TO DIVERSIFICATION & BEYOND

Oman 2014 | DIPLOMACY | YEAR IN REVIEW

While in the medium term Oman has been catapulted back into the extraction game by enhanced oil recovery (EOR), earlier worries that exploitable reserves were fast depleting have spurred the government to ease the Sultanate's reliance on hydrocarbons.

While in the medium term Oman has been catapulted back into the extraction game by enhanced oil recovery (EOR), earlier worries that exploitable reserves were fast depleting have spurred the government to ease the Sultanate's reliance on hydrocarbons. Still, in 2012, hydrocarbon revenues accounted for 86% of government revenues and 40% of GDP, which came in at $76.46 billion, up 5% on 2011. While this is partly thanks to a return to strong oil output—production reached 924,000 barrels per day (bbl/d) in 2012, up from 710,000 bbl/d in 2007 but still off the 970,000 bbl/d achieved in 2000—the fruits of diversification efforts are beginning to be seen. Non-oil GDP has been riding on an upward curve in recent years and is expected to average just over 5% growth between 2013 and 2017 as a result of growing domestic demand and bold fiscal policy, including job creation stimuli.

In terms of trade, the majority of ships departing Oman are of the hydrocarbon-carrying variety, with their contents accounting for 70% of all goods leaving the Sultanate's shores. In May 2013, Oman posted a trade surplus of OMR841.80 million, according to the National Center for Statistics & Information (NCSI). In 2012, the Sultanate closed the year with a current account surplus of 10.4% of GDP.

The government has struggled with its budget in recent years, dependent as it is on the international price of oil. In 2013, it announced the fiscal breakeven price point per barrel would be approximately $104. The figure for 2012 hovered around $109, but any significant drop could threaten the government's ability to fund its economic stimulus package, which is aimed at boosting job creation. The stimulus comes in the form of low-interest rate business loans funded through government revenues, with those signing on paying rates of just 2% with a one-year grace period.

Those in jobs, however, can enjoy the non-existence of income tax, while the top corporate tax rate is an enviable 12%. Omani consumers are also likely to shrug their shoulders should you mention VAT, absent as it is from price tags in the Sultanate. In fact, tax equals just 3.1% of GDP, compared to figures of over 30% in some Western nations, while public debt sits comfortably below 10%. A growing population, however, could put pressure on public spending in the coming years, with the tax base targeted for reform should the government need new ways to balance the books.

In order to combat unemployment among Omani nationals, an Omanization policy is in effect that provides quotas for hiring local workers. While this may, at first, seem unfavorable to foreign investors, it is likely to help build strong local know-how at multinationals. The regulatory framework is also being strengthened, with the process of starting a business taking on average just eight days, compared to the world average of 30. It is this environment that is helping to boost FDI pull. In 2012, total FDI stock grew 9.6% to reach OMR6.48 billion ($16.85 billion), according to the NCSI. Flows over the year were up 41% on the previous year, to OMR570 million ($1.48 billion). While oil and gas exploration received 46.4% of this total, all eyes were on the manufacturing sector's 18.3% share, a key indicator that is showing positive signs of economic diversification.

While the name Duqm may be obscure to many for now, the former fishing village is likely to be the face of Oman at trade and investment roadshows for years to come. The development of port infrastructure at Duqm is transforming the former backwater into the latest trading hub on the Arabian Sea, while significant FDI—up to $10 billion worth—is expected over the next five years. The port will allow ships to avoid entering the Strait of Hormuz into the Arabian Gulf, currently the world's premier energy transit route, with rail, road, and pipelines then moving goods on into Saudi Arabia, the UAE, and beyond. With $5 billion having already been invested by the government, attention will be lavished on the Special Economic Zone Authority of Duqm (SEZAD), which is at the heart of the project, in the coming years and decades.

Currently in its Eighth Five-Year Development Plan (2011-2015), and under the leadership of HM Sultan Qaboos bin Said Al Said, Oman is leveraging its oil and gas revenues while acutely aware that the carbon clock is ticking. Save for any major oil price shocks at the international level, GDP growth will likely come in at just under 5% in 2013 and 2014, according to Moody's. The IMF has a slightly sunnier outlook for GDP growth in 2013, at 5.1%, while it predicts 3.4% growth in 2014 due to a slowdown in further hydrocarbon production increases. Either way, Oman will need to continue to woo investors, support domestic job growth, and bolster its non-oil export basket should the Sultanate wish to get a taste of life after oil.