MUSCAT: Growth in Oman may rebound even stronger than anticipated this year, with a recent report predicting GDP will expand by 7.3 percent in 2010.
The report, written by the Arab Organization for Industrial Development and Mining (AOIDM), singled out diversification in the non-oil sector as a leading spur for growth, with Oman’s non-oil GDP tripling from $2.1 billion to $6.4 billion between 2004 and 2008.
The headline figure is notably higher than the government’s initial prediction in January of 6.1 percent for 2010 and more bullish than the IMF’s early estimate of 4.1 percent.
If realized, it would mark a strong recovery from comparatively slow growth in 2009, when the global downturn and a slump in oil prices saw GDP expand by 1-2 percent. Indeed, the figure comes close to matching the 7.8 percent growth experienced in 2008, a boom year for the Gulf which saw record oil prices nearing $150 a barrel.
In common with the rest of the Gulf, Oman’s current bright outlook has much to do with a steady strengthening in the price of oil in recent months.
Oman oil (which serves as a benchmark for the region’s Asian exports) has recently been trading at close to $75 a barrel.
This is significantly higher than the government’s conservative estimate of $50 a barrel, made at the start of the year during budget calculations.
The higher price is likely to see the government register either a budget surplus for 2010, or a much reduced deficit.
Predictions based on the $50 price had foreseen an initial deficit of some OR810m ($2.1 billion). By comparison, in 2009 the government predicted an average oil price of $45 a barrel and a budget deficit of OR800m ($2.07 billion).
The actual price realized that year averaged out at $56.7 a barrel, and as a result the final budget deficit came in significantly lower, at OR680m ($1.76 billion).
With the gap between estimated and actual oil prices likely to be even larger this year, and oil production in Oman increasing, the effect on the predicted deficit will likely be even greater in 2010.
With stronger growth fundamentals, however, come greater inflationary pressures.
Early government predictions for inflation in 2010, released at the same time as the 6.1 percent growth forecast, foresaw inflation in the Sultanate averaging 3.5 percent for the year.
The AOIDM report, however, suggests that inflation may reach 5.2 percent – close to the 5.3 percent level experienced during the commodity bubble of 2008.
Latest government figures show inflation to be on the rise, with the headline rate hitting 3.2 percent in May, the last month for which figures are currently available.
The uptick in inflation, which according to the executive president of the central bank, Hamood Sangour Al Zadjali, was prompted by an increase in global food costs and greater demand for building materials, has led the government to revise upwards its initial inflation estimate to between 4 percent and 5 percent for the year.
Indeed, inflation in neighboring Saudi Arabia has already crept up to 5.4 percent, largely due to the same factors, as a buoyant oil price and resurgent dollar contribute to the cost of basic goods and services.
With no plans to reassess the riyal’s dollar peg, the Omani monetary authorities will be keeping a close eye on the situation, no doubt mindful of the events of 2008.
One key difference from that year, however, and a potential bright spot on the horizon for the Omani authorities, is the relative weakness of the eurozone.
The dollar’s significant strengthening against the euro reduced and then stabilized rates for tourism-related real estate on the Omani market.
According to a recent report by Cluttons, a real estate specialist, a decline in residential leasing as well as an oversupply of rental property have combined to reduce rental values in the Sultanate.
This could well play a significant role in taking the edge off developing inflationary pressures, as one key characteristic of the 2008 Gulf inflationary cycle was rocketing real estate prices.
With real estate currently quiescent and headline estimates for growth continuing to rise as the year progresses, the Omani economy looks set to be returning to speed.
