MUSCAT: The Sultanate can continue to bank on its thriving non-oil sectors to drive economic growth over the medium term, aided by a flurry of new enabling policy actions and a brightening business environment, the Central Bank of Oman (CBO) said in its newly published 2018 Annual Report. According to the apex bank, non-petroleum activities, which have been burgeoning during the past few years, offer promising prospects in 2019. Summing up its assessment of the economic outlook for Oman, it said: “Considering the prospects of petroleum and non-petroleum activities, the macroeconomic outlook for 2019 appears reasonable but fraught with challenges, especially on the back of expected range-bound oil prices and uncertainty surrounding them. The outlook, however, looks to be robust over the medium-term with expected recovery in oil prices and accelerated traction in non-oil economic activities,” it stated.
The non-oil sector, the CBO report said, will continue to gain traction on the back of an improving business climate underpinned by effective policy decisions. “The recent promulgation of several impending laws, viz, Foreign Capital Investment, Privatisation, Public Private Partnership, Bankruptcy, Establishing the Public Authority for Privatisation and Partnership would act as catalysts to improve further the business and investment environment, giving a much-needed impetus to the diversification and private sector-led growth in the Sultanate,” it noted. Economic prospects during 2019 will hinge on the trajectory of oil prices coupled with policy efforts to improve the business environment and foster private sector-led growth.
Looking back on Oman’s fiscal performance in 2018, the CBO report noted that the Omani economy gained further impetus with a surge in oil prices and expansion in non-oil economic activities. The Omani crude oil price averaged at $69.7 a barrel in 2018 as compared to $51.3 per barrel during 2017. The recovery in oil prices also contributed to growth in non-oil economic activities, reflecting inter-linkages, although the dependency of non-oil activities on oil activities has somewhat weakened in the last few years, it said. The nominal Gross Domestic Product (GDP) recorded a growth of 12.0 per cent in 2018, higher as compared to 7.3 per cent in 2017. The petroleum and non-petroleum sectors grew in nominal terms by 37.1 per cent and 2.9 per cent, respectively, in 2018.
As non-petroleum activities witnessed some deceleration in growth, the petroleum sector was the main driver of accelerated growth in the Omani economy during 2018. Notably, with Khazzan Phase-I becoming operational, natural gas is also emerging as a significant contributor to the Omani economy, according to the report. Despite some deceleration in growth across several activities, the non-petroleum sector is gradually evolving as the key force for ensuring sustainable growth in the Sultanate, the CBO said. The diversification plan, “Tanfeedh”, along with other initiatives to improve the business environment are yielding encouraging results and fostering traction in the non-hydrocarbon sector.
The Ninth 5-year Development Plan under Vision 2020 continues to emphasise more diversified economic activities to insulate the economy from external shocks. The government also undertook some important policy measures during 2018, viz establishment of a commercial arbitration centre, the adoption of a new commercial companies’ law, and a further streamlining of licensing processes through Invest Easy in order to improve the business and investment climate and promote private sector-led growth in the Sultanate.
With regard to the inflationary situation, headline inflation eased to 0.9 per cent during 2018 from 1.6 per cent in 2017, the report said. Although imported inflation remains the major determinant of inflation, domestic factors also played a role in affecting inflationary conditions in the Sultanate.
“Headline Inflation in Oman during 2018 followed a contrary trend to global inflation as consumer inflation in both AEs and EMDEs is estimated to have increased. The subdued rise in non-fuel international commodity prices, appreciation in US$ exchange rate, and muted domestic demand led to benign inflation in the Sultanate,” said the Central Bank.
On the fiscal front, the surge in oil prices provided required support to government revenues, while fiscal measures that were undertaken last year also continued to support the growth of non-oil revenue of the government. However, at the same time, government expenditure also increased noticeably in 2018 due to higher spending on oil & gas production, defence, subsidies and elevated interest payments.
Buoyant government revenues, however, led to a decline in overall fiscal deficit by about 30 per cent to RO 2,649 million during 2018. In terms of budget outcome, the actual fiscal deficit over-performed the budget estimate by 11.7 per cent, with much higher overshooting in the government revenue vis-à-vis the government expenditure. The estimated fiscal deficit of RO 2,800 million in the 2019 budget assumes an average oil price at $58 per barrel.
Government debt also increased to RO 14,492 million in 2018 (a jump of about 30 per cent) — the debt to GDP ratio increased to 47.5 per cent, the report said. “The burgeoning government debt level not only constraints the fiscal space but also raises sustainability concerns,” it noted.
Commenting on monetary conditions, the Central Bank noted that the Federal Reserve raised the policy rate four times during 2018, each by 25 basis points, which were automatically transmitted to Omani monetary conditions due to the currency peg arrangement.
“Consequently, interest rates on both deposits and lending increased in Oman. Nonetheless, both credit and deposits maintained reasonable growth of 6.4 per cent and 7.8 per cent, respectively during the year, consistent with expanding non-oil economic activities.”
With regard to the health of banking sector and quality of assets, banks remained resilient and strong, despite early signs of some vulnerability on the back of a slowing real estate sector. The CBO continued with the gradual implementation of Basel III norms including capital conservation buffer to strengthen the banking sector. Consequently, the banks remained adequately capitalized as their Capital Adequacy Ratio (CAR) stood at 17.9 per cent by the end of December 2018, significantly higher than mandated by CBO at 12.875 per cent.
The banks in the GCC region generally maintain sufficiently higher CAR to deal with ramifications of volatile oil prices. The quality of loans did not deteriorate much as the gross non-performing loans (NPLs) of conventional banks stood at 2.7 per cent in December 2018 (net NPLs stood at 0.9 per cent).
The financial markets functioned smoothly during the year, albeit sluggish activities in some segments. The short-term interest rates in the money market remained aligned and some improvement was noticed in the volume of domestic inter-bank call money market partly reflecting easing of regulation pertaining to lending ratio.
The activities in equity markets were subdued and the Muscat Securities Market Index (MSM-30) closed lower by about 15 per cent at the end of 2018. The liquidity in both equity and bonds segments of the capital market also dropped during 2018. As the surge in oil prices improved foreign currency liquidity, the foreign exchange market functioned without any pressure during 2018, the apex bank noted.
Oman’s external account also witnessed a significant improvement during 2018 backed by a steep recovery in oil prices, buoyant non-oil exports, and decline in merchandise imports. The current account deficit (CAD) narrowed to RO 1,671 million during 2018 from RO 4,222 million in 2017. The net financial & capital inflows were higher than CAD, resulting in an overall balance of payments surplus. Consequently, total net foreign assets (CBO and SGRF together) increased by RO 990 million, alleviating pressure on the adequacy of external buffers. Imports cover of CBO’s net foreign assets increased to 7.4 months from 6.3 months a year ago, it said.
Omani oil prices averaged at $61 a barrel during the first three months of 2019 as against $62.9 per barrel during the same period last year. Amid this backdrop, petroleum activities in nominal terms are likely to be moderate during 2019, it added.