Economy of Oman emerges from a period of volatile growth; stabilising for the first time in seven years

A report by regional investment bank EFG-Hermes shows that because of the recent rebound in oil prices dating back to 2002, the Omani economy has enjoyed sustained surpluses to its budget despite declining production levels (twin surpluses, budget and current account).

Other contributing factors to the recovery include the launch of a series of mega projects; for instance the construction of the first of two LNG trains in Oman and the subsequent exporting of LNG to Korea for the first time in 2000. Similarly regulatory reforms - such as the Capital Market Law and Oman's accession to the WTO, that allowed the government to grant automatic approval to foreign investment projects with an ownership stake of up to 70 per cent - have been instrumental in counterbalancing potential volatility in crude oil prices, strengthening the banking system and fuelling a recovery in private sector investment.

The latest macro and microeconomic indicators suggest that this recovery is solidifying - as at 2Q2006, growth in credit to the private sector accelerated to a 7-year high and financial results of listed companies showed sustained growth in net earnings, particularly for domestic-orientated companies such as banks and cement companies.

Menna Shamseldin, Economist at EFG-Hermes said "We predict that this positive period will continue, at least in the medium term. A surge in investment expenditure will drive economic growth, a continuation of a trend that began in 2002/03. And the pro-cyclical fiscal stance within the region is further fuelling this stability."

Growth in investment demand is reflected by the strong growth in the banking sector. As at May 2006, the government continued to be a record high net creditor vis-à-vis the banking system (USD1.6 billion) whereas the aggressive provisioning policy has ended. A reduction in the CBO ceiling on personal credit rates competitive pressures and low OMR deposit rates have also supported balance sheet expansion.

"Although short-term risks are not detectable at this stage" warns Menna Shamseldin "we remain concerned over the modest level of proven crude oil and natural gas reserves and its implications on external and internal imbalances in the longer term. Ideally, despite major investments in the tourism sector and growth in the manufacturing, transport, banking and internal trade sectors, we would like to see the discovery of new crude oil/natural gas reserves in the region, in order to ensure this positive turn of events continues."