Oman GDP grew by 5.0% in 2012; expected to grow further by 4.2% in 2013

Global Investment House
Oman Economy

Oman’s real GDP expanded steadily over the past few years, with an estimated growth rate of 5.0% in 2012, which was lower than government’s target of 7.0% and was almost close to the IMF forecast. Oil and gas continue to dominate the Omani economy, contributing more than half of the nominal GDP and almost two–third of net fiscal revenue. However, Oman has successfully executed its diversification strategy as non-oil GDP to grow 5.4% in 2011 from 3.1% in 2009. The non-oil sector’s contribution to GDP rose considerably from 52.7% in 2001 to 72.2% in 2011. Factors such as high domestic demand, an expansionary fiscal policy and growth in the non-oil economy would bolster economic growth to average 5.1% over 2013–17.

Oil production is estimated to expand 1.5% annually during 2013–17 compared to an annual average of 5.7% in 2008–11 and a 4.0% rise in 2012. As production has become more difficult and complex, diversification programs are gaining prominence. Strong growth in non-oil production is likely to compensate for the weakness in oil production. Factors such as high domestic demand, an expansionary fiscal policy and gains in the non-oil economy would ensure robust economic growth. However, the economy will likely remain vulnerable to any downturn in domestic oil production and fluctuations in oil and gas export prices.

High oil exports to continue support external balances

Oman’s trade balance is structurally positive. The country exports more than it imports. This resulted in a manifold increase in the trade surplus to USD25.4bn in 2011 from USD5.1bn in 2001. Crude oil and related products continue to be the key reason for the increase in trade surplus. In 2011, oil and gas constituted 70.8% of total exports. Higher oil production and prices also supported growth in trade surplus, which otherwise would have been impacted by a surge in imports during the same period.

EIU expects trade surplus to remain at USD25.5bn in 2012, but anticipates a slight fall in 2013. The decline could primarily be due to the forecast of lower Brent crude price of USD104.5/barrel compared to US$111.9/b in 2012. Furthermore, the trade surplus would remain substantial throughout 2013–17, although slower pace of growth in oil production may have a negative impact. Overall, export revenue is expected to increase by an annual average of around8% over 2013–17, supported by the continued development of Oman’s sea ports, which would raise re-export trade.

Diversification strategy – Vision 2020 gaining prominence

Vision 2020 outlines the economy’s diversification from oil and steps for privatization and ‘Omanization’. It also aims to reduce dependence on the oil sector to 9.0% by 2020 and raise the gas industry’s contribution to 10.0%. In line with this, the government is stimulating gas and oil related industries such as petrochemicals, fertilizers and aluminum production that, in turn, are driving growth in the manufacturing sector. Paired with this is the carefully structured tourism strategy, aimed at high net worth individuals. One of the main goals of the Tourism Ministry is to represent Oman as a year-round destination.

Government forecasts budget deficit of USD4.4bn in 2013

Oman passed its 2013 budget plan on January 1, 2013. The government aims to stimulate growth in the non-oil sector and thereby pursue its diversification strategy. Revenues are budgeted at USD28.9bn, up 27.0% from that in 2012. Oil revenues constitute 72% of budgeted revenues, with a base price of USD85.0 per barrel and an average production of 930,000 bpd. Meanwhile, expenses are budgeted at USD33.1bn in 2013, a 29.0% increase from the previous year. Current expenditure and investment expenditure will continue to be the key contributors to expenses, resulting in a budget deficit of USD4.4bn for 2013. However, government finances will remain vulnerable to changes in hydrocarbons prices.

Inflation declines to 2.9% in 2012 as key commodity prices fall

Inflation rate, which measures the price consumers pay for a standard basket of goods, eased in 2012, led largely by softening of food prices and rent costs. Average inflation in Oman slowed to 2.9%, down from 4.1% in 2011 and 3.2% in 2010. The decline was primarily due to two commodity groups, namely ‘food, beverage & tobacco’ and ‘rent, electricity, water & fuel’. Food prices regressed to 2.2% in 2012 compared to 4.5% in 2011, while rent costs retreated to 2.2% in 2012 vis-à-vis 2.8% in 2011. Transportation costs however increased by 1.9% in 2012 compared to 1.5% in 2011. Education soared 15.2% during the year, but constitutes just 3.3% of the weight on the index.

Meanwhile, the wholesale price index declined to 2.1% during the first three quarters of 2012 compared with a rise of 7.5% in 2011. Except for agricultural products, which fell 2.3% during the period, all of the other components of the index increased at an average rate of 2.4%.

Growth in liquidity

Given the fixed exchange rate regime of Oman, the Central Bank of Oman (CBO) has to ensure monetary stability in the current uncertain global environment. The focus remains on liquidity management and supporting growth, while keeping inflation under check. In 2012, banks witnessed excess liquidity, as growth in deposits remained strong. This, coupled with an expansionary fiscal policy, resulted in a significant increase in total money stock.

At the end of 2012, narrow money stock (M1) grew 13.9%YoY mainly due to increase in the currency held by the public (9.8%) and growth in demand deposits (15.5%). During the same period, quasi money grew 9.3%. However, its share of the total money stock declined marginally to 68.0% in 2012 compared with 68.9% a year ago. The rise in quasi money can be attributed equally to time and saving deposits. As a result, broad money stock M2 (M1 plus quasi–money) grew 10.7% to USD28.2bn.

Released by Global Investment House.