Muscat continues its search for economic stability

Published in MEED, 20 March 2018

The Oman economy is in a weaker position than most other GCC countries, but it does have the potential to diversify away from its historical dependence on oil and gas. Sometimes though, the authorities seem to make the task more difficult for themselves.

As a small economy largely dependent on international oil and gas sales, one thing that is critical to the health of the Omani economy is how well it facilitates cross-border commerce. Yet in recent weeks, the authorities have sown some confusion with the announcement of new visa rules.

In a surprise move, the Royal Oman Police (ROP) – the body in charge of the country’s visa system – announced on 18 February that Oman was abandoning its long-standing system of issuing visas on arrival to nationals of 68 countries. Instead, from 21 March, all passengers must apply for their visa in advance.

The change coincided with the official opening of the much-needed, but long-delayed, Muscat International airport terminal on 20 March. The new facility will give the country the sort of modern infrastructure that passengers to Dubai, Doha and elsewhere have grown used to. The ROP insists the visa changes will mean a smoother arrival for them too.

“The new online visa system is intended to facilitate and ease the process for tourists travelling to Oman and reduce the waiting time at the terminal upon their arrival in Oman,” it said in a statement. “When they arrive, they will not need to wait as in the old system for an estimated 30 minutes. The overall objective of our new system is to encourage more tourism to the country … and to provide better service for our guests.”

However, not everyone is convinced, with some observers suggesting it may damage the country’s tourism industry, which is generally viewed as a key element in the government’s attempts to diversify the economy. There are “lots of justifiable complaints,” said one industry observer. “Even Iran issues visas at the airport.”

Oman cannot really afford to lose many tourists or business visitors, given the weakness of its economy. That fact was clearly highlighted by the government’s most recent budget, unveiled at the start of the year. Overall expenditure for the year is estimated at RO12.5bn ($32.5bn), up from a budgeted RO11.7bn last year (the actual spending figure was higher), while revenues are expected to amount to RO9.5bn, up from RO8.7bn in 2017. But that still leaves a substantial shortfall, which the government will need to fill with further borrowing. The alternative course of action, of more cuts to spending after several years of relative austerity, is simply too difficult politically.

Revenues may yet end up being greater than the government’s forecast, as the budget was based on a fairly conservative average oil price of $50 a barrel. In January this year, oil was fetching an average of $69 a barrel and the US Energy Information Administration (EIA) is predicting an average across the whole year of more than $62 a barrel. Even so, any revenue uplift is unlikely to remove the deficit entirely. The Washington-based IMF estimates the breakeven oil price for Oman for this year to be $78.80 a barrel.

Ratings agencies and other analysts have been pointing out the inherent weakness of the Omani economy for many years and continue to downgrade it in the light of the lower-than-needed oil prices. In February, Capital Intelligence Ratings became the latest to take action when it downgraded Oman to BBB, citing a continued decline in foreign exchange reserves and rising external debt levels, among other factors.

More worrying for the government will be if any of the ‘big three’ ratings agencies make any further downgrades. Standard & Poor’s (S&P) pushed Oman into non-investment grade territory in May 2017 and cut its rating further to BB in November last year. Fitch Ratings and Moody’s Investors Service both have the country just above junk status, but if they were to follow S&P’s lead, investors could start to take a more cautious approach to the country. “Crossing over to the sub-investment grade space could trigger a bit of a sell-off,” says one economist. “There is a step change at that point that could trigger volatility.”

The country is not the worst placed economically in the region – an accolade that probably falls to Bahrain – but it clearly faces a challenging future. There are some positives though. The IMF is forecasting a GDP growth of 3.8 per cent this year, which is faster than any other GCC country except the UAE. Others are not quite so optimistic, but still say growth levels will be helped by government inertia in some areas.

“We expect the Omani economy to expand by 2.7 per cent in 2018, with somewhat stronger growth in the non-hydrocarbon sectors due to the delayed VAT implementation,” says Steffen Dyck, senior credit officer at Moody’s. The tax is not expected to be imposed in Oman until 2019, at least a year after it was brought in by the UAE and Saudi Arabia.

The oil price rise in the second half of 2017 also helped to ease some of the fiscal pressure on the government, as did the start of production at the Khazzan tight gas field in September 2017. The field will produce an estimated 1 billion cubic feet a day (cf/d) of natural gas in phase 1, making a significant contribution to Oman’s overall hydrocarbons output. A second phase will take production to 1.5 billion cf/d, representing an increase of about 33 per cent on the sultanate’s output in 2015.

There has been a further windfall as a result of the dispute between Qatar and the quartet of countries comprised of Bahrain, Egypt, Saudi Arabia and the UAE. Since June 2017, these four have suspended all trade with Qatar via air, land and sea traffic, forcing Doha to look elsewhere for new partners. One big beneficiary has been Sohar port, which is now used in place of Dubai’s Jebel Ali by many ships en route to and from Qatar. Port officials report a substantial rise in volumes at Sohar – in the final quarter of 2017, for example, some 1,087 vessels called at the port, compared to 646 in the same period a year earlier.

Although there appears to be little movement towards a resolution of the Gulf crisis, Oman knows such gains may prove fleeting and cannot be relied on to sustain economic activity in the long term. For that to happen, it needs to make far more headway with its diversification. There are a number of sectors that the authorities have identified as being particularly promising in that regard, including tourism, petrochemicals, aquaculture and manufacturing. Expanding the economy in multiple directions at once requires large investments and the development of new skills. It will also, almost inevitably, require more expat workers and tourists too, assuming the new visa system works as intended.