MUSCAT, DEC 28 - Relatively stable international oil prices, sizable reductions in the budget deficit, and the enactment of far-reaching investment and business friendly laws are among a string of factors that collectively augur well for an upturn in the economic outlook for the Sultanate in 2020.
Together with the gains made in growth of the non-oil economy coupled with the adoption of a new blueprint for the nation’s long-term development, Oman has a very good reason to feel optimistic about prospects for economic growth as the nation heads into the new year, according to a Muscat-based market expert.
“There are multiple headline indicators that point to an economy that is positioned to perform better as we go into 2020,” said Alkesh Joshi (pictured), Partner – EY Oman. “Foremost is the management of the fiscal deficit, which was forecast at RO 2.8 billion in the 2019 budget, but has since plummeted to around RO 1.6 billion. This 40 per cent decline in the actual deficit will come as a big relief to the government, which is now under less pressure to borrow from the international market, having already raised $3 billion via a bond issuance in July 2019. This is the result of prudent fiscal management on the part of the government.”
Contributing to the brightening fiscal situation are two key factors, said the expert. “Firstly, oil prices are expected to average around $64 per barrel during 2019, which is notably higher than the $58 per barrel price adopted for the 2019 Budget. The higher realisation in oil prices has played a big part in reducing the deficit. Secondly, the government has been cautious in its spending during the year, prioritising only projects that required urgent attention. This has helped keep expenditure in check.”
GDP growth
Also boding well for Oman’s economic outlook is the uptick in the Gross Domestic Product (GDP), which grew 2.2 per cent in 2019, according to Alkesh. Contributing to this increase was growth in both the oil and non-oil sectors. Oil & Gas accounted for roughly 75 per cent of government revenues this year, down from the 80 per cent norm that prevailed in previous years – a testament to the strides being made in the diversification of the economy, he noted.
Furthermore, improvements in the debt-to-GDP ratio buoy hopes for a more promising economic outlook, says Alkesh. “The overall foreign debt presents equates to roughly 50 per cent of GDP, which represents a marginal reduction from the 54 per cent level that prevailed mid-year. Admittedly, it is still relatively high, but when compared to debt to GDP ratio trends among its peers in the GCC, Oman is not too far off from the regional average.”
In another plus for the Omani macro-economy, inflation ticked down by 0.22 per cent this year – a marginal dip which, nevertheless, has contributed to a small increase in the purchasing power of the consumers. “Any boost in consumer spending is a plus for economic growth,” he remarked.
Economic recovery
Listing other fiscal and monetary developments that attest to an economy on the rebound, Joshi cited growth in the banking sector’s loan portfolio as a notable example. “Banks have reported a 2.5 per cent growth in their loan books this year, which is a positive indicator. Loan growth is typically driven by two principal factors: Firstly, it points to more people joining the workforce. Generally, when an individual gets a job, they tend to borrow from banks to invest in a home, enrol for their higher studies, and so on. Secondly, loans extended to the corporate sector means that businesses – whether manufacturing or services – need funds for their operations. This is evidence of further economic activity.”
“On the flip side, it could also mean that borrowers have liquidity constraints and thus need to borrow to meet their working capital requirements. But liquidity in the country will gradually improve as deficit management efforts continue apace. This will hopefully get the government investing again in infrastructure projects in 2020 — a move that will improve the overall liquidity in the country. Banks, for their part, seem to be adequately funded. Their capital adequacy ratio seems to be good, which has enabled them to enlarge their loan book,” he further explained.
Privatisation
Privatisation is also expected to gain traction in 2020, buoyed by the government’s recent success in selling a 49 per cent stake in state-owned Oman Electricity Transmission Company (OETC) to a Chinese corporation for an estimated $1 billion. “This successful stake sale is an indication that foreign investors are quite bullish about the quality of Omani assets and believe in the Sultanate’s economic story. Privatisation is expected to move ahead more strongly in 2020.”
Also set to spur inflows of foreign direct investment (FDI) into the country are landmark laws that the government enacted during the course of 2019 to help bolster Oman’s investment appeal, said the executive.
“The legal framework created as a result of these new statutes is designed to boost investment sentiment,” he noted. “Take, for example, the Commercial Companies Law, which replaced an older version that was enacted back in 1972. The new law allows, among other things, the launch of single person-owned companies. In July, we had the Foreign Capital Investment Law allowing 100 per cent foreign ownership in certain sectors, as well as the Public Private Partnership (PPP) Law and Bankruptcy Law. These legal statutes create a robust foundation for further privatisations to take place and we can expect more such privatisation transactions in 2020. In effect, the government has prepared the ground for private companies to play a bigger role in running the economy, while it can focus more on providing governance to its people and to the country.”
Excise tax
Tax reform has been a notable highlight of 2019, said Joshi, citing in this regard the introduction of Excise Tax (or Sin Tax) on certain goods branded as harmful to health. “The roll-out of Excise Tax is a key step in the government’s efforts to diversify its income sources. Tax collections have been extremely promising, with authorities reporting a 20 per cent increase in excise tax earnings as compared to its initial estimates. Overall tax collections have improved as well, paving the way for further reform of the tax regime.”
Rounding off the list of important macroeconomic developments during the year that will have a positive impact on the economy going forward is the Vision 2040 blueprint for sustaining Oman’s growth over the long term. The roadmap places the accent on, among other objectives, five key sectors, notably Tourism, Manufacturing, Logistics, Fisheries and Mining, which will serve as growth drivers of the economy over the next two decades, he added.
(Tomorrow: ‘Foundation laid for positive economic growth in 2020’)
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