Economic Analysis: Forecast of the Omani economy for the year 2007



Economic Analysis – Forecast of the Omani economy for the year 2007

Subscribe to the meepas Middle East Analysis Review subscribe@meepas.com

By: Meir Javedanfar - meepas.com

20/07/2005

Introduction

The first part of this analysis focused on the structure and growth engines of the Omani economy. This the second part of this meepas© analysis on the Omani economy will forecast Oman's real GDP growth for the year 2007.

It is one of the major goals of the Omani government to diversify the Omani economy away from oil by the year 2020 which is two years before the country's oil resources are estimated to run out. This plan called “vision 2020” has been making important strides recently which have been illustrated through increasing foreign and local investment in Oman's non oil sector.

Other sectors of the Omani economy have also seen expansion. This has been due to a number of factors one of which is the government's assistance to foreign companies who wish to invest in Oman. Incentives offered include:

Up to 100% foreign ownership
Provision of soft loans with low interest rates
Exemption from customs duty on imports of plant and equipment
Relief from customs duty on raw materials for up to 10 years
No personal income tax
Corporate tax holiday for up to 10 years
Full repatriation of capital, net profit and royalties
Export credit insurance through the Export Guarantee and Financing Agency

Furthermore Oman's entry into the World Trade Organisation and its free trade and Customs Union agreement with its GCC neighbours have had a further positive impact on the Omani economy. This is in addition to Oman's stable financial environment which include low inflation rate and recent surplus registered by the budget.

According to IMF forecast the real GDP of Oman is expected to grow by 3.6% for the year 2005. The IMF expects this figure to increase to 5.3% for the year 2006.

It is the opinion of meepas© that the Omani economy will continue its positive upward trend in the year 2007 however the rate of real GDP growth will slow down to 4.5%. The analysis below by meepas© will outline expected areas of growth, and will address the reasons as to why the rate of growth will slow down.

Oil sector

Oil contributes to one-third of Oman's GDP and 70% of export earnings. However according to a number of energy analysts Oman 's oil fields are generally smaller, more widely scattered, less productive, and more costly per barrel than in other Persian Gulf countries. The average well in Oman produces only around 400 barrels per day (bbl/d), about one-tenth the volume per well of those in neighbouring countries. To compensate, Oman uses a variety of enhanced oil recovery techniques. Although these methods raise production levels they also increase the cost of oil extraction as illustrated by the per barrel extraction cost of $4.79 in 2002 to $6.35 in 2003. Nevertheless the Omani economy has been enjoying the fruits of the recent rise in oil prices. This is evident in the $1 billion budget surplus for the year 2004, where initially the government expected a deficit. According to a number of estimates, oil prices are expected to stay at their current high level until the end of 2006. Based on this estimate, it is the opinion of meepas© that the expected fall in international oil prices will be the biggest factor behind the reduction in the growth rate of the Omani economy for the year 2007 as oil has a large impact on Oman's economy. The long term effects of the forecasted fall in oil prices is expected to be low to moderate, due to the fact that the Omani government has and will be implementing its economic diversification plan which will gradually be reducing Oman's dependence on oil.

Trade sector

Trade, exports and re-exports are important parts of Oman's diversification strategy. It is the opinion of meepas© that the contribution of this sector to the Omani economy will increase by 2007. This is due to our expectation that by 2007 the Free Trade Agreement (FTA) between the US and Oman will in place and fully functioning. The FTA with the US will boost Oman's exports to the US. It is also forecasted that the FTA will increase US investment in the Omani economy by companies who will want to take advantage of Oman's lower labour costs and its proximity to other GCC countries.

Furthermore it is also expected that the GCC which Oman is a member of will have concluded its Free Trade talks with the EU. The FTA with the EU is expected to further increase Omani exports to EU whilst having a positive impact on EU investment in Oman's economy.

The contribution of Oman's trade sector to the real GDP growth is expected to be further boosted by 2007 due to the government's privatisation and modernisation of Oman's ports and their management. This is due to the fact that Oman's ports are a crucial gateway for its trade and exports whilst being the centre of a number of free trade areas such as the one based at the port of Salalah.

Gas sector

The impact of this sector on Oman's economy and diversification plans was highlighted by the IMF Article IV consultation with Oman which specifically pointed to Liquefied natural gas (LNG) exports from Oman LNG being responsible for the reduction in the balance of payments deficit and an increase in Oman's reserves.

It is forecasted that by 2007 Omani gas exports will increase their share of contribution to Oman's GDP to 8% from its current 6%. The increase is based on forecasted higher foreign investment in this sector owing to government incentives. It is also expected that government investment in this sector since 2002 will begin its pay off by 2007 through increased capacity to extract gas. Furthermore Oman's ability to export gas will be boosted in 2006 when the construction of the third LNG train is expected to be completed (this is in addition to the present two-train liquefaction plant at Qalhat near Sur). Future growth and investment in Oman's Liquefied Natural Gas (LNG) Company and sector is set to continue due to strong credit ratings from Moody and Standard & Poor (A3/A-). Furthermore the fact that a number of Omani ports will be able to handle super tankers by 2007 will add to Oman's attraction as a gas exporter as its clients will be able to take advantage from the economies of scale in the transport of this commodity.

Tourism Sector

For the last number of years the Omani government has been investing in Oman's tourism infrastructure. This has included investment in Oman's Airline (Oman Air has been investing in the upgrade of its fleet), roads and airports. Foreign participation in the Tourism sector has also been increasing thanks to government incentives to investors. This was evident in the recent $70 million investment by Egypt's Orascomm conglomerate in Oman's tourism industry. Therefore by 2007 it is expected that this sector of the Omani economy will increase its contribution to the GDP through the payoff from the recent investment. Furthermore expected improvement in the political atmosphere of the region (especially Iraq) will add to attraction of Oman as tourism destination.

Construction Sector

The expansion of the tourism and gas sector of the Omani economy is forecasted to have a similar impact on Oman's construction sector as demand for hotels, tourism resorts and LNG facilities will rise. This is evident by a number of recent contracts awarded to the Oman Construction Company. Furthermore plans to expand Oman's manufacturing and transport sector (especially ports) will increase demand for the services of the construction sector. This is in addition to the privatisation of the power generation and Water desalination sector in Oman which has lead to increase in demand for the services of the construction sector for the development of new power and water treatment facilities. The forecasted expansion of the steel sector, plus our forecast for increase in demand for housing due to Oman's growing young population are other factors which support our prognosis for the growth of the Omani construction sector in the year 2007.

Conclusion

To conclude, the Omani economy is expected to continue its growth thanks to focused government planning, responsible expenditure as well as investment in Oman's non oil sector. However Oman's continued dependence on oil until the year 2020 will mean that its economy will be at the peril of falling oil prices such as the one forecasted for the year 2007. Nevertheless if by the year 2020 the Omani economy achieves its target of reducing its total dependence on oil to just 9% it's economy will be the first in the region to be free of risks associated with sudden falls in oil prices.

End of Analysis

Subscribe to the meepas Middle East Analysis Review subscribe@meepas.com

Logon to meepas.com for access to detailed background and current political and economic analysis of 16 Middle Eastern countries.