Risk drivers and outlook

Like many countries in the region, Oman witnessed unprecedented protests in 2011 and 2012. Like most monarchies in the region, the sultanate has so far been able to preserve political stability. The popularity of Sultan Qaboos, the implementation of constitutional reforms and a steep increase in public spending helped to calm down demonstrators. High international oil prices helped to finance spending increases and maintain a current account surplus, while the country’s short term liabilities remained low by any standards, and foreign exchange reserves adequate. The country’s short-term political risk, which reflects its liquidity situation, is thus low, resulting in the best category 1/7.

Meanwhile, Oman’s dependency on high international oil prices has increased over the past few years. The increase in public spending (including higher wages, subsidies and social benefits) would be difficult to reverse if needed in case of  a sustained fall in oil prices. At the moment, a severe oil price drop is not immediately expected, though the potential impact of unexpected oil supply and demand dynamics on longer term oil prices should not be disregarded. In any case, Oman’s low public and external debt level and its net foreign asset position provide significant external buffers.Therefore, Oman’s medium-/long-term political risk classification is in category 2. The evolution of Oman’s political risk is dependent on future oil prices, the level of success in economic diversification and further political stability.

Systemic commercial risks are relatively low - in category A - as its non-hydrocarbon economic activity is expected to continue to grow by more than 5% in the coming years, though there is still room for improvement for the Omani business environment through energizing its private sector.

Facts & figures

Pros

  • Low external and public debt levels
  • Net creditor to the world
  • Strategic location
  • Popularity of Sultan Qaboos strengthens stability

Cons

  • Oil dependency remains high, despite diversification efforts
  • Relatively low oil and gas reserves
  • Not completely immune for regional unrest
  • Uncertainty regarding succession

Main export products

  • Crude oil (62.5% of current account receipts excluding re-exports), LNG (8.6%), Chemicals (7%), Travel (2.1%)

Income group

  • High-income

Per capita Income (USD)

  • 19 110 USD

Population

  • 3.3 M

Description of electoral system

  • Majlis al-Shura (lower house): 4-year term; next election: 2015
  • Majlis al-Dawla (upper house): members are appointed by Cons the Sultan

Head of State and of government

  • Sultan and Prime Minister Qaboos bin Said Al-Said

Country risk assessment

Political stability prevails, despite regional upheaval, as gradual reforms continue

Oman’s Sultan Qaboos bin Said al-Said has extensive political powers. He holds the positions of head of government, minister of foreign affairs, defense and finance and chair of the central bank. After the fall and death of Libya’s Muammar al-Qadhafi in 2011, Sultan Qaboos became the Arab world’s longest-serving ruler. Despite the revolutionary storm that has ousted a number of autocratic presidents in the Arab world since early 2011, Sultan Qaboos’ position has remained relatively stable over the past few years. Like other monarchs in the Arab world, he enjoys broad popularity and legitimacy among Oman’s population. In fact, after his accession in 1970, when his father was overthrown in a bloodless coup, Sultan Qaboos managed to unify Oman’s diverse society and end the decade-long rebellion in its southern Dhofar province. He also started introducing gradual political reforms decades ago, creating a bicameral council in the 1990s while gradually expanding the electorate to appoint members of Oman’s Majlis al-Shura (lower house) in the 2000s, though it remained a consultative institution. Moreover, under his reign, Oman has transformed from one of the poorest countries in the Arab world to a high income country, by developing the country’s oil sector.

Oman_Graph1EN

Still, politics in the Sultanate has not remained immune to the so-called Arab Spring. In February 2011, as the presidents of Tunisia and Egypt were deposed, unprecedented protests demanding political and socio-economic reforms were witnessed in Oman as well, though the position of the Sultan himself had never been threatened. The protests forced Sultan Qaboos to carry out a number of quick government reshuffles, announce constitutional reforms and increase public spending to appease protesters’ socio-economic demands, though some degree of force helped as well. Low-level protests continued during the summer of 2011 and re-emerged in 2012, but for now, political stability has returned to the country. In October 2011, the announced constitutional reforms were implemented, expanding some powers of Oman’s elected Majlis al-Shura. The organisation of the first municipal elections late 2012 indicates that a cautious and gradual reform process is likely to continue.

