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KEY ROLE FOR KHAZZAN PROJECT

Oman is witnessing an earlier-than-expected
pick-up in gas production.
Image courtesy: BP

Gas output to boost Oman’s GDP next year: NBK

KUWAIT, October 18, 2017

Oman’s economic growth will slow to just 0.3 per cent this year – its weakest since 2011 – on the back of a drop in oil output, before recovering to 2.8 per cent in 2018 as gas production expands and the non-oil economy steadies, a report said.

There remain notable downside risks, however, noted the latest Economic Update from the National Bank of Kuwait (NBK).

The government’s large budget deficit could require sharper-than-forecast fiscal consolidation if the financing climate deteriorates – perhaps from the anticipated “global tapering” of monetary policy – which could also affect the government’s plans for economic diversification. And inflation is set to rise following the introduction of new taxes. On the upside, Oman is benefitting from trade diversion due to the ongoing rift between Qatar and the Saudi-led bloc.

Growth to be supported by rising gas production; non-oil steady

Despite the above, NBK has nudged up its growth forecasts to reflect both non-oil dynamics and an earlier-than-expected pick-up in gas production. Household expenditures will grow modestly even with the headwinds facing consumers, and the pursuit of business friendly laws should support non-oil growth.

The launch of the BP Khazzan project’s first train in September, with the second train to follow in the first quarter of 2018 (1Q18), will boost oil GDP and partially offset the extension of oil production cuts taken in accordance with the Opec/non-Opec agreement. Overall GDP growth is forecast at 0.3 per cent and 2.8 per cent for 2017 and 2018, respectively.

Latest high frequency activity indicators are mixed. Car registrations were at their lowest in five years in August, with the 12-month rolling total down 23 per cent year-on-year (y/y). Hotel revenues, however, shook off a prolonged contractionary period, with July’s12-month rolling total at its highest level in almost 18 months and up 3 per cent y/y. Meanwhile, a majority of private sector companies reported discouraging earnings in 2Q17.

Companies have also slowed their hiring, with expat employment growing a mere 3 per cent in August, compared to a monthly average of 10 per cent in 2016. Governmental pressure to hire Omani nationals let go in the wake of the economic downturn also contributed to the slowdown in expat employment growth.

Looking to 2018, increased revenue from a new VAT and recovering oil prices may see government investment spending pick up, with growth further lifted by the complete launch of the BP Khazzan tight gas project. Indeed, this may lead to stronger government consumption, gas production, and LNG exports. Household consumption will grow but at a subdued pace, as consumers grapple with higher prices (VAT) and modest jobs growth.

Oman continues to pursue diversification initiatives in a bid to divest its economy from oil. These efforts, however, are being held back by lower oil prices, which are affecting the pace of investment. A friendlier foreign investment law (due to be officiated soon) and a stronger focus on tourism and other sectors may help boost non-oil activity going forward. Nonetheless, growth in the non-oil economy will average a modest2.4 per cent per year in 2017 and 2018.

Oman is not participating in the blockade of the Qatari economy and could see a marginally positive economic impact, as trade and travel between Qatar and both Saudi Arabia and the UAE is diverted. Omani ports (Duqm and Salalah) have reported increased bilateral trade between the two countries, while Qatari travellers are using Muscat international as a newfound transit hub. If the dispute persists, these effects could become more deeply entrenched. New shipping lines have been opened between Oman and Qatar’s recently inaugurated Hamad port.

Oil & gas sector to pick up on gas production boost

After an exceptional 2016 that saw average daily oil production breach 1 million barrels per day, oil output will contract in 2017 as Oman complies with the cuts agreed by Opec and non-Opec countries. However, the launch of the BP Khazzan tight gas project at end-2017 and early 2018 will deliver a strong boost to the gas sector as daily production capacity is increased by 1 billion cubic feet, or close to 25 per cent. Oman’s hydrocarbon GDP is forecast to decline 2.9 per cent in 2017, before rising 3.4 per cent in 2018.

Excise tax and VAT to push inflation considerably higher

Consumer price inflation has eased in recent months and stood at 1.1 per cent y/y in August, but will pick up in 4Q17 as the government implements an excise tax. Inflation will rise further in 2018 as the government continues to liberalize prices on energy and other goods and services and introduces VAT, offsetting downward pressures from global food and energy prices. Inflation will average 1.8 per cent in 2017 rising to 4.2 per cent next year – though delay in implementing VAT beyond the Q1 built in to our assumptions would see the latter come in lower.

Fiscal deficit to overshoot in 2017 and to persist into 2018

The fiscal position remains very weak. At 80 per cent of its OMR 3 billion target just 6 months into 2017, the government is likely to overshoot its deficit projection for the second year in a row.

Recent public finance data showed little progress in significantly reducing spending, which was virtually unchanged in 1H17 from 1H16. Current expenditures increased by a small 1.3 per cent, at the expense of investment expenditures (down 6 per cent), on the back of higher defence spending and interest payments. Efforts to curb public sector wage growth, however, did materialize somewhat, with civil ministry spending (which includes wages) decreasing by 2.4 per cent.

On the bright side, revenues, both oil and non-oil, rose on the back of higher oil prices and better fee collection and tax revenue. The government has adopted several measures to strengthen its finances and recently overhauled the corporate income tax (1Q17), while the implementation of an excise tax scheduled for 4Q17 will lend further support. However, NBK still forecasts a large deficit of 14.5 per cent of GDP for 2017.

Implementation of the VAT in 2018, which could add OMR 0.4 billion, in addition to a pick-up in oil prices, will see revenues increase next year. However, current and investment expenditures pickup, encouraged by the stronger revenue streams. Indeed, the government may offset the impact of the tax through wage increases and a more aggressive pursuit of its development plan. NBK forecasts the deficit narrowing to11 per cent of GDP in 2018.Nevertheless, NBK does not rule out more aggressive spending cuts should the funding climate weaken or should oil prices come in much lower than expected.

Banking system sees liquidity conditions improving

In light of the rise in oil prices, the banking sector is projected to see liquidity pressures ease gradually as government deposits recover, supported by the government’s international borrowing program. Government deposits were up3 per cent y/y in July 2017.

Credit growth is slowing in 2017, possibly on the back of weaker household spending, and is expected to pick up in 2018, as individuals cope with the higher cost of living brought forth by the implementation of the VAT. In July2017, private credit growth eased to 4.9 per cent y/y from an average 10 per cent in 2016.

Despite Oman’s currency peg to the dollar, the Central Bank of Oman (CBO) refrained from increasing its main policy rate after the June US Fed rate hike. However, the CBO has been raising its overnight repurchase rate. It registered at 1.72 per cent as of July2017.

The banking sector remains well capitalized. According to the CBO’s latest quarterly financial soundness statistics (June 2017), credit risk remains low with nonperforming loans (NPL) at 1.9 per cent of gross loans. Capitalization was also high, with a capital adequacy ratio of 16.6 per cent in 2Q17. – TradeArabia News Service




Tags: Oman | banking | Opec | Gas output | Khazzan |

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