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Sun 20 Jun 2010 04:00 AM

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Tracking the Omani economy

The Omani government’s firm hand on the tiller has left the sultanate’s economy in better shape than many of its regional peers.

Tracking the Omani economy
Local banks accounted for 93 percent of financial system assets in 2008. The Omani government is tapping into sectors such as real estate and finance to diversify its economy.
Tracking the Omani economy
Tracking the Omani economy
Freight throughput at Salalah Port has boomed due to its strategic position.
Tracking the Omani economy
The Central Bank of Oman has played an important role in reducing public debt as a percentage of GDP from 34 percent in 1999 to 5.6 percent last year.

The Omani government’s firm hand on the tiller has left the sultanate’s economy in better shape than many of its regional peers.

Much like many of the towns in Oman, the pace of life in Duqm used to progress pretty slowly. A leisurely drive down the main drag shows a settlement that is similar to many in the Gulf, with a smattering of restaurants, telecoms masts, guesthouses and the obligatory police station. But drive just a few kilometres north-east of the main town towards the sea, and the casual observer will immediately see the fruits of a succession of five-year plans that Oman’s government has put in place to kick-start the sultanate’s economy.

Roughly equidistant between Muscat and the coastal port city of Salalah — the two economic hubs of Oman — Duqm is the unlikely vanguard of a series of projects that are emerging all over the country, delivering the infrastructure that will allow Oman to delve deeply into less traditional sectors. As elsewhere in the GCC, then, diversification has been the watchword.

“Of course, Oman has had more motivation to diversify than the UAE, Saudi or Kuwait because, like Bahrain, Oman only has limited hydrocarbon resources,” says Economist Group regional associate director Jane Kinninmont. “Their tourism sector is particularly promising as Oman has more sites of natural beauty and historical interest than most GCC states. It has also deliberately focused on very high-end tourism, being keen to avoid the kind of weekend hedonism seen in Bahrain or Dubai, which has caused some social tensions in Bahrain in particular.”

That assessment is one with which other analysts agree. The country has one slight advantage in that as it is not a member of OPEC, it does not have to pander to specific quotas, allowing it to ramp up output when required. But this kind of activity takes place on a relatively small scale.

“But oil in Oman is difficult to extract, it’s expensive to extract and there’s less of it,” says Oliver Cornock, GCC regional editor at the Oxford Business Group. “In terms of diversification, I think they’ve recently come up with a few things post-crisis that are quite interesting — one of which is the new Brand Oman Management Unit, which has come up with some truly good ideas and translated them from being a notional part of executive plans into action.”

The startling array of projects that are taking shape in Duqm are testament to this process. Alongside a major port and oil export facility, the town is also developing a freezone, a dry dock and a series of residential and tourist projects. The port, in particular, is ambitious, and Oman’s government scored quite a success in April by announcing that one of the world’s largest terminals will lend its expertise to the Wusta coast site. The Port of Antwerp, ranked as the second-largest terminal in Europe behind Rotterdam, will join Oman in creating a 50:50 joint venture port management company that will be at the heart of the development of Duqm. In addition, an airport is also in the process of being built.

These ambitious plans are being established not only in the Wusta region but also at the more developed sites of Sohar and Salalah. Based much closer to the east-west trade routes than Dubai, the potential of Salalah as a location to snaffle business from the inner Gulf has been known for some time. But 2009 appears very much to have been Sohar’s year, especially given the collapse of the shipping sector worldwide. Freight throughput rose by 39 percent, with a 200 percent rise in containers through the new Oman International Container Terminal. Much of this growth has been driven by new industry sites in the port’s hinterland, especially the SIUCI urea and ammonia project and the start-up of Sohar Aluminium’s smelter. While it may be hard to quantify how exactly successfully the country’s diversification efforts are progressing, a look at the macroeconomic situation indicates a pretty positive outlook.

“If you take the figures for last year, GDP was at 3.7 percent,” adds Cornock. “It’s predicted to nearly double that to six percent this year, which would suggest quite simply that they are doing something right — and it isn’t based purely on oil.”

In a recent note on the resilience of the banking sector, the International Monetary Fund (IMF) said that the market was adequately capitalised and that its resilience to credit risks and macroeconomics shocks was confirmed via the results of a broad stress test exercise carried out in the banks’ loan portfolios. In fact, the banking sector makes up a significant majority of the financial system, with seventeen local banks accounting for around 93 percent of financial system assets at the end of 2008.

