Recently released figures indicate that Oman’s diversification strategy is beginning to bear fruit. But, despite the Sultanate’s finances looking healthier, the country still remains vulnerable to price shocks in the energy sector.
The economy posted solid growth for the first quarter of the year, with nominal GDP rising 4.6% year-on-year, according to data issued by the National Centre for Statistics and Information (NCSI) on July 4. The oil and gas sector recorded a 0.2% decline, which was easily offset by an 8.3% rise in the non-energy sector, mainly driven by a 10.9% jump in the services sector.
The services sector saw wholesale and retail trade, its largest component, rise 7.1% and real estate services grew by 6.1%, suggesting increasing confidence in the consumer sector – a factor that should continue to fuel economic activity over the rest of the year.
Despite the rise in consumer spending, inflation has remained subdued. The inflation level was 1.48% in May, up from 1.1% in the same month of 2013 but well below the 2012 level, according to the NCSI report. The figure for May was 0.2% higher on the previous month, a smaller rise than that seen in April.
There is also evidence that the Omanisation programme – a policy to replace migrant workers with nationals – is gaining traction, too.
The number of expatriate workers in Oman has been steadily declining since the measures were introduced, and as of the end of May there were nearly 190,000 Omanis registered as working in the private sector, a 3.7% increase from end-2013 levels. Fewer workers from India, Pakistan, Egypt, and Ethiopia arrived in Oman between March and May, according to the NCSI data.
Another positive development is the strong turnaround in state finances over the past year. The budget recorded an OR551.3m ($1.43bn) surplus for the first five months of the year, compared with a deficit of OR71.6m ($186.5m) in the same period in 2013 according to a July report from the statistics agency. Total state revenues increased 0.5% for the period year-on-year to OR6.04bn ($15.7bn).
The improvement in the budget was all the more significant as oil earnings showed a decline, highlighting the strides Oman has made to diversify its economy. Oil revenues dipped OR200m ($520m) in the first five months of 2014 compared with the same period a year ago to OR4.3m ($11.2bn).
Still vulnerable to oil shocks
While most of the recent data suggests that the economy’s solid performance looks set to continue in the short to medium term, ratings agency Standard & Poor’s (S&P) has said Oman could face headwinds in the longer term.
In a report issued at the beginning of July, S&P warned that Oman, along with Bahrain, were most vulnerable to a fall in oil prices. Hydrocarbons, which still account for half of GDP, are set to remain vital to the economy for the foreseeable future. S&P added a sharp and sustained drop in the oil price or in export volumes could hit the sultanate’s economic and financial indicators, more so than most of the other Gulf states.
This was mainly due to Oman having a higher break-even point for oil prices than other GCC members, with the exception of Bahrain.