GCC Brief. GCC CPI, % y/y, Data Financial and economic data

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1 GCC Brief 15 April 1 Stock market data : GCC MSCI stock market index, -1 Jan- Jul- Jan-9 Jul-9 Jan-1 Oil market data: Crude oil prices, -1, $pb WTI OPEC Jan- Jul- Jan-9 Jul-9 Jan IEA 1 forecasts (mbd): World oil dd =. (+.%) Non-OPEC supply = 5. (+1.%) Commentary Oman outlook: steady growth in 1 by Daniel Kaye, Senior Economist, danielk@nbk.com Oman s economy has weathered the global downturn comparatively well. Real GDP could grow by -5% this year, underpinned by rising hydrocarbon output and broader industrial sector development. The near-term prospect is for substantial budget surpluses albeit obscured by off-balance sheet transfers. Medium-term initiatives to rationalize spending and broaden the tax base are still likely, however. Meanwhile, inflation may accelerate to around % in 1. But in the context of the current fragile global growth environment, this will seem a small price to pay to secure a solid economic recovery. Charts Focus on Consumer price inflation More>> More>> Latest GCC monetary data: (13 th April unless otherwise stated) : : M3 5.3 %y/y (Feb) Repo rate.5 % $1=BHD.377 M 3.1 %y/y (Mar) Disc. rate.5 % $1=KWD GCC CPI, % y/y, With a full set of 9 data now in, inflation in the GCC is shown to have fallen sharply last year to an (un-weighted) average of %. Inflation may pickup in 1 as growth recovers, but is likely to remain at modest levels. Oman: M. %y/y (Feb) Repo rate. % $1=OMR.35 Source: Official sources / NBK N.B. Shows yearly averages. Uses simple un-weighted averages of country inflation rates : M 35.7 %y/y (Feb) Lend. rate 5.5 % $1=QAR 3.1 Data Financial and economic data More>> : UAE: M3. %y/y (Feb) Repo rate. % $1=SAR 3.75 M.5 %y/y (Feb) Repo rate 1. % $1=AED 3.73 NBK Economic Research Al Shuhada Street, P.O Box 95, Safat 131, City, Tel: Fax:

2 GCC Brief 15 April 1 Oman outlook: steady growth in 1 Oman s economy has recorded some of the Gulf region s more sluggish growth rates for much of this decade, at least in relative terms. Real GDP grew by an average of.5% per year between 3 and, compared to an average of nearly % for the GCC as a whole. These days, however, that achievement looks less disappointing. Its development model whilst perhaps less eyecatching than many others - has seen Oman through the crisis of the past two years better than many of its peers for a number of reasons, including: i. Its relatively straightforward, stable financial system, dominated by traditional banks (focused on customer and government deposit taking, corporate and retail lending) with relatively small investment portfolios and modest utilization of volatile wholesale and foreign funding. This helped limit investment losses, stem liquidity issues and prevent any major rise in non-performing loans (NPLs). ii. The execution of various large scale industrial sector projects, including those under the government s diversification program. This also helped generate a huge 71% surge in the size of the expatriate labor force between and 9, providing a major boost to the non-oil economy. iii. Rising hydrocarbon output, compared to the sharp declines in production seen in some of its GCC neighbors. This is mostly the result of Oman s status as a non-opec crude oil producer, but also due to rising output of condensates. As a result, the fallout from the financial crisis was relatively easily contained by the authorities. Measures taken by the Central Bank of Oman (CBO) to support the financial system included several cuts in its main lending rate to % (through ), the introduction of a $bn emergency dollar lending facility to support bank liquidity (Nov ), a cut in the reserve requirement from % to 5% (Dec ); and an increase in the allowed loan-deposit ratio from 5% to 7.5% (Jan 9). The government also introduced an OR15mn marketmaking fund intended to support the stock market (Nov ). Yet in broad terms, the financial system has not come under any intense systemic pressure. According to some press reports, only USD mn of the CBO s emergency lending facility was ever used, while banks have avoided the need for more explicit government support in the form of major cash injections or extra deposit guarantees. As a result, although growth in both deposits and credit have slowed sharply to % of late (see chart 1), the banking system is seen as remaining adequately capitalized and capable of supporting sustainable economic growth over the coming years Chart 1: Bank loans and deposits Credit Deposits Outlook economic growth With no apparent major excesses or bubbles in the financial and real estate sectors, the Omani economy looks set to remain one of the more steady performers in the GCC region. Although the economy is small, lacks a degree of dynamism and government resources are limited, the push for diversification is providing a sustained catalyst for development. This diversification covers the Liquefied Natural Gas (LNG), petrochemicals, metals and tourism sectors, as well as state spending on infrastructure including health and education, housing and transport (such as the new Al-Duqm port). The recent performance of the hydrocarbon sector often perceived as vulnerable to decline - has provided an upside surprise and helped cushion the impact of the slowdown in private sector activity on GDP. Total hydrocarbon production actually rose for the second year in a row in 9, by 5% to around 1.3 million barrels of oil equivalent (boe) per day. A combination of rising private sector involvement and Enhanced Oil Recovery techniques by state-owned Petroleum Development Oman (PDO) Oman s main hydrocarbon producer - has been used to offset natural declines in Oman s ageing oil fields

