John Davies is an economist with a special interest in emerging markets, global trade and heavy industry. He is the co-founder of research and analysis firm, North Shore Analysis. During eight years at Fitch Solutions, he held various positions including on the Global Strategy Team, where he focussed on global macroeconomics and emerging markets. Prior to Fitch Solutions, he spent a year at the UK Treasury where he analysed trends in the UK economy, and has experience at PricewaterhouseCoopers. John holds a BSc in Economics and Politics from the University of Bath and a MSc with Distinction in Economic History from the London School of Economics.
Major Economic Shock In 2020
The outlook for Oman’s economic growth has deteriorated significantly since the start of 2020 due to both the collapse in global oil prices and the Covid-19 pandemic.
External Sector Particularly Exposed
The external sector will be the main drag on Oman’s economic growth in 2020. Most significantly, oil exports will be slashed by a sharp decline in the price of oil since the start of the year. Oil prices have been dragged lower by a lapsing of the OPEC+ oil output agreement at the end of March and the spread of the global Covid-19 pandemic. Although oil output quotas are now no longer in place, which theoretically allows oil producers to ramp up production to offset a collapse in oil export prices, Oman’s oil industry has little spare capacity that can be utilised. Even before the recent collapse in oil prices, the IMF was forecasting no growth in Oman’s oil export volumes or revenues over 2020-2024.
Meanwhile, non-oil exports will be negatively impacted by a severe slowdown in global economic growth. Weaker growth in the wider Gulf Cooperation Council, China and India will be particularly negative for Oman’s main non-oil exports of petrochemicals, metals and fertiliser.
Tourism inflows, which accounted for around 3.0% of GDP in 2018, will also shrink due to a collapse in demand for foreign holidays from consumers globally. Europe and the wider GCC were the main sources of tourism arrivals in 2019. Finally, exports of transhipment and logistical services will be weaker due to a sharp fall in global trade volumes. Oman acts as a logistical hub for East-West trade and is a stopping point for major container liners traversing the Suez Canal.
Domestic Slowdown Due To Covid-19 And Limited Fiscal Stimulus
Turning to the domestic sector, government policy aimed at containing the spread of Covid-19 will be negative for household consumption and business investment. Although Oman had reported only 419 cases of Covid-19 and 2 deaths as of April 8, the experiences of countries that experienced earlier exposure to the virus suggest that significant contagion is likely in Oman. Government policy has already ramped up measures aimed at limiting the spread of the virus, including travel restrictions, suspending prayers at mosques, closing all schools, universities and non-essential shopping malls and commercial establishments. Employee attendance at government and private businesses is also to be minimised.
Government Has Limited Ability To Cushion Slowdown
The negative impact of both the oil price collapse and the Covid-19 pandemic will be all the more severe for Oman’s economy given the government’s limited ability to offset it with fiscal stimulus. The official 2020 budget forecasts a USD6.5bn deficit, equivalent to over 8.0% of GDP. Given that the budget assumed an average oil price of USD58/bbl compared to the April 8 price of USD32/bbl, the eventual deficit will be substantially higher.
The government’s ability to issue debt in order to pursue greater fiscal stimulus will be limited by a deterioration in the country’s credit profile over recent years. Oman’s debt burden has already surged from 4.9% of GDP in 2014 to an estimated 59.9% in 2019. Oman government debt is rated junk by three of the major ratings companies, with both Moody’s and Fitch having cut the country’s rating further into junk since the start of 2020.
Announced fiscal support for households and businesses has been muted in recent weeks. Measures have included suspension of municipal taxes, government fees, rent payments for companies in industrial zones and reduction of port and air freight charges, as well as postponement of loan servicing for borrowers from the Oman Development Bank and SME support fund. More aggressive support seen in some other countries such as direct payment of salaries and grants for businesses are unlikely to materialise.
There will thus be a surge in bankruptcies of formerly profitable businesses over the coming months as Covid-19 restrictions remain in place. The most exposed sectors include hospitality, retail and construction. Mass closure of businesses will not only deepen the economic slowdown in 2020, but also limit the potential pace of rebound in 2021.
Sultan Haitham Shares Qaboos’s Economic Ambitions…
Sultan Haitham bin Tariq al Said succeeded his longstanding predecessor Sultan Qaboos bin Said al Said in January and has repeatedly expressed a desire for policy continuity. With regards to Oman’s economic goals, this will mean continued pursuit of the government’s Vision 2040 programme. Government policy will continue to prioritise diversification of the economy away from the oil export sector and towards non-oil sectors such as manufacturing, logistics and tourism.
…But Deteriorating Economy Will Force Change In Strategy
While Sultan Haitham shares the economic aspirations of Sultan Qaboos, the drastic change in Oman’s economic circumstances over 2020 will force adaptation of government strategy. While economic diversification will remain a priority, the timeline for achieving the goals of Vision 2040 will be pushed back and the strategy for achieving them will shift. Potential significant changes could include:
– Faster Pace Of Omanisation – The economic shock to the local population in 2020 will boost public dissatisfaction and could result in public protest. In response, the government is likely to accelerate the pace of ‘Omanisation’ of the workforce, whereby certain jobs are reserved for locals. This would raise costs for foreign businesses operating in Oman.
– Privatisation – State assets could be divested in order to raise funds for capital and current expenditures. While the oil and gas sector would likely be the largest opportunity for privatisation, the collapse in oil prices over 2020 means that any asset sales would likely have to wait until 2021 at the earliest.
– Closer Ties With China – A significant slowdown in economic growth in China over 2020 will make the availability of state-subsidised capital from China harder to come by in future. Nonetheless, investment from China could be forthcoming in return for subsidised exports from Oman’s energy and manufacturing sectors. This could include petrochemical products from the Duqm refinery and petrochemical complex and natural gas from the Khazzan-Makarem field, for instance.
