According to ICAEW’s latest Economic Insight report, Oman’s outlook remains for an improvement in 2018, underpinned by an easing in oil output cuts and ramp-up in gas production, which both facilitate an increase in government spending. However, the accountancy and finance body says weak domestic demand continues to weigh on non-oil activity, posing a downside risk to the expected 3.6% GDP growth for 2018, while the overall pace of expansion is expected to slow to 2.9% in 2019.

Economic Insight: Middle East Q4 2018, produced by Oxford Economics, says Oman’s economic fortunes remain largely tied to the oil sector and government spending. Recent official data releases show Oman’s real GDP shrank by 0.9% in 2017, after downwardly revised growth of 5% in 2016, amid a decline in oil production and fiscal retrenchment. Meanwhile nominal GDP growth was revised down to 7.3% in 2017 (from 8.7%), which followed a deeper than previously estimated contraction of almost 7% in 2016.

The turnaround in the oil price has facilitated an increase in spending, alleviating some pressure on activity. Nonetheless, with oil output rising only modestly so far, the space for government stimulus remains constrained in the context of still significant fiscal imbalances. The budget deficit is expected at a still wide 6.5% of GDP in 2018 as a whole, albeit down from 13.8% of GDP in 2017.

Moreover, despite a 25% year-to-date increase in budget revenue, the government continues to borrow to finance spending as evident by its US$1.5 billion issue in Islamic bond (known also as Sukuk), which is the second this year, following the US$6.5bn sovereign bond issue in January 2018. This will reinforce the fast pace of debt accumulation, lifting the debt-to-GDP ratio to over 50% of GDP this year and maintaining the risk of further credit rating downgrades. Meanwhile, FX reserves have continued to decline, to US$14.5bn, the lowest level since early 2013.

Maya Senussi, ICAEW Economic Advisor and Senior Economist for Oman at Oxford Economics, said: “The strengthening in the hydrocarbon output is helping to cut the fiscal and current account deficits but this is not sustainable. Oman needs to make substantial reforms if it is to get its economy onto the right track. A plan to introduce new taxes will help to bring down the deficit but it’s crucial to undertake a social impact analysis and bring in measures to protect vulnerable households before making any big changes.”

The introduction of Value Added Tax on the horizon implies purchasing power will remain constrained in 2019, as inflation rises to 2.7% year-on-year, from a projected 1.1% this year. Moreover, private sector credit growth has slowed in recent months, even as lending rates have remained stable, posing a further headwind to spending in the coming months.

Middle East economies are still dominated by oil sector development

Economic recovery in the Middle East is slowly gathering momentum after last year’s slump, when economic growth slowed to an eight-year low at only 0.9%. Overall, the Middle East’s GDP is expected to grow to 2.3% in 2018, though growth remains below the 2010-2016 average of 3.9%. However, oil continues to dominate and shape the macroeconomic outlook for Middle Eastern economies, despite major economic diversification efforts.

According to the report, the same factors that slowed down economic growth in 2017 are now contributing to the overall economic recovery. Oil prices have hit their highest levels since the end of November 2014 in recent weeks at more than US$80pb, oil production has been elevated in the GCC compared to last year and the fiscal stance has been expansionary in 2018 across the GCC in contrast to 2017.

As a result, the GCC governments are expected to benefit from a combination of higher oil prices and elevated oil production levels, contributing positively to oil sector growth, fiscal and external balances. The global crude oil price is forecast to average US$80 per barrel in Q4 2018, retreating slightly to US$76.5 per barrel in 2019.

On the other hand, indicators for the non-oil sector are also showing positive signs after a slow start in 2018. The PMI index, which measures the health of the non-oil private sector, slumped amid the introduction of the 5% VAT in Saudi and UAE in January 2018, but recovered thereafter and remains in expansionary territory.

Similarly, credit to the private sector, which measures bank lending to the private sector and a proxy of domestic economic activity, has accelerated in the top three GCC economies (Saudi Arabia, UAE and Qatar) in Q2 2018. Credit to the private sector in Saudi Arabia was mostly in negative territory last year and in Q1 2018, but has steadily trended up this year, reaching 1% year-on-year in August 2018, a 19-month high. While in the UAE and Qatar, the indicator has accelerated from 1.5% and 7.4% in Q1 2018 to 2.3% and 10.4% in Q2 2018, respectively, reflecting the gradual strengthening in private sector activity.

Mohamed Bardastani, ICAEW Economic Advisor and Senior Economist for Middle East at Oxford Economics, said: “Supported by higher oil prices, oil exporters in the Middle East region will experience visible improvements in external and fiscal balances in 2018–19. Non-oil activity is also expected to continue its recovery, supported by a slower pace of fiscal consolidation.

“But despite the positive outlook, consolidation efforts should continue over the medium term. This will enable countries to mitigate the potential impact of shocks and ensure a sustainable use of hydrocarbon revenue. At the same time, continued structural reforms will facilitate private sector development and strengthen long-term resilience. Any delays on the structural reform agenda could curtail economic diversification.”

 

Source: Mojo PR