Solid performance in the non-oil sector of the Omani economy steered the country towards relatively sound growth in 2015, with the financial services industry in particular helping to cushion the blow of lower energy prices.
Although estimates suggest economic expansion will ease in the year ahead, as the impact of weaker hydrocarbons earnings takes effect, the contribution of the private sector is expected to maintain its upward momentum, with the non-energy sector continuing to lead overall growth.
Steady growth forecast
While year-end data has yet to be released, Oman’s GDP growth in 2015 is expected to have reached 4.4%, according to IMF estimates, up from 2.9% in 2014 but down slightly on mid-year forecasts of 4.6%.
Inflation remained subdued throughout 2015, falling to a GCC-wide low of 0.43% year-on-year (y-o-y) in October, as prices in headline categories, such as food and beverages and transport and utilities, flattened or declined late in the year.
Growth is expected to slow in 2016, however, falling to 2.8%, according to IMF forecasts. The more moderate pace of expansion is in line with forecasts for other GCC states, most of which are tipped to see growth ease in the coming 12 months.
Weaker energy revenues trigger spending cuts
With oil dropping to $50 per barrel by October, earnings from the country’s main export fell by more than 45% y-o-y in the first 10 months of the year. Further declines saw spot prices fall below $40 per barrel in late 2015, curbing government revenues further.
The drop in energy income, though partly offset by a 4.4% y-o-y reduction in state spending on investment, development and social programmes through October, pushed the budget into deficit in 2015.
While the government had anticipated a OR2.5bn ($6.5bn) fiscal deficit for the year, this threshold was surpassed in August, when the budget shortfall reached OR2.7bn ($7bn). By October the deficit had risen to OR3.26bn ($8.5bn), according to data issued in late December by the National Centre for Statistics and Information.
Shoring up revenues
To help shore up government revenues, the Shura Council, an advisory body for the government, voted in favour of a series of tax increases in late December, as well as a broadening of the corporate tax base.
While any increases would be subject to cabinet approval, the council’s recommendations included raising the corporate tax rate from 12% to 15% and removing the current tax-free ceiling of OR30,000 ($77,900).
Supplementary revenue could also be generated by an uptick in oil production, with output from Oman’s oil fields increasing by 3.2% y-o-y in the first 10 months of 2015, averaging 977,000 barrels per day. However, the effect of such an increase is likely to be moderated by any further easing in oil prices.
Domestic currency market benefits from oil slide
To help bridge the growing fiscal gap, the government made extensive use of the local currency throughout 2015.
While banks halted investment in certificates of deposit at the Central Bank of Oman (CBO), the first 10 months of the year saw the sector move strongly into government debt, buying up 32.5% more government development bonds than during the first 10 months of 2014.
In another signal that the domestic currency market is benefitting from the weak energy climate, the government issued its first sovereign sukuk (Islamic bond), worth OR200m ($519.4m), in October. According to the CBO, further sovereign sukuk could be in the offing.
Analysts will be looking for the five-year, oversubscribed offer to spur further private sector sukuk issues in the year ahead.
Banks post healthy 10-month results
Oman’s banks also remained on a sound footing in 2015. Commercial banks posted asset growth of 15.7% y-o-y as at the end of October, with total assets rising to OR28.3bn ($73.6bn).
Sector-wide credit growth reached 10.4% y-o-y in October, with lending totalling OR18.32bn ($47.6bn), according to CBO data released in late December. Deposits rose by a more modest 5.9% to OR18.16bn ($47.2bn).
The Islamic banking segment, meanwhile, recorded more robust growth. Assets rose by 64% y-o-y to OR1.56bn ($4.1bn), while deposits nearly tripled to OR1.37bn ($3.6bn).
The government could look to the banking sector to fund anticipated budget deficits in 2016 or 2017, although such a move would likely tighten liquidity conditions in the market and drive up borrowing rates for the private sector.
In the short term at least, borrowing costs look set to remain at their present levels, after the CBO announced in mid-December that it had no plans to revise benchmark rates. The announcement came as many other central banks in the region raised key rates in the wake of the 25-basis-point increase by the US Federal Reserve earlier in the month.