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EDITOR IN CHIEF- ABDULLAH BIN SALIM AL SHUEILI

Oman maintains comfortable level of foreign reserves: CBO

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The Central Bank of Oman released its fifth issue of the Financial Stability Report (FSR) 2017, which indicated that improvement in oil prices and better understanding of the new oil price range has allowed better economic planning by the policy makers. While acknowledging the challenges faced by the economy, including nominal contractions in 2015 and 2016, it was noted that the financial stability in the Sultanate remained intact.


“Measured reforms, including the pace of economic diversification, have been taken and policies were put in place to increase revenues and reduce expenditures. The Central Bank of Oman continues to maintain a comfortable level of foreign reserves, which is sufficient to back-up the peg,” the FSR stated.


The FSR asserted that the Omani banking sector remained well capitalized and profitable with low NPLs ratio. The banks remained fairly liquid without any bout of serious stress, and the credit growth remained healthy and the risks were well-contained. It was further stressed that the stress tests also showed low solvency and liquidity risks for the banking sector. The report concluded that despite economic headwinds, on balance, the overall financial stability of the Sultanate remained intact in 2016.


Highlights:


Slowdown in Economic Growth is Expected to Reverse during Next Year


Oman’s real GDP grew at 5.7 per cent in 2015. The IMF’s estimates for real GDP growth are 3.05 per cent in 2016 and 0.38 in 2017. The economy is expected to return to higher growth from 2018. IMF forecasts growth of 3.8 per cent in 2018, with an average growth of 2.4 per cent over the period 2018-2022.


Performance of Non-oil Sector Reflects Diversification Efforts 4. Although the overall figures display slow economic performance, the performance of nonhydrocarbon GDP reflects the Sultanate’s diversification efforts while the robustness of Oman’s financial sector provides a cushion for the potentially negative effects on financial stability.


Oil Prices Improved but Remain Uncertain. Government Expenditure Remained Heavily Dependent on Oil Revenues


OPEC and Non-OPEC oil producers agreed to reduce the supply of crude in an attempt to increase crude prices. The agreement pushed oil prices higher in late 2016. The upswing in crude prices was hampered by high crude inventory as well as quick increase of rig count in the United States. Oman’s oil price softened during the first quarter of 2017 to reach US $ 51.22 per barrel at the end of April 2017. The oil market is uncertain, however, Oman oil prices are anticipated to average between US $ 50 to US $ 55 per barrel in 2017


Government expenditure remained heavily dependent on oil prices. The 2017 budget is benchmarked on oil prices averaging US $ 45 per barrel. Thus, a timely fiscal consolidation would improve the current account and strengthen the stability of the currency and the financial system in the Sultanate.


The Rial’s peg to the US $ is fully intact. Total foreign reserves at the CBO increased substantially in 2016, which are adequate to maintain the peg.


Banking Sector Remained Resilient amid Challenging Economic Conditions. Short-term Risks to Financial Stability further Subside as Commodity Prices Stabilised


The banking sector in Oman continued to remain resilient amid challenging economic conditions. Although the twin deficit continued to be there while the government is moving towards fiscal consolidation, the crude prices have risen from their lows of the last year. The new oil price range is now better understood, which has allowed better fiscal planning by the government.


Relatively improved crude oil prices, ongoing fiscal reforms, and satisfactory financial performance by the banking sector meant that the short-term risks to the financial stability further subside in 2016 which is evident from most of the banking stability indicators.


Financial Stability Report - 2017 III


The banking stability index also show that on balance, the stability of the banking sector stayed intact as the sector remained well capitalized, profitable, and fairly liquid with low infection ratio during the year under review.


Islamic Banking Showed Strong Growth. The Sector as a Whole is Gaining Systemic Importance


Islamic banking in Oman has achieved remarkable growth since its inception about four years ago. At the end of December 2016, the Islamic banking assets formed 10.3 per cent of the total banking sector assets. With an annual growth of 37 per cent, total assets held by Islamic banks and the Islamic banking windows of conventional banks exceeded RO 3 billion, while the total assets of foreign banks stood RO 1.9 billion at the end of 2016.


Islamic banking institutions (IBIs) recorded remarkable improvement in profitability. The aggregate pre-tax profits of IBIs during 2016 increased to RO 13.6 million from RO 1.6 million in 2015. Due to fast paced growth, the Islamic banking sector as a whole is gaining systemic importance.


Despite the prevailing macroeconomic challenges, the banks remained resilient to stressed scenarios at the aggregate level. Results of different solvency stress tests did not flag an increased vulnerability of solvency of the banks mainly due to their high capital adequacy ratio as well as their limited exposure to equity and forex. The robustness of the banking sector is also echoed in the macro-financial stress tests where banks on average remained solvent even in the severe scenario. Banks Remain in Comfortable Position when Faced with the Liquidity Shocks


When assessed with respect to the international benchmarks (of one business week or five days), all of the banks were found to be in a comfortable position to face the liquidity shocks under the assumed stress scenarios. At the end December 2016, the banking system as a whole would be able to sustain a liquidity shock for an average of 18 days with only cash and a total of 20 days with cash and securities.


 


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