Analysis: Oman racing against time with depleting oil reserves
Source: BI-ME , Author: Moussa Ahmad
Posted: Wed November 12, 2008 12:00 am

OMAN. Oman has shown strong political will in driving its strategic diversification. Encouraging results have been seen in recent years, yet the country faces the tough challenge of evaporating credit and hydrocarbon revenues.

Oman has achieved a lot in recent years: aggressive diversification policies, improved techniques to recover oil from its declining oil fields, and a strong commitment to boosting private-sector employment. The main issue facing the Sultanate is its ability to speed up its transformation before its hydrocarbon revenues – on which it still overwhelmingly depends – evaporate.

Strong political will has brought encouraging results, but Oman's reliance on exports is relatively low,and in many ways it has different challenges from the other GCC states, according to a new Standard Chartered economic report.

Oman has embarked on an economic diversification strategy along with its neighbours. The small country of 3 million people has been quite successful. Its GDP breakdown shows a certain degree of balance. It is the least reliant country in the Gulf Cooperation Council (GCC) on exports: 44% of its GDP comes from consumption (versus 17% for Qatar and 29% for Saudi Arabia), while the remainder is roughly evenly split between investment (17%), government expenditure (21%), and net exports (18%).

Interestingly, Oman’s recent growth has not been based as much on credit, which has dried up dramatically in the region. Commercial banks increased personal lending by 29% in first half 2008, according to central bank figures, compared to 50% in the UAE. And Oman’s government debt-to-GDP ratio is the lowest in the GCC after Saudi Arabia, at around 8%.

IIn the rest of the GCC, 90% of exports, on average, are made up of hydrocarbons (this excludes the UAE, an obvious outlier in this category at 53%). By contrast, hydrocarbons account for 75% of Oman’s exports, down from 81% in 2006, indicating Oman’s relatively lower dependence on the commodity. This falling dependence on oil export proceeds is all the more remarkable in the context of much higher oil prices. In terms of direct contribution to GDP, Oman has also reduced its dependence on oil, whose contribution fell from 48% in 2006 to 45% in 2007.

A good measure of the openness of any economy is its exports-to-GDP ratio. In Oman exports represented about 58% 2007 GDP, compared to 90% for the neighbouring UAE. While this openness could become a major weakness in an environment of global slowing demand, Oman is able to rely more heavily on its domestic market as a backup.

Oman’s diversification strategy has spanned over various sectors of the economy, including large-scale
industrial projects, tourism, real estate development, gas-based industry development, and incentives for
private-sector development.

Gas-based industries (power generation, aluminium) will get a strong boost from the implementation of the Dolphin Energy project, which began in early November 2008. The region’s first cross-border gas project is pumping gas directly from the Qatar North Field in partnership with the UAE, through which the pipeline runs (and which it serves). The recent arrival of this new feedstock will ensure access to cheap energy to fuel the country’s future development.

Certain non-hydrocarbon sectors have shown impressive growth, according to the latest available figures
(2007). In line with the regional trend, the country saw a 38% boom in its construction industry and 50%
growth in the manufacturing sector, which now constitutes 10% of GDP. Services, meanwhile, also grew very fast, reaching almost 13% of GDP; financial services increased 46%. We expect this trend to be confirmed in the 2008 figures.

At the same time, Oman is focussing on leveraging its maritime position through the development of fisheries (16 fishing ports in operation, four in development, and new infrastructure additions in this area). Like Dubai, Oman is also betting on the re-export sector: its overall re-exports rose 31% in 2007, helping to boost the total export figure to a record-high US$25 billion.

The country has also made an aggressive push to expand private-sector employment of Omani nationals in
order to ensure a future beyond lavish government spending on public-sector salaries. A growing private
sector will also enable Oman to absorb a growing local workforce in the coming years, as almost half of its population is under 15 years old. The government has recently placed a strong emphasis on education and
skills training in order to better adapt the workforce to labour-market needs.

The Sultanate is in the middle of its seventh Five Year Development Plan, which includes the goal of having
the number of private-sector employees surpass the number of public-sector workers. The share of Omani workers in the private sector rose above 15% in 2007 to around 131,775, according to Institutes of
International Finance (IIF) figures. Based on this, it is estimated that the private-sector workforce surpassed the public-sector workforce in size. This bodes well for Oman’s long-term prospects.

There are no official unemployment statistics, but estimates suggest that the unemployment rate fell substantially from around 14% in 2006 to less than 5% in 2007, a trend that should be confirmed this year.

Cyclical headwinds

While Oman’s government has shown a strong political will to transform the country, a few challenges remain.

In 2008 in particular, Oman has not been immune to the global commodity price shock. Combined with a
constrained currency regime, this has led to the highest inflation figure in the region, on par with Qatar, and inflation peaked at 13.7% in June and stayed above 13% over the Summer.

Some 50% of the CPI basket is comprised of the food and rent categories. Food costs have been directly impacted by higher commodity prices and a weakening currency, while the rent increase is a consequence of fast economic growth and the inevitable bottlenecks in the real estate supply-demand equilibrium.

Standard Chartered has forecast average inflation of just below 10% for the whole of 2008. The figure should ease substantially in 2009 on the back of more favourable external conditions (for inflationary pressures, at least) and an easing of the strains on domestic demand.

Declining oil reserves

These cyclical challenges are not as great as the structural one facing Oman, namely the race against the
end of domestic oil production as reserves decline.

The prevailing view is that Oman’s oil production is in terminal decline. Its 5.6 billion barrels of reserves (official 2007 figure) constitute 0.5% of global oil reserves. Oman’s production peaked at 0.96 million bpd in 2001, and is currently at 0.72 million bpd. Domestic consumption represents about one-tenth of total production. Oman’s reserves-to-production ratio is at around two decades, which means that time is a pressing consideration.

What is worse, especially in the current context of softening oil prices, is that Oman has the highest fiscal
break-even price for oil in the GCC and the second-highest in the OPEC. In this environment, the strategies laid out and implemented by the government are going in the right direction.

First, Oman has invested heavily in trying to delay the end date of oil exploitation. Investments in oil recovery techniques have led to substantial improvements. In 2007, condensate output grew by 70%. 2007 was also the first full year of production at the new Sohar refinery plant, which led to 149% growth in refined product output.

Second, it appears that long-term investments are being made. Oman’s current account surplus as a
percentage of GDP is much lower than in the rest of the GCC. This is partly due to Oman’s lower oil proceeds, but it also reflects growing imports (up 30% during 2006-2008). The biggest constituent of imports today is machinery and transport equipment, at 50% of the total, while manufactured goods, mainly construction-related materials, are the number two item.

With the current account surplus hovering at 'only' around 10% of GDP, the breakdown of Oman’s imports
shows that they are driven mostly by long-term investment in development projects. The difference with the UAE in this regard is that Oman’s construction boom has been mostly driven by long-term diversification into areas such as tourism, infrastructure (such as harbours and airports), and manufacturing development.

Oman is acting resolutely to counter the impending disappearance of its main revenue generator. So far, its
actions have shown strong determination and have already yielded impressive results in terms of
diversification. But the clock has started to tick, and the Sultanate cannot afford any deviation from its current plan if it is to beat the odds.



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