Economy: Oman

The overall economic environment in Oman is showing signs of improvement, including a pick-up in bank lending. Claims on the private sector accelerated to 9.7 per cent year-on-year as of July, indicating that business activity in the private sector is growing, a positive sign.

On the government side, the focus remains on fiscal measures and the boost in spending expected this year. There has been acceleration in expenditure growth to 17.8 per cent year-on-year for the first seven months of the year. Both capital and current spending are seeing solid growth.

The government is pushing ahead with large projects, especially in the infrastructure and power sectors. Despite the rise in investment expenditure, there was a weak project awards outturn in the first half of 2011, which we believe was mainly due to the political environment in the first quarter.

We expect to see a pick-up in project activity in the second half and into 2012, and capital expenditure even to outpace current expenditure growth of 15.4 per cent year-on-year, supported by government handouts announced earlier this year. That spending increase looks set to continue in 2012, albeit at a slower pace.

Despite increased government spending, a widening in the fiscal surplus is likely, with stronger revenue growth. Recently released public finance data indicate that revenues rose 43.1 per cent year-on-year in the January-July period, led by higher oil and gas revenues. Our fiscal surplus estimate remains intact, of round 13.7 per cent of estimated 2011 GDP. Official data show a surplus for the first seven months of 2011 of only $1.1 billion, with only the net oil revenue figure being published, which does not include all oil revenue, as it shows revenue after the transfers made to the Government Reserve funds.

Revenue growth should largely be driven by a rise in hydrocarbon prices and an increase in production, with daily average oil production increasing by 2.2 per cent year-on-year in January-July. Since that is broadly in line with our past estimates, we maintain our oil production expansion estimate. However, we highlight downside risks linked to weaker global demand.

Increased oil production is positively impacting headline GDP growth. According to official data, Oman's real GDP expanded by 3.6 per cent in the first half, mainly due to growth in the hydrocarbon sector. Our real GDP growth forecast of 3.1 per cent for 2011 is retained, owing to low growth expected in the non-hydrocarbon sector. As to the reduction of our real non-oil GDP growth forecast to 3.3 per cent in March, following the wave of unrest which was seen, there are upside risks to that figure if we see a pick-up in project activity and continued fiscal support.