Stable growth in Oman during 2013 is expected to continue this year, supported by both an increase in oil production and the government’s fiscal policies, with the non-oil sector set to boost expansion.
Under the draft 2014 budget, unveiled on January 2, GDP is forecast to rise by 5% this year, roughly the same rate recorded in 2013. Significantly, much of this growth will be driven by the non-oil segment of the economy, which Darwish bin Ismail Ali Al Balushi, the minister responsible for financial affairs, said would expand by 7.3%, a step up from the 5.6% of 2013.
The new year will also see an increase in state spending, with expenditure set to rise by 5% over the 2013 figure to $35.1bn. Of this, some 24% is to be directed to investment projects, including new refineries, road and rail works, and tourism facilities.
The economy’s solid performance in 2013 was reflected in a decision by ratings agency Standard & Poor’s (S&P) to maintain its outlook for the Sultanate as “stable” going into the new year and affirming Oman’s long- and short-term sovereign credit ratings at A/A-1. In a report issued in late December, S&P said Oman’s strong net external and general government asset positions, as well as prudent investment policies, mitigated against any risks posed by the economy’s high level of dependence on hydrocarbons. The report said the budget surplus should increase this year to 1.9% of GDP from an estimated 1.6% in 2013, despite increased expenditures.
Oil industry steps up
The economy in 2013 was buoyed by a stronger performance from its mainstay energy sector, with output up and international prices remaining high. Production from Oman’s fields rose 2.5% over the first 11 months of 2013, with the daily average climbing from the preceding year’s 915,600 to 941,700 barrels. Though prices on global markets eased slightly, coming in at an average $105.40 a barrel through the end of November, marginally down on the 2012 average, this was more than offset by the increase in production. For the 2014 budget, the government has assumed $85 per barrel price and average daily output of 945,000 barrels.
The Sultanate is stepping up investments in the energy sector, both to develop new deposits and prolong the life of existing fields using enhanced oil recovery (EOR) technology, which will become increasingly important in the coming years as many of Oman’s oil fields approach the end of their normal operational life. According to some estimates, up to one quarter of Oman’s oil production will be the result of EOR processes by 2021, with the provision of associated technology set to be a major area of business activity.
Bank credit, deposits up
Growth is expected to be supported by lending from the country’s banks. As of October, outstanding loans were up 6.8% over the same month the prior year, supported by an 11% rise in deposits, according to data from the central bank. With domestic interest rates easing to below 5.5% late in 2013, down from above 6% the year before, credit is forecast to remain affordable, and the Finance Ministry has predicted further rate reductions.
Inflation remained subdued throughout the year, falling to 1.3% in November. Price increases could pick up this year, however, as the government looks to scale back some of its subsidies, with support for fuel and gas being among those in line to be reduced. The impact of this policy, if implemented, will likely be felt in Oman’s inflation figures, as too could the effects of wage rises for civil servants, which may fuel demand in 2014 and spur activity in the retail, real estate and service sectors. Despite this, the government has forecast inflation to hold at around 1.5% or less in the coming year.
Though not having the fiscal reserves of some of its Gulf neighbours, Oman’s stability and the expanding breadth of its economy should shield it from any major external shocks over the coming year, while the improved performance of its hydrocarbons sector will allow it to take advantage of the recovery in many of its key markets. With forecasts of steady growth, modest inflation and a further easing of interest rates, the Omani economy should offer opportunities across the board in 2014.