Despite a sizeable fiscal deficit this year and the next due to decline in oil prices, Oman is likely to avoid deep cuts in spending as the real GDP grows by 4% in 2015 before moderating to 3.7% in 2016, a report said.
The government can comfortably finance deficits in the near term thanks to its sovereign wealth fund, strong credit standing, and low debt levels, explained the latest Economic Update by the National Bank of Kuwait (NBK).
Real GDP will be driven by a strong non-oil performance, the update said, noting that with lower oil prices highlighting the need to diversify the economy, authorities are keen to go ahead with their ambitious projects pipeline.
As a result, project spending is expected to remain at high levels, which is seen supporting non-oil growth in the near term. The recent decision to scrap a crude oil production cap and push for a steady rise in oil output will also see growth in the oil sector pick up slightly.
Oman’s non-oil growth is expected to remain healthy over the next two years, though it will moderate slightly to around 6%. An ambitious diversification plan will help sustain the upbeat pace in the non-oil economy. Oman’s non-oil growth will be primarily driven by its ambition to develop its logistics and tourism sectors and reduce dependence on hydrocarbon revenues.
The government expects to invest RO3.2 billion ($8.2 billion) in 2015, of which RO1.7 billion will be geared towards non-oil projects. Although slightly less than 2014’s spending as weaker revenue prospects may streamline investments, it is in line with past expenditures and reaffirms the government’s commitment to implementing its stated development plans.
Current and future government projects intend to capitalize on Oman’s topography and geographic location, targeting downstream oil sectors, transportation, and tourism sectors. Unlike its GCC neighbours, the construction sector does not show prominence due to the country’s still nascent private sector, the report said.
Rapid population growth in recent years driven in large part by strong demand for expat labour has provided support to the real estate sector. The population has grown by 48% since 2010 to 4.1 million in 2014. Of the 1.7 million expats residing in Oman, 1.6 million of them are actively employed by the private sector. As a result, the real estate sector accounted for 10% of nominal GDP in 2014, up 6.3% year-on-year, driven by increases in rents and activity.
Resident private credit activity will continue to benefit from Oman’s healthy non-oil outlook. Private credit to the non-financial sector grew by 12.5% in 2014, driven by lending to construction and manufacturing, while personal loans increased by 9.5%. As a result, private credit growth in Oman kept a strong pace in 2014, averaging 9.5%. This pace has been maintained through February 2015, as it is expected to do throughout 2015 supported by robust economic activity.
With oil prices at current levels, authorities have sought to soften the impact by bolstering oil and gas output through a focus on development. As a first step, the cap imposed on oil output was scrapped and upstream hydrocarbon development prioritized. Output in the oil and gas sector is expected to pick up slightly over the next two years, averaging growth of 0.8%.
Crude oil production averaged 943,000 barrels per day (b/d) in 2014, up a mere 0.2% year-on-year (y/y). The government is targeting crude and condensate output of 980,000 b/d in 2015, in an effort to offset lower oil prices.
In an effort to support the continued development of the oil sector, Oman is looking to spend RO1.5 billion on oil and gas projects in 2015, up from 2014’s expenditures of RO 1.2 million. Its current expansion plans target total oil output of 1 million b/d in the next year or two. Investment will focus on the development of PDO’s fields and enhanced oil recovery (EOR) activities.
According to NBK, gas production will remain steady for the next two years, but will see a large boost once the BP Khazan project comes online in 2017.
The Omani government is expected to post a deficit this year and the next owing to lower oil prices and modest increases in oil production. The 2015 budget, based on an oil price of $75-$80 per barrel, estimates a deficit of RO2.5 billion. A deficit of RO4 billion is more likely given that oil prices are lower than official projections; also, expenditures are seen remaining elevated in pursuit of the country’s development goals and politically sensitive expenditures are maintained.
Hydrocarbon revenues contracted by 3.9% in 2014 to reach RO13.7 billion, leading Oman to post a deficit of 1.2% of GDP. Omani crude oil averaged $103.7 per barrel in 2014. Oman’s breakeven price of oil is estimated at $105-110, the report said.
Oman is well equipped to handle the strain on its budget. In addition to drawing on reserves and donor grants, the government will likely seek funding from debt markets and international lenders taking advantage of its low debt levels and healthy credit rating to support spending.
Consumer price inflation is expected to remain modest over the next two years as inflationary pressures remain subdued. Inflation is seen averaging around 1% in 2015 and 2.5% in 2016. The strong US dollar and RO will help contain imported inflation, as will lower international food prices. Some upward pressure will come from the robust growth in population and healthy non-oil activity. Pick-ups in domestic demand, wages, and the consumption of services and real estate are expected, the report said.
The current account balance is projected to shift into deficit in 2015 and 2016 following the sharp drop in oil prices. Weaker oil prices will more than offset the decline in import prices, driving the trade balance into deficit.
The services deficit will continue to expand, albeit at a slower pace as projects aimed at boosting tourism and transport come to fruition. Meanwhile, further growth in the expatriate population will see remittances grow, thus widening the transfers deficit.
Source: Trade Arabia