Mar. 15, 2018
Like its neighbors, Oman is in the midst of a crucial economic moment. The oil price boom that led to strong GDP growth for the Middle East's oil exporters has ended; after sitting at about USD100 per barrel, crude oil prices plummeted beginning in mid-2014, falling below USD30 a barrel before stabilizing around USD50 in 2017. The sudden and dramatic drop led to a corresponding fall in revenue and economic activity that affected all major oil exporters, but Oman was particularly hard-hit due to its smaller size and proportionally larger reliance on oil. According to the World Bank, GDP growth dropped from 5.7% in 2015 to 2.2% in 2016, and real GDP growth was expected to continue to slow to less than 1% in 2017. With oil revenues down, Oman's government is well aware of the need to launch a shift. The Sultanate is currently in the midst of an economic diversification program that has seen it leverage its Southeast Asian connections and ideal logistical location to build new networks for industry and trade, an ambitious but necessary project.
The largest non-OPEC exporter in the Middle East, Oman's oil industry is characterized by what makes it different from its GCC neighbors. Oman's proven reserves of about 5.4 billion barrels place it seventh in the Middle East, but extraction is more costly than in neighboring countries due to the depths of its reservoirs. To overcome this, the Sultanate has become a leader in enhanced extraction techniques, using its good relationships with foreign firms to form technology partnerships and raise efficiency by up to 100% in some instances. These techniques helped raise production from 715,000bpd in 2007 to just under 1 million bpd as of early 2017, but the fall in oil prices has led to a significant drop in oil revenues even as production has hit new highs. After accounting for around half of nominal GDP in 2013 and 2012, hydrocarbons accounted for 33.9% of nominal GDP in 2015 and just 27.5% in 2016. 2017 has brought some relief in the form of higher oil prices; though not a member of OPEC, Oman coordinated with the cartel to cut production by 45,000bpd in an attempt to stabilize prices. The move has led to some moderate improvement, as crude prices have stabilized somewhat in 2017, reaching a two-year high of just under USD60 a barrel in September 2017. Oman saw net oil revenue rise 43% in the first seven months of 2017 thanks to these higher prices, but industry participants recognized that the landscape had shifted. OPEC's cuts, projected to end in March 2018, may be extended, but the larger problems of excess supply mean that while oil will remain Oman's largest industry for the foreseeable future, it must be a part of a robust and diversified economy.
SHIFT IN GOVERNMENT ACTIVITY
This was felt most acutely in the decrease in government revenues; as with many small oil exporting states, Oman's government had grown to be the primary driver of economic activity, but the drop in revenues meant that this was suddenly an unsustainable position. The 2017 budget calls for just over half of all government revenues to come from oil, down from 72% in 2016, but a deficit of OMR3 billion—down from 2016's OMR5 billion—is still projected even with moderate spending cuts and an expected rise in revenue from the non-oil sector. Growing international concern about the health of the Omani government's financial position has led credit rating agencies to downgrade Oman's long-term bonds and assign them a negative outlook; 2017 saw both Moody's and S&P lower the Sultanate's rating, citing concerns about the structural vulnerabilities. In an attempt to assuage fears, Oman's 2017 budget includes moderate cuts, but the importance of state expenditures to the Omani economy mean that the government has to walk a fine line between fiscal prudence and stimulating the economic activity needed to propel the economy. For this reason, the 2017 budget includes no cuts in wages nor basic social services; most of the cuts come from civil ministries. The other possible solution to the budget equation is to increase revenues, and new tax policies have been proposed to create new income and value-added taxes, eliminate certain exemptions, and increase the efficiency of the tax collection process. These changes will take years to take effect, but once implemented should provide the Omani government with a stronger revenue base.
INDUSTRY & FOREIGN INVESTMENT
The best way to grow government revenues, though, is through a diversified economy able to support a wide range of taxable industries. The most important long-term development in the Omani economy over the past few years has been the aggressive expansion of an ambitious development plan to establish new sources of economic activity and develop the potential of existing ones. This has taken a number of looks across different fields, but a handful of core principles have emerged as constants. Across industries, the Sultanate has taken advantage of its preexisting international relationships to find sources of foreign investment, attracting investors drawn to the potential of one of the world's fastest growing populations. Many development plans are designed to build upon Oman's natural resources and ideal logistical location at the crossroads of shipping routes to African, the Middle East, and Asian markets. To make investment more attractive, Oman's government has expressed its willingness to open markets to the private sector through lifting restrictions on foreign ownership, privatizing previously inaccessible markets such as telecoms, and passing new public-partnership laws.
The grandiose scope of this project means that it will take years to judge its effectiveness, but several major projects are already underway, giving an idea as to how the Sultanate's transformation might look. Duqm is perhaps the best example: once a quiet fishing village on Oman's southern coast, it has attracted more than USD11 billion in investment for a collection of projects designed to turn it into a logistical hub. Almost every element of Oman's economic diversification plans is represented in Duqm: planned projects include a refinery with a capacity of 230,000bpd, methanol plant, automobile production plant, solar panel production plant, and world-class tourism facilities. Chinese investors have been one of the driving forces behind the project, accounting for more than USD3.2 billion of investment so far due to the project's alignment with Chinese “Belt and Road" plans to establish new economic ties across the Asian continent. Oman has also already discussed possible technology integrations with South Korean firms; a Korean delegation visited with Omani government leaders in September 2017 to discuss possibilities in transport infrastructure. Once completed, Oman's vision is for Duqm to become a center for industry and economic activity on the Arabian sea, with light and heavy industry, tourism, shipping, and retail activity all concentrated in an efficient smart city accessible to the world.