Oman: Hydrocarbon sector to drive growth (page 1 of 2)

As with other regional oil exporting countries, the Omani economy is booming on the back of the strong oil price. Highlighting the strong economic performance, recently-released central bank data indicated that nominal GDP growth accelerated to 24% in 2005, from 13.7% in the previous year. We estimate real GDP growth was 5.5%. Importantly, the latest data shows the decline in annual oil production levels moderated in 2005, falling marginally by just 1% to 282.6m barrels. Furthermore, the 46.1% y/y rise in the average price of Omani oil to USD 50.3 pb more than compensated the lower output level; consequently, the hydrocarbon sector expanded by 44.3% y/y. The easy domestic liquidity conditions also supported the economic expansion and the non-oil sector grew by 9.2%.

Meanwhile, high energy prices also resulted in external and fiscal surpluses increasing, the build-up of FX reserves and the reduction of government debt levels. Total government debt levels stood at 8.6% of GDP at the end of 2005. Oman has indicated it will continue use its oil revenue to repay its debt in 2006, possibly cutting debt by 30%.

Robust growth will remain a feature of the Omani economy in 2006, with real GDP growth accelerating to 6.5%. This will be the highest growth levels since 2001. Again the higher oil price will more than compensate from the continued fall in oil output; production levels fell further to 763,000 bpd in Q1, from an average of 774,000 bpd in 2005.

Furthermore, Oman's macroeconomic position will be supported by higher LNG exports after the third train at Qalhat, producing 3.3 million tonnes-a-year, came on stream in December 2005. These factors are reflected in exports increasing by 35.5% y/y in Q1 2006, while overall government revenue grew by 62.4% y/y. Earnings from natural gas increased substantially by 160.2% y/y to USD 487.3m. Importantly, Qalhat LNG has signed long-term sale and purchase agreements for the total production of the third train.

The economic expansion will also be driven by higher government spending, which will in turn support investment and private consumption. The expansionary budget plans to increase spending in '06 by 15.1% from the previous budget; this is markedly above the increases in previous budgets. Furthermore, the strong revenues will allow the government to intensify investment spending, both to increase oil production levels and to diversify the economy, namely in the downstream and tourism sectors. This diversification is particularly important for Oman given the fact that oil reserves are only slated to last for around 25-30 years, at current production levels.

On the upstream side, the government has announced plans to invest USD 10bn between 2006 and 2010 to enhance oil recovery and sustain oil production; Muscat wants to see oil flowing at 900,000 bpd by 2010. With regards to 2006, investment in the oil and gas sector is set to increase by over 39% from the 2005 budget. On the downstream side, the government is focusing in areas such as petrochemicals, aluminium smelting and fertilisers. The government also has plans to expand Port Salalah and develop a freetrade zone (FTZ) there (the first phase of which will cost in the region of USD100 million). Importantly, Oman is tapping into private and foreign investments and partnerships in its development plans.

Meanwhile, importantly for the development of the tourism sector, Sultan Qaboos bin Said al Said issued a royal decree in February formalising rules allowing non-Omanis to own real estate in the country.