DIVERSIFICATION DREAMS

Oman 2014 | ECONOMY | REVIEW: ECONOMY

While oil and gas extraction still rule the roost, Oman is now supporting new businesses in order to spark job creation and drive diversification.

Having seen hydrocarbon extraction rates fall in the mid-2000s on worries that the wells may be about to run dry, enhanced oil recovery (EOR) has allowed the Sultanate to once again compete with other oil majors. Although state revenues have been bolstered by hydrocarbon prices, Oman is hedging its bets to fund a bold stimulus package to support new business and diversify the economy away from oil and gas.

GDP grew by 5% in 2012 to reach $76.46 billion, with a consensus estimate of around another 5% growth for 2013. A whopping 40% of this figure can be accounted for by oil and gas revenues, the proceeds from which accounted for 86% of the government's annual fiscal budget. Elsewhere, the country maintained a trade surplus worth 10.4% of GDP in 2012 on the back of strong oil exports, with the May 2013 surplus recorded at OMR841.80 million ($2.2 billion). The fiscal breakeven point for a barrel of oil was set at $104 for the 2013 budget, meaning that any major slips could nudge the government into deficit and threaten the Sultanate's crucial stimulus package, which grants new business loans at highly competitive rates and aims to boost jobs at a time when many nationals find themselves out of work. The country's FDI figures for 2012 were convincing, however, indicating a trend toward diversification. Of the OMR570 million ($1.46 billion) that flowed into the Sultanate in 2012, 18.3% went to the manufacturing industry, the second highest receiving sector after oil and gas exploration. In the years to come, however, it is the nascent Duqm port and industrial zone development that will underscore investor balance sheets. Expected to attract $10 billion in FDI over the next five years, developments at Duqm, a former fishing village on the Arabian Sea, are set to turn it into a key shipping hub on the way from Asia to Europe.

INDICATORS & THE BUDGET

The price of oil ran at $109 per barrel in 2012, slightly above the $104 level defined by the government as the fiscal budget breakeven point. With 86% of government revenues accounted for by oil and gas, the IMF has been cautious when predicting the course of GDP in the coming years. While the institution suggests growth of 5.1% in 2013, it blames a likely drop in oil prices on a lower 3.4% growth prediction for 2014. In the non-oil sectors, the Sultanate's economic diversification strategy is showing strong signs of success. With non-oil GDP having grown 5.4% in 2011, the consensus suggests that it will continue at a similar growth level between 2012 and 2017. Should oil production slip again as EOR methods become more costly, the non-oil sector could help to compensate should the worst happen. Inflation fell over 2012, down to 2.9% from 4.1% in 2011. The rate was recorded at 0.6% in August 2013.

OIL HABITS & DIVERSIFICATION

Oman's oil production reached 924,000 barrels per day (bbl/d) in 2012, with an average of 940,000 bbl/d expected by end-2013. This is still lower than the 2000 peak of 970,000 bbl/d, but higher than the 2007 low of 710,000 bbl/d. Despite recent discoveries, including at Block 52 and Block 53, Oman's oil is increasingly hard to reach. Moody's, a ratings agency, predicts that growth in the hydrocarbon sector will slow to an average of 2% in upcoming years as oil prices fall. This only solidifies the importance of the current price per barrel, allowing Oman breathing room to diversify its economy. The government has also introduced a crucial incentive framework in order to encourage international investment in extraction, which requires more costly EOR methods. In terms of diversification, Oman is currently in the midst of its Vision 2020 economic plan, which also includes an Omanization framework. According to the plan, oil will account for just 9% of GDP by 2020, while the contribution of gas will increase to 10%. The manufacturing sector is also being targeted, especially as a means to move up the value chain in terms of petrochemicals, fertilizers, and aluminum production. A budding tourism industry also forms a key part of efforts to reduce the economy's reliance on hydrocarbons.

TRADE

With a current account surplus worth 10.4% of GDP, Oman is an important exporter of oil. In May 2013, the trade surplus came in at OMR841.80 million ($2.2 billion), with shipments of oil and gas accounting for approximately 70% of the figure. Significant imports include transport equipment, electrical machinery, mechanical appliances, and mineral products. One of the country's largest trade partners is the neighboring UAE, accounting for 11% of exports and 27% of imports. Japan is also a key trade partner, accounting for 10.5% of exports and 13% of imports. Over 95% of the Sultanate's oil exports head to Asia, with half going to China. In 2012, Oman exported a total of 278.2 million barrels of oil, with plans to also increase refining capabilities—there are currently two refineries in Oman, with a capacity of 220,000 bbl/d—in the coming years, especially in Duqm. Following China, Japan is the next largest receiver of Omani crude, followed by Taiwan, Singapore, and Thailand.

GET TO WORK

The government has introduced a stimulus package that aims to put more people, especially Omanis, into work, while also boosting Omanization rates. The program, funded by government revenues, is set at $156 million and provides loans to new businesses at a 2% interest rate and with a one-year grace period. Loans under $12,986 will face no interest at all. With a typical business loan interest rate at between 6% and 7%, the government's intent is clear; create private sector jobs and decrease unemployment. Omanization is also a target of this plan, in a country where expatriates form the majority engaged in private employment. According to recent studies, as few as 17% of workers in the private sector may be Omani, with the majority of locals preferring instead to take up state positions. The scheme is reliant on hydrocarbon revenues, with the breakeven point per barrel of $104 one of the highest in the Gulf region. The very fact that Oman has been able to afford such a stimulus package at a time of global belt-tightening, however, is impressive. In fact, high oil prices have allowed the government to increase public spending to $33.8 billion in 2013, 30% higher than in 2012. The Ministry of Finance, however, has suggested such lavish spending may be subdued in coming years in order to preempt a budget deficit should international oil prices move lower.

FDI & THE DUQM EFFECT

FDI flows grew 41% in 2012 to OMR570 million ($1.48 billion), up from OMR404 million ($1.05 billion) in the previous year. This brings total FDI stock to OMR6.48 billion ($16.85 billion) in 2012, up 9% on end-2011, according to the National Centre for Statistics & Information (NCSI), putting the figure at 21.6% of GDP. The oil and gas sector was the most significant FDI draw in 2012, bringing in 46.4% of the total for the year. Manufacturing was the second largest category, hauling in 18.3%, while financial intermediation completed the trio on 15.5%. In terms of FDI stock, the UK holds the largest share, at 38.7%, while the UAE is the second biggest player, followed by the US and India. Even though the UK and the US are the largest foreign players in terms of oil and gas exploration, the UAE and India dominate the manufacturing and construction sectors. In terms of the foreign purchase of property, GCC citizens are the largest buyers.

Oman's FDI horizon is dominated by one name, however: Duqm. Located 560 kilometers from Muscat in the Al Wusta region, Duqm is set to become the latest hub on the Arabian Sea, drawing in transit from Asia to Europe and allowing shippers to bypass the Arabian Gulf and the Strait of Hormuz. The government has already invested $5 billion to develop infrastructure around Duqm, centered on the Special Economic Zone Authority of Duqm (SEZAD). It now seeks up to $10 billion in order to develop refineries and petrochemicals projects. Set to be one of the largest economic free zones in the Middle East, the Sultanate is hoping to draw trade through the hub and onto Saudi Arabia, the UAE, and beyond. Developments are set to continue until 2020, while SEZAD estimates that 45,000 jobs will be created for Omanis.