expected to be even more significant sources of future income.

New industrial estates provide space for light industry and a new free zone at Sohar will be dedicated to downstream industries. The Sohar development is aimed at creating value-added products from Oman’s many raw materials. These diversification measures, along with social stability, should help keep ratings up and investors happy.