Economic concessions impact public finances

Meanwhile, the steep increase in public spending since 2011 would be difficult to reverse, if necessary. In 2012, the Omani government spent 70% more than in 2010. The main drivers behind this spending growth were influenced by pressure to meet economic demands from demonstrators, such as public job creation, public wage increases, subsidies and social benefits. The budget for defense spending also doubled in the same period. Investment spending is increasing as well, but at a slower speed. Luckily for Oman, the rise in domestic oil production and higher international oil prices in the same period also boosted public revenues by 60%, so that  the overall public balance remained in surplus (4.5% of GDP in 2012 compared to 5.5% in 2010). However, looking forward, this surplus is likely to come under pressure as revenues from the oil sector are expected to decrease while government expenditure will further grow. Hence, the IMF even expects Oman’s public balance to fall into deficit after 2014.

Succession process embedded in the constitution, but no successor appointed yet

The October 2011 constitutional amendments also included a clause on political succession. Sultan Qaboos has no direct heritor, nor has he publicly designated an heir-apparent. At 73 the Sultan appears to be in good health, but given the broad powers of his function, the question of his succession is a major political uncertainty. Under the amended constitution, a successor will be appointed by the Ruling Family Council. If this council fails to agree on a successor within three days, the next sultan will be appointed by an enlarged Defence Council, based on a written letter by the previous sultan. The ruling regime does not seem to have a motive to overtly dispute a future succession, certainly given the political instability in the region, though in absence of a clear successor it is  difficult to see through the plans of individual aspirants.

External relations dominated by pragmatism

In its foreign relations, Oman is taking a rather pragmatic stance. In 1981 the sultanate joined fellow Gulf monarchies Saudi Arabia, the United Arab Emirates, Kuwait, Qatar and Bahrain in founding the Gulf Cooperation Council (GCC). However, unlike the first four, it has not joined the Organization of the Petroleum Exporting Countries (OPEC) cartel. Oman, which has an important geostrategic location, also maintains good relations with the United States and the United Kingdom. Meanwhile, its relations with its opposite neighbour Iran are remarkably better than relations between Iran and most other GCC countries, which feel uncomfortable with Shia Iran’s potential power and influence in the region (particularly Saudi Arabia). Oman’s relationship is explained by its geographic location, as its enclave forms one side of the highly important Strait of Hormuz. Moreover, Iran is an important trade partner for Oman and as the sultanate’s natural gas consumption is increasing (as discussed below), it could benefit from future Iranian natural gas imports. This has recently led to a new Memorandum of Understanting between both countries to import Iranian natural gas via a yet to be constructed pipeline under the Gulf of Oman. Last August, Sultan Qaboos became the first foreign leader to visit Iran since the inauguration of Iranian President Rowhani and Oman hosted secret talks between Irani and US officials that eventually led to   the interim agreement that was agreed upon last November.

Oman_Graph2EN

However, the sultanate’s large dependency on hydrocarbon revenues also renders the sultanate vulnerable to a sustained drop in international oil prices as Oman has quite high external and fiscal breakeven oil prices. Last year, the country needed an oil price of USD 93 per barrel (pb) to balance its public budget, while an oil price of USD 82 pb was required to balance its current account. So far, these breakeven prices remain comfortably below current international oil prices. However, they are rising (up from USD 61 resp. USD 65 in 2009) and relatively high compared with other GCC countries (see graph). International oil prices are generally projected to remain high in the long run, supported by increasing energy consumption in non-OECD economies. However, a moderation in oil prices in the coming years is likely and oil prices below USD 80 pb were witnessed as recently as in late 2010. Moreover, prices will unavoidably fluctuate in the longer term, depending on both projected and unforeseen demand (depending on global economic activity, evolutions in energy efficiency and environmental concerns) and supply (e.g. the further evolution of unconventional oil and gas exploration or a reintegration of Iranian oil in international markets) dynamics.

