With political and economic instability to its west in Yemen, and a battered real estate market to the north in the UAE, the performance of Oman’s economy in the past 12 months highlights Muscat’s relative prudence in its public spending plans in recent years.
With year-on-year rises in oil revenues, from RO3.3bn ($8.6bn) in 2002 to RO7.2bn in 2007, the government reduced public debt from 16.3 per cent of gross domestic product (GDP) in 2002 to 4.5 per cent in 2007. Economic growth was 7 per cent in 2008 and is projected to be 3 per cent in 2009 compared with the 0.9 per cent growth predicted for the UAE.
With oil prices in excess of $100 a barrel for the first six months of 2008, the revenues earned from these sustained high oil prices resulted in a surplus estimated at 8.8 per cent of GDP, which was RO23bn in 2008. “Real GDP grew 12 per cent in 2008, which was beyond our expectations,” one government source tells MEED. “The first half of the year was very good – we had nominal growth at 44 per cent and 12 per cent in real terms.”
Combined with previous years’ surpluses, economists estimate an accumulated surplus of close to 42 per cent of GDP at the end of 2008. These revenues now form a buffer as Oman faces the prospect of a prolonged dip in oil earnings in 2009. Its surplus is expected to become a deficit of between 3 and 4.9 per cent of GDP as a result of government spending in 2009, according to ratings agencies, and liquid assets are expected to fall from $27bn to $25bn.
Oman’s 2009 budget, announced on 2 January by Ahmed bin Abdulnabi Macki, National Economy Minister and deputy chairman of the Financial Affairs & Energy Resources Council, is based on raising oil production to 805,000 barrels a day (b/d), from 750,000 b/d in 2008.
“The government continues to implement major infrastructure projects as planned and by doing so it is expected to increase spending on the development programme of this year’s budget by 10 per cent,” Macki said, outlining the state’s spending plans for 2009.
Oil and gas revenues account for 78 per cent of the country’s total revenues and the break-even price for Oman’s 2009 budget is estimated at $50 a barrel.
With average oil prices estimated for the year at $45 a barrel, ratings agency Capital Intelligence predicts Oman will run a deficit of 3 per cent, about RO385m in 2009.
However, Oman’s financial reserves are 35 per cent of GDP, -meaning the deficit does not present a large economic risk.
Sources in the National Economy Ministry say the potential deficit could be covered by withdrawals from the State General Reserve Fund (SGRF), which was established in 1980 for use in circumstances such as these.
The government put RO832m of 2008’s oil and gas revenues into the SGRF and other similar funds, which have helped smooth project funding as oil prices slumped to $40 a barrel in early 2009.
As optimists in the country note, this may not even be necessary as the deficit could easily become a surplus should oil prices recover to reach more than $60 a barrel. In mid May, crude oil prices breached $60 a barrel for the first time this year.
“But if it [crude oil] is below $45 a barrel for three or four years,” says Salim Ben Nasser al-Ismaily, chief executive officer of the Omani Centre for Investment Promotion and Export Development (OCIPED). “Then they will need a new model.”
The ability to push on with planned projects, facilitated in part by the government’s emergency fund, is crucial as an engine of growth for Oman’s economy. Macki said in a statement to local press in April that public spending this year would be increased by 11 per cent from the 2007 budget. His message was clear and has been welcomed by the private sector, which is largely dependent on public projects to win new business.
Macki said Oman has adopted a “package of policies and mechanisms, the most important of which was to continue in the expansionary fiscal policy to stimulate growth”.
So far in 2009, the sultanate has released invitations to bid on construction projects worth $4.7bn, according to Gulf projects tracker MEED Projects.
Engineering, construction and procurement (EPC) contract awards for the construction sector in the first half of the year are valued at $720m, while planned projects with financing in place are at $1.4bn.
One major EPC contract award is for the construction of Muscat International Airport, worth RO500m, which was won in May by Athens-based Consolidated Contractors International Company (CCC), and Turkey’s TAV.
