Economy: Revival hopes
Published: 10/01/2018 12:00 pm
Rebound in global crude prices along with other factors might give enough headroom to the government to initiate measures for higher economic growth next year
Economic activities in Oman have been subdued for over two years due to low oil prices. But things are expected to change in 2018 as global crude prices are showing signs of recovery and the measures taken by the government to readjust finances and boost growth seem to be yielding results.
“We are already investing, and next year we will invest more,” says H E Mohammed al Rumhy, minister for oil and gas, while expressing confidence that the OPEC deal to support prices would continue in 2018. Continuation of the OPEC deal for whole of 2018 could ensure that the prices of crude oil remain above the budgeted estimated of US$45/bbl, which would help in augmenting the income and reducing debt.
“There is consensus among OPEC members to extend this reduction in production to support price and they are expected to reach an agreement by the end of year. So, we will continue to maintain same production level for the next year,” says H E Rumhy.
He adds that the government would invest more next year on a number of projects such as Duqm refinery and port expansions. Moreover the ministry has signed agreements for exploration and production for four blocks which would also attract substantial investments next year.
Agreeing to this Ahmed Amor al Esry, managing partner of EY, says that Oman could achieve higher economic growth next year on the back of comparatively higher crude prices and on a number of programmes launched by the government under the Tanfeedh umbrella.
“We hope 2018 would be better than 2017 because of many reasons. One of the main reasons is that average oil price is much better. We will reach the end of 2017 with an average price of US$51/bbl, and we are likely to start 2018 with an average oil price of US$60/bbl. Hopefully these levels will sustain in 2018,” says Esry.
Besides recovery in crude prices and other initiatives, commencement of production at Khazzan gas field, which is likely to increase its production to maximum capacity in the first quarter of 2018, is another major milestone that could boost revenue for the government.
“Khazzan gas project has added 1bn cu ft of gas to Oman since Sept 2017, which will reach to 1.5bn cu ft in the next phase. Currently this additional gas is being used to utilise spare capacity of Oman LNG. This has surely boosted gas revenue of the government,” says Mubeen Khan, a Muscat based chartered accountant and analyst.
Last month OPEC and Russia, the word's two largest oil exporters, agreed to extend production cut to support prices to 2018 end, thus providing a much needed support to the global crude prices.
“Oman has always supported any move by OPEC members to support prices. We are part of the committee which oversees implementation of production cut decision,” says H E Rumhy.
Experts believe that the second half of 2018 could see the global crude market balancing itself as increase in demand from Asia could offset surplus supplies.
“GDP growth in 2018 would certainly be much better than 2017. The worst is over and the future looks bright,” says Khan while adding that oil prices will show more recovery and the prices next year would be much higher than the US$60/bbl.
“I see Oman’s fiscal deficit for 2018 to be much lower than the year 2017 although reaching fiscal break-even may take some time,” says Khan.
Echoing similar sentiments Fabio Scacciavillani, chief investment officer at Oman investment fund says, ”The global economy, for the first time since the 2008-09 recession, is on a solid expansion course and the engine of growth is roaring in all major economies.
”Emerging markets, including our region, are on a trajectory of higher growth supported by the external stimulus. Sooner or later, domestic demand in Oman will benefit from such powerful pull and I think will surprise all of us on the upside.”
Scacciavillani believes that the uptrend in the oil price will continue in 2018 as demand overtakes supply and the crude inventories gradually deplete. The process will not be linear and risks linked to geopolitical tensions as well as financial fragility in global finance might affect the energy markets, but a decline in process from current level is highly unlikely.
According to him fiscal position of oil exporters, including Oman will markedly improve and we could see a decisive decline in public deficits if a prudent fiscal stance is maintained.
A number of steps taken by the government in past two years including removing unproductive subsidies, pushing for alternative revenues and a host of other programme under Tanfeedh is likely to yield some positive result next year.
According to Esry a number of initiatives that have been discussed under the Tanfeedh programmes are likely to start rolling out in 2018.
“We can feel already that the situation is improving gradually as 2017 has been better than 2016 and I think 2018 should also be better. Moreover, the government has also gone through a learning curve during these years and have gone through lots of cost optimisation. So we are expecting benefits of most of the decisions taken in previous years to start realising this year,” says Esry.
On other projects, he says, “Duqm is very active and a residential facility for workers was inaugurated recently. These are not temporary structures but permanent world class buildings along with a proposed industrial complex, making Duqm a base for growth.”
The government has launched an ambitious programme under the name Tanfeedh with a view to boost the economic diversification process. As a result, around 120 various initiatives were finalised that will be executed simultaneously so that maximum benefits could be achieved.
Scacciavillani says, “Undoubtedly the diversification process is gaining traction as the completion of these major projects will open new opportunities for both private and public entities. Most likely the private sector will be increasingly confident that this is the most favourable time to launch investments in Oman.
“Fiscal policy has continued to support the growth rate even during the slump in the oil market, albeit to a lesser extent compared to the boom years. With the price rebound fiscal policy will regain substantial margins of manoeuvre particularly for key infrastructure projects.”
According to Khan, the government has done really good job in steering through troubled water and as the situation is gradually becoming comfortable economic development would further get accelerated.
“We must commend the fiscal discipline shown by the government which sailed through the turbulent times without causing any discomfort or compromising quality of services provided to the citizens and residents,” says Khan while adding that the number of government investments planned earlier could show some positive results next year.
He says despite economic hardships the government continued to invest in projects such as the new international airport, Duqm Special Economic Zone, Sohar Freezone as well as Salalah Freezone. As all these projects have reached advanced stages, some positive outcome from them are expected in 2018.
“The combined foreign direct investments attracted by these free zones is estimated to be more than US$50bn. This shows that Oman is on a speedy path of industrialisation,” says Khan.
While a majority of economists and analysts believe that 2018 could be a better year compared to the last two years, none of them expect large scale investment cycles to kick off in the GCC region until crude starts to trade above US$80/bbl, a price at which most countries in GCC region could balance their fiscal budget. That being said, the general mood in the economy is that of optimism.