The significant number of local banks — and the lengthy presence of the foreign banks, seven out of ten of which have been operating in Oman for more than 30 years — seems to point towards the argument that the country has been less exposed compared to its GCC peers, particularly neighbouring Dubai. Having said that, the credit crisis certainly did not leave the sultanate untouched, with the IMF note claiming that already limited investment portfolios in the country had been slashed by half between June 2008 and June 2009, with the combined investment portfolio of the four largest banks slumping by 61 percent. But a $2bn lending facility to prevent the possibility of US dollar liquidity appears hardly to have been used, the agency says.
Oman’s weathering of the recession has also been due in no small part to the close fiscal attentions of the Central Bank of Oman (CBO). The CBO has played a vital part in reducing overall public debt as a percentage of GDP from 34 percent in 1999 to an impressive 5.6 percent last year, according to ratings agency Standard & Poor’s. In fact, the US government believes that figure could be as low as 2.8 percent, putting the country 129th out of 130 nations surveyed, and sandwiched between the newly resource-rich states of Equatorial Guinea and Azerbaijan.

“We’ve seen crash and burn happening elsewhere in the Gulf to a greater or lesser degree, but Oman has come across as being far more moderate, from the financial perspective,” adds Cornock. “The CBO has put in place some interesting mechanisms to ensure that growth is there and there won’t be a return to big inflation, and they’ve been very clever at managing the banks’ lending. There was a big problem with non-perfoming loans in Oman in 2000, but that issue isn’t happening any more.”

If there are criticisms of the regulatory performance, these are relatively muted. The IMF argues that some inefficiencies exist, and that local banks need greater incentives to achieve better risk management and better credit allocation. But these pointers are few and far between.

“Successful and conservative policies adopted by the CBO to monitor both the commercial and investment banks operating in the country have really helped it cope with the recession,” says Alfred Strolla, managing partner of accounting giant Deloitte’s Oman office. “In addition, the government has introduced a very large budget for the fiscal year 2010 encouraging and introducing new infrastructure projects, including building new roads, bridges, seaports and airports.

“Furthermore, the price of oil picking up to an average of $75 per barrel left Oman raking in a budget surplus for the first quarter of this fiscal year.”

On the real estate front, the story has been similar. Like Dubai, Oman has invested in a number of masterplanned communities, but given that there hasn’t been the type of housing boom that the UAE witnessed, there has also not been the same kind of slump.

“The general feeling in Muscat is that the market has bottomed out, and project development is continuing,” says Ian Watkin, chief executive of property agency Cluttons Oman. “There’s also been some recent activity, particularly in the fund side, looking at some of the projects in the Muscat area.”

Here again, the hand of the government is evident. Like other GCC economies, Oman has a long-specified plan — Vision 2020 — part of which has been to upgrade the Muscat capital area in line with its efforts towards diversification. In addition, the lower number of projects and the slower pace of the market has kept the majority of speculators away, with the result that sales in the few offplan developments still appear to be holding up quite well. At The Wave, a masterplanned community lodged in the gap between Muscat International Airport and the sea, just to the east of the capital, demand for its seventh release of properties has been exceptional. In just two days, the project sold 60 percent of the 160 units on offer, with one investor rumoured to have bought ten apartments.

In more good news for the sector, recent news suggested that work on the previously stalled Blue City, or Al Madina A’Zarqa, was set to continue after a Dubai-based investment company said it would take on almost all of the project’s senior debt. With a hoped-for eventual population of 200,000, Blue City had represented perhaps the boldest of the sultanate’s moves on the real estate front. But the lack of sales nearly led to the project being wound up until Essdar Capital stepped in to assist. Watkin says that the move has been a significant fillip for the local market.

“I think it’s great for the reputation of that development,” the Cluttons official says. “Hopefully that will help the project change direction, and it should also be good both for the profile of Oman and the real estate sector as well.”

Oman has been characterised as having a moderate but progressive, slow but sure sort of attitude, a view which seems to be particularly attractive to investors in the current shaky economic climate.

“Oman has adopted a policy of building on what’s already there and is not looking to import any massive change,” says Cornock. “I would regard that as one of the country’s main strengths.”