The National Economy Ministry unveiled the CCC-TAV joint venture as the winner despite it not being the lowest bidder for the work. The contract involves building the northern runway, taxi system, aprons, roads, utility buildings and other civil works. Further packages will cover a terminal building, an air traffic control tower and ancillary buildings. The CCC-TAV joint venture is also bidding to build the passenger terminal and air traffic control tower at Muscat International airport, tendered in February.
Despite the contract awards made this year, there is some pressure on the government to delay awarding further contracts on which the tender process was initiated in early 2008, as the cost of construction materials, such as reinforced steel (rebar), has fallen significantly since last August. The price of rebar is currently about $500 a tonne having reached a peak of about $1,600 a tonne in June 2008.
Some sources argue that the Muscat airport construction contract, which was released in August 2008, could have been re-tendered. “There was a 20 per cent fall in unit rates tendered by contractors compared with last year, sometimes as much as 25-30 per cent,” says one Muscat-based projects consultant.
Pushing through planned projects has not been the only measure of economic support implemented by the government. As 2008 came to a close, the Central Bank of Oman (CBO) took two further measures to combat the effects of the global financial crisis. The first, in October, was to boost the availability of -liquidity for banks, providing a $2bn foreign exchange facility.
According to Ali Hamdan, head of economic research at the CBO, the facility offers short-term support to local commercial banks to help them weather the global banking crisis. “The fund is temporary in nature due to the turmoil [in the banking sector] – as inter-bank lending has dried up,” says Hamdan.
The speed and decisiveness with which the CBO responded to the liquidity crisis has been praised by many in the banking sector. “Oman has been through contractions before and they are much more experienced in this respect than somewhere such as the UAE,” says -Murray Simms, chief executive officer of National Bank of Oman.
The pronouncements from the government reflect this. “They have been sober, and there is no sense of panic coming from the ministries. They have taken all the right steps, such as reducing the reserve and lending requirements,” he adds. “The CBO has been key to the stability of the banking sector. The regulatory regime is recognised throughout the region, something which is borne out of experience.”
In a second measure of financial support, the CBO established a RO150m fund to support the Muscat Securities Market (MSM). The fund trades on the MSM, smoothing volatility after the exchange lost significant value.
The MSM-30 share price index had dropped to 5,781 points at the year-end, a 36 per cent fall compared with December 2007. But the MSM is now in a period of stabilisation and even appreciation, says Abdullah al-Salmi, chairman of MSM.
According to Bahrain-based Sico Investment Bank, the sector’s stocks on the market have rallied during the past month. The MSM banking and finance index increasing by close to 15 per cent since April 2009. The biggest challenge for the MSM, however, has been the lack of initial public offerings (IPO) from companies. There are currently 235 companies listed on the exchange.
“We are small compared with our neighbours, but we are the most efficient and best regulated,” says Al-Salmi. “The challenge for us is to provide new products and to activate the market.”
This is a difficult issue in a country where much of the business is family run, or government controlled.
The MSM has been set the role of encouraging family businesses to list and has had limited success so far, thanks largely to the reluctance of family-owned businesses to list, and open their companies up to market scrutiny.
In 2007, Galfar Engineering and Contracting, a local engineering, construction and contracting company with a turn-over of $1bn and a staff of more than 25,000, listed on the MSM.
“This was a big success for the MSM and we hope it will show other businesses the benefits of joining,” says Al-Salmi.
As demonstrated in the push to encourage more local companies to list, Oman has made some significant strides in modernising and diversifying its economy in the past two years.
“We were looking out of place in the GCC a few years ago,” says one source. “The only thing we had in common was oil and gas.”
The measured pace of Oman’s development is the result of a prudent government that has watched the economic rise of its neighbours carefully, but chosen to takes its own path regarding economic policy.
“Slow and steady is the Oman way,” says one Muscat-based economist. “It has always been driven by long-term government spending and infrastructure projects, not by Dubai-style developments.”