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Saturday, April 13, 2024

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Oman

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GDP: USD114.7bn (World ranking 64)
Population: 4.6mn (World ranking 126)
Form of state: Monarchy
Head of government: Haitham bin Tariq Al Said (Sultan and PM)
Next elections: 2027, Legislative

Strengths

  • Fiscal and current account balances are in surplus thanks to oil and oil-related revenues, which is supporting the economic recovery and improving Oman’s debt maturity profile
  • Positive diplomatic relations with all countries in the area, thanks to a moderate foreign policy and the absence of binding dependencies or affiliations (non-OPEC member)
  • Enhanced regional influence qualifies the country as a credible additional supplier of refined and petrochemical products

Weaknesses

  • Over-reliance on hydrocarbons (35% of GDP) exposes the country to oil price volatility
  • Risk of increased costs for businesses due to an “Omanization” policy to replace expatriate workers in the private sector with Omani nationals
  • A conflict resurgence in the region could affect economic and trade performance

Economic overview

A fiscal stability success story – for now

In order to hasten the economic recovery from the pandemiccaused slowdown and support the expansion of its banking sector, Oman started a three-year fiscal stability program in October 2022. On the back of favorable oil revenues and fiscal actions under the plan, the fiscal balance attained a surplus of +7.5% of GDP that year. It is projected to remain in surplus throughout the medium term. Furthermore, the government used some of the hydrocarbon windfalls to pay off, prepay and buy back a portion of central government debt in order to improve its maturity profile.

Economic growth is predicted to improve slightly to +2.8% in 2024 from an estimated +2% in 2023. Accelerated production at the country’s main petrochemical project is one of the reasons why non-hydrocarbon growth is set to increase to 3% in 2024. In August 2023, Oman signed its first-ever natural gas sales agreement with Germany to supply 0.4mn metric tons per year of LNG from 2026.

The exchange rate and price stability are likely to be maintained. Oman has a fixed exchange rate system, with the Omani rial (OMR) pegged at OMR0.38 per USD. We expect the currency peg to hold over the next two years and help keep inflation pressures in check at around 2% in 2024. Profitability in the banking industry has rebounded and capital and liquidity buffers remain healthy

Economic diversification challenges amid a supportive cycle

Oman’s economy is still heavily reliant on hydrocarbons, which account for approximately 35% of GDP, 75% of total fiscal revenue and 58% of total goods exports. Aside from the central government, the public sector includes around 170 state-owned businesses (SOEs) engaged in almost every economic sector. Macroeconomic uncertainties, particularly shocks resulting from oil price volatility, the realization of contingent liabilities from SOEs and additional difficulties in removing subsidies, might impact the fiscal balance and public debt in the long term.

The current cycle is mostly supportive of the Omani economy. With the help of oil and non-oil exports, Oman achieved its first current account surplus since 2014 in 2022 at +5.2% of GDP and this is expected to continue in the medium term. Sultan Haitham bin Tariq al-Said will prioritize preserving Oman’s domestic unity while attempting to reconcile the need to reduce fiscal spending with the need to preserve the current economic development trajectory. New road, rail and port infrastructure connecting Oman to the rest of the Gulf will support the growth of the logistics sector. Trade and budget surpluses expected in 2023–24 will allow the government to postpone additional spending cuts.

Gradual shifts in foreign policy and the labor market

The Sultanate of Oman is the oldest independent state in the Arab world. The government avoided relations with communist countries during the Cold War because of former-USSR support for the Dhofar insurgency (1963–1976) in the country’s southern governorate. Since 1970, Oman has adopted a moderate foreign policy and extended its diplomatic contacts considerably. It backed the Camp David Accords in 1979 and was one of three Arab League governments, along with Somalia and Sudan, that did not cut ties with Egypt after the Egypt-Israel peace deal was signed in 1979. Oman has also launched diplomatic endeavors in Central Asian nations in recent years, particularly in Kazakhstan, where it is involved in a joint oil pipeline project. In addition, Oman maintains cordial relations with Iran, its north-eastern neighbor across the Gulf of Oman and established international relations with the Holy See in 2023, with a signing ceremony taking place in New York City.

In the foreseeable future, the government is likely to continue to strengthen ties with its Gulf neighbors, particularly Saudi Arabia and the United Arab Emirates, as well as with Iran, while maintaining some distance from informal cartels, such as the Organization of the Petroleum Exporting Countries (OPEC). The recent rapprochement between Saudi Arabia and Iran as well as the resurgence of conflicts involving Israel are likely to reinforce cohesion among Gulf Cooperation Council (GCC) countries to the benefit of trade-flow stability and economic cooperation.

On the labor front, Oman faces the same difficulty as the other five GCC members in reducing the fiscal cost of an overstaffed public sector by requiring or incentivizing the private sector to hire Omani citizens rather than foreigners without deterring the business investment necessary for ambitious economic growth and diversification strategies. Foreign workers dominate the private sector in Oman, despite the fact that expats do not make up a demographic majority in the country in the same way that they do in other Gulf countries. This is because they are often hired because they demand lower wages and fewer labor rights.

Despite years of stricter “Omanization” rules and higher expat hiring fees, nationals now make up slightly under 20% of the 1.7mn strong private sector workforce (excluding domestic workers). Companies still lean toward hiring skilled foreign workers because of the cost savings. This has led to a considerable increase in the number of expatriates working in the private sector, after a precipitous drop caused by the Covid-19 pandemic. Despite this and the gradual increase in the number of private sector posts reserved exclusively for nationals (nearly 200 were added in July 2022, including for human resources managers, librarians and legal clerks), many Omanis continue to favor public sector work due to the higher pay and generally better working hours. A new labor law approved in July 2023 introduced incentives for recruiting Omani nationals in the private sector, greater rights for private-sector workers and increased margins for businesses to fire underperforming staff to further the government’s Omanization goals. This plan is aimed at reducing the fiscal burden of the bloated public sector (mainly staffed by Omanis) by creating attractive possibilities for nationals in the expat-dominated private sector. However, this may increase operational costs for private sector enterprises.

 

CEOWORLD magazine - Insights - Oman