3 GCC Brief 15 April 1 PDO aims to keep crude and condensate production broadly stable over the coming -5 years while expanding its production of natural gas by as much as % (primarily to satisfy rising domestic demand rather than to boost LNG exports). By 15, PDO s production of natural gas is expected to exceed its output of crude oil. The oil and gas sector which accounts for 5-5% of Oman s GDP is therefore likely to continue to make a significant contribution to overall growth over the medium-term. We expect real hydrocarbon output (excluding refining) to expand by a further % in 1, after similar increases in and 9. (See chart.) Chart : Real GDP Hydrocarbons Non-hydrocarbons Total 1f Est./ F'cast After expanding by more than 1% per year in -, real growth in the non-oil economy probably decelerated to around 3% in 9, hit by weaker confidence, subdued credit conditions, slower project spending, a reduction in trade flows and smaller inflows of private sector expatriate labor. (The latter, however, still increased by 1% in 9, much faster than in its neighbors.) 1 is likely to see some of these weaknesses ease, helped by the further implementation of large scale industrial and tourism projects as well as by expansionary fiscal and monetary policies (see below). We expect real non-hydrocarbon GDP growth of % in 1, which may turn out to be the trend rate for the next few years. Internal and external balances Rising government spending is set to support economic growth over the medium term. The 1 budget outlines a 1% budget-on-budget increase in spending from 9, with big increases in both current (1%) and capital (11%) spending. The budget arithmetic is complicated by the fact that the government has overspent heavily in previous years (e.g. by 3% in ). As a result, actual spending growth could turn out weaker than projected in the budget, though the level of spending may turn out to be higher. After dipping in 9, government revenues could bounce back by % in 1 as a result of higher hydrocarbon receipts, which typically account for around % of total revenues. This should see the budget surplus rise from around % of GDP in 9 to 7% in 1. (See chart 3.) However, the strength of the fiscal position is obscured in the government s figures by its presentation of hydrocarbon revenues net of transfers to Oman s various reserve funds, which makes the surplus appear smaller than it is. Between 5 and, transfers are estimated (unofficially) to have been worth an average of 11% of GDP per year Before transfers* Official Chart 3: Budget balance (% GDP) Estimate/ f'cast e1f Source: Ministry of Finance / IIF / NBK * Before transfers to Oman s various reserve funds. Estimates of transfers provided by the Institute of International Finance. Note that despite the strong fiscal position, the government is still facing longer-term pressure to rationalize spending and/or broaden the tax base in order to guard against a secular decline in oil revenues. Meanwhile, the external position weakened considerably last year. Oman typically records a large surplus on its goods balance (around 3% of GDP), which more than offsets deficits in all other areas. However, the goods surplus probably fell sharply owing to a 35% drop in hydrocarbon revenues (driven by the fall in oil prices). As a result, we expect the current account to have been more or less in balance in 9. (See chart.) Higher oil prices should help oil exports recover this year, pushing the current account surplus back up to around 3% of GDP. This is well down on the average of 1% per year seen between and, reflecting the now higher level of imports

4 GCC Brief 15 April Chart : Current account balance (% GDP) Est./ F'cast 1f main tool for absorption of excess liquidity is issuance of Certificates of Deposit (CDs). But as chart shows, the rates on these instruments have (apart from a brief period in ) been consistently below those on equivalent dollar deposits. In addition, the CBO uses a repurchase rate to inject funds into the money market. This has been at % for more than a year Chart : Omani and US interest rates (%) CBO repo CBO CDs USD o/n deposits Prices and money Inflation slowed dramatically in 9 to 3.5%, down from 1.5% in. (See chart 5.) The bulk of this decline reflected a deceleration in food price inflation from % to less than 1%. Food makes up about one third of the price index and food price inflation is likely to pick up in 1. In other areas, inflationary pressures may also accelerate somewhat as a result of faster economic growth. We see inflation rising to an average of around % in 1. In the current fragile global growth environment, this increase might be seen as a small price to pay to lock-in a solid economic recovery Chart 5: Consumer price inflation (% y/y) F'cast 1f N.B. Figures before are for Muscat only The Omani rial has been pegged at a fixed rate of OR.35 per 1 US dollar since the beginning of 19. This means that Omani monetary policy is driven by corresponding policy changes in US. At the margin, however, the Omani interest rate structure can differ from that in the US somewhat owing to the CBO s use of sterilization and regulatory controls, plus the relative insensitivity of local deposit flows to interest rates. The CBO s Source: Central Bank of Oman The authorities continue to state that Oman will stay outside of the proposed Gulf single currency and that the rial will remain pegged to the US dollar. Accordingly, with US interest rates remaining low, there seems little reason to expect Omani interest rates to rise very far over the next year. If inflation accelerates this year, this implies falling real interest rates which should provide a further stimulus for domestic economic activity. Table 1. NBK forecasts for the Omani economy Variable 9e 1f Real economy Nominal GDP $bn Nominal GDP %y/y Real GDP %y/y Hydrocarbon %y/y Non-hydrocarb n %y/y Budget balance 1 %GDP Current account %GDP Money & financial Crude oil prices $pb Consumer prices %y/y OMR/$ (end yr) Int. rates (end yr) 3 % Source: NBK / IIF; forecasts are NBK N.B. Year averages unless otherwise stated 1 Before transfers to Oman s various reserve funds Brent crude 3 Repo rate

5 GCC Brief 15 April 1 Focus on Consumer price inflation With a full set of 9 data now in, inflation in the GCC is shown to have fallen sharply last year to