Oman_Graph3EN

External buffers strengthen Oman’s capacity to withstand a temporary fall in oil prices

The Omani economy seems well equipped to withstand a temporary fall of international oil prices. Even if international oil prices fall below breakeven oil prices, repayment risks are mitigated by low short-term external debt and a low debt service ratio. These currently stand at around 7%, resp. 2.5% of current account receipts. Meanwhile, foreign exchange reserves cover 4.5 months of imports, which is a healthy level, but the lowest among Arab oil exporters.

A longer term fall in oil prices would be more problematic, despite substantial external buffers such as low total external debt (26% of current account receipts and 17% of GDP) and large foreign assets, which are estimated to almost equal the country’s GDP and represent more than 150% of its current account receipts for 2012. Such a sustained fall in oil prices below USD 80 pb would reverse Oman’s current account surplus into a deficit and result in the country’s currently comfortable net foreign asset position vanishing into thin air. Meanwhile, public spending would come under pressure and the appeal of Oman’s hydrocarbon sector (and investments therein) would be reduced, which would severely impact economic activity.

Since 2008, Oman’s oil production has been increasing again after having fallen since 2000. Helped by enhanced oil recovery techniques, oil production is almost reaching its peak production level of 970,000 barrels per day in 2000. However, oil and gas reserves are relatively low compared to its neighbors. In fact, Oman’s oil reserves would be exhausted within 16 years if no new oil discoveries are made. Oman’s natural gas reserves would last longer, but will still be depleted within 33 years.

Oman_Graph4EN Oman_Graph5EN

Diversification goes ahead, but ambitious targets are unlikely to be met

Oman’s vulnerability to a sustained drop in oil prices, in combination with relatively low oil and gas reserves indicates the need to diversify its economy. This pressure is not new. In the 1990s, the country already started to develop a strategy in order to diversify its economy by 2020, the so-called Vision 2020. Vision 2020 set ambitious targets for economic diversification: lowering the share of the oil sector in total economic activity to 9% while increasing the contributions of gas (to 10%), industry (to 29%), services (to 47%) and agriculture (to 5%). A look at the 2012 composition of GDP shows that it is unlikely that all targets will be met within the next 6 years.

Oman_Graph6EN

However, diversification is under way, supported by important public investments under successive five-year development plans (FYP). Over the few past years, public investments improved infrastructure and further developed industrial activity, including LNG and petrochemicals production capacity. But as Oman’s energy- intensive industrial activity grows and natural gas represents more than 80% of the country’s electricity capacity, domestic consumption of natural gas is also increasing, pushing down exported LNG volumes. Therefore, the longer term success of diversification into energy-intensive industrial activity will also depend on further gas discoveries. To meet domestic demand, Iranian gas imports are being envisaged and Oman LNG announced the suspension of LNG exports as of 2024 (after current LNG contracts expire).

Under the current FYP, investments in airports, roads and seaports aim to improve Oman’s infrastructure. The development of an economic zone in Duqm into a major port at and industrial base should further strengthen this diversification and attract new trade flows. Located on the shore of the Arabian Sea, it has the potential to become an important trade hub. After all, upon completion of the Gulf railway (another important public investment project) which would link the GCC states (currently expected for 2018), transshipment of trade in Duqm could provide an alternative for the politically sensitive and congested Strait of Hurmuz as a trade route.

The various public diversification investments underpin non-oil economic growth, which in 2014 is also expected to remain higher than 5% for the sixth consecutive year. Meanwhile, Oman would benefit from energizing its private sector to further diversify its economy and increase labor participation. After all, almost 90% of the workforce in Oman’s private sector is from non-Omani origin, while unemployment is estimated to exceed 20%.

Analyst: The Risk Management Team, s.vanderlinden@credendogroup.com