Gas output could boost Oman GDP next year; deficit a concern
Inflation seen rising through 2017 and 2018
KUWAIT: Oman’s economic growth will slow to just 0.3 percent this year - its weakest since 2011 - on the back of a drop in oil output, before recovering in 2018 as gas production is expanded and the non-oil economy steadies. There remain notable downside risks, however. The government’s large budget deficit could require sharper-thanforecast fiscal consolidation if the financing climate deteriorates - perhaps from the anticipated “global tapering” of monetary policy - which could also affect the government’s plans for economic diversification. And inflation is set to rise following the introduction of new taxes. On the upside, Oman is benefitting from trade diversion due to the ongoing rift between Qatar and the Saudi-led bloc.
Despite the above, we have nudged up our growth forecasts to reflect both non-oil dynamics and an earlier-thanexpected pick-up in gas production. Household expenditures will grow modestly even with the headwinds facing consumers, and the pursuit of business friendly laws should support non-oil growth. The launch of the BP Khazan project’s first train in September 2017, with the second train to follow in 1Q18, will boost oil GDP and partially offset the extension of oil production cuts taken in accordance with the OPEC/non-OPEC agreement. Overall GDP growth is forecast at 0.3 percent and 2.8 percent for 2017 and 2018, respectively.
Latest high frequency activity indicators are mixed. Car registrations were at their lowest in five years in August, with the 12-month rolling total down 23 percent y/y. Hotel revenues, however, shook off a prolonged contractionary period, with July’s 12-month rolling total at its highest level in almost 18 months and up 3 percent y/y. Meanwhile, a majority of private sector companies reported discouraging earnings in 2Q17. Companies have also slowed their hiring, with expat employment growing a mere 3 percent in August, compared to a monthly average of 10 percent in 2016. Governmental pressure to hire Omani nationals let go in the wake of the economic downturn also contributed to the slowdown in expat employment growth.
Looking to 2018, increased revenue from a new VAT and recovering oil prices may see government investment spending pick up, with growth further lifted by the complete launch of the BP Khazzan tight gas project. Indeed, this may lead to stronger government consumption, gas production, and LNG exports. Household consumption will grow but at a subdued pace, as consumers grapple with higher prices (VAT) and modest jobs growth.
Oman continues to pursue diversification initiatives in a bid to divest its economy from oil. These efforts, however, are being held back by lower oil prices, which are affecting the pace of investment. A friendlier foreign investment law (due to be officiated soon) and a stronger focus on tourism and other sectors may help boost non-oil activity going forward. Nonetheless, growth in the non-oil economy will average a modest 2.4 percent per year in 2017 and 2018.
Oman is not participating in the blockade of the Qatari economy and could see a marginally positive economic impact, as trade and travel between Qatar and both Saudi Arabia and the UAE is diverted. Omani ports (Duqm and Salalah) have reported increased bilateral trade between the two countries, while Qatari travelers are using Muscat international as a newfound transit hub. If the dispute persists, these effects could become more deeply entrenched. New shipping lines have been opened between Oman and Qatar’s recently inaugurated Hamad port.
Oil & gas sector to pick up
After an exceptional 2016 that saw average daily oil production breach 1 million barrels per day, oil output will contract in 2017 as Oman complies with the cuts agreed by OPEC and non-OPEC countries. However, the launch of the BP Khazzan tight gas project at end-2017 and early 2018 will deliver a strong boost to the gas sector as daily production capacity is increased by 1 billion cubic feet, or close to 25 percent. Oman’s hydrocarbon GDP is forecast to decline 2.9 percent in 2017, before rising 3.4 percent in 2018.
Excise tax and VAT Consumer price inflation has eased in recent months and stood at 1.1 percent y/y in August, but will pick up in 4Q17 as the government implements an excise tax. Inflation will rise further in 2018 as the government continues to liberalize prices on energy and other goods and services and introduces VAT, offsetting downward pressures from global food and energy prices. Inflation will average 1.8 percent in 2017 rising to 4.2 percent next year - though delay in implementing VAT beyond the Q1 built in to our assumptions would see the latter come in lower.
Fiscal deficit
The fiscal position remains very weak. At 80 percent of its OMR 3 billion target just 6 months into 2017, the government is likely to overshoot its deficit projection for the second year in a row. Recent public finance data showed little progress in significantly reducing spending, which was virtually unchanged in 1H17 from 1H16. Current expenditures increased by a small 1.3 percent, at the expense of investment expenditures (down 6 percent), on the back of higher defense spending and interest payments. Efforts to curb public sector wage growth, however, did materialize somewhat, with civil ministry spending (which includes wages) decreasing by 2.4 percent. On the bright side, revenues, both oil and non-oil, rose on the back of higher oil prices and better fee collection and tax revenue.