KFH-Research mentioned in its report concerning the expectations of the Omani economy during this year, that Oman's total GDP will grow by 6%, and that the Omani economy will continue to prosper, regardless of the global economy slowdown or the financial turbulences caused by increasing government expenditure.
The report stated that Oman needs a plan to diversify sources of income, since its oil is expected to be depleted.
Oman: Growth Brightens
2012 Economic Outlook
Oman's GDP growth has been largely unaffected by the global economic slowdown and financial turmoil. This mainly reflects the continued strength of oil prices associated with a boost in public spending and resilient growth exports. The Omani economy picked up strongly since 2009 and growth has continued to gather speed over the past year – real GDP growth reached 5.5% in 2011, up from 4.0% in 2010 and 1.1% in 2009. Roughly the same factors that aided growth in the past years are expected to continue in 2012, with growth benefiting from a number of industrial and infrastructure projects as well as a significant portion of the expected GCC aid package. Hence, we forecast GDP growth of 6.0% in 2012, up from 5.5% in 2011.
Non-oil Sector Developments
The major part of the projected growth in Oman will not come from the oil and gas sector alone. Although historically oil and gas sector has contributed significantly to government finances and the development of the country, but moving forward, the major chunk (almost 70.0%) of GDP growth in 2012 will be from the non-hydrocarbon sector. Over the longer run, the economy depends on making greater inroad towards diversification. Oman's hydrocarbon reserves are limited and alternative sources of income need to be developed. Private investment need to be encouraged, and in order to achieve this, improvements in the business environment should be made.
According to the latest available data, Oman's inflation fell to 2.2% y-o-y in May 2012 (the lowest level since February 2010) from 2.9% y-o-y in April 2012 as prices of food and personal care items fell. Food and beverage segment prices (30.0% of CPI basket) dropped to 1.0% y-o-y in May 2012 compared with 2.0% y-o-y in April 2012 according to the data released by the National Centre for Statistics and Information of Oman. Moving forward, inflation is expected to remain under reasonable control, averaging 3.2% this year after 4.0% in 2011.
Oman follows a fixed exchange rate regime with its currency pegged to the US dollar. Such regime exerts pressures on Oman's monetary policy framework to maintain the pegged rate and to manage domestic liquidity. However, some differences in the interest rates are inevitable in the short term because of factors such as the rate of return to capital in the domestic economy, level and state of bank liquidity levels, transaction costs and risk premium. Currently, Oman's repo rate is set at 1.0% and will likely remain at this level.
The government has announced a total public expenditure of OMR10.0bln in this year's state general budget – an increase of OMR800.0mln over the revised expenditure in 2011. With euro-area crisis continuing to worsen, the government maintained its expansionary fiscal policy aiming to support economic growth and keeping inflation at bay. Given the increased spending, public finances are expected to deteriorate. As such, we expect the budget to post a deficit of 1.3% of GDP in 2012 after a surplus of about 4.7% in 2011.
One of the challenges faced by Oman is its shrinking oil resources. Therefore, the government reinvigorates its reform program, called "Vision 2020", in which one of the central tenets is the diversification of the economy. The basis of this program is that Oman's oil resources are expected to be depleted by the year 2022. As a result, the government embarked on a plan to diversify the economy away from the oil sector, and it aims to decrease the share of the oil sector on the country's GDP by 9.0% by the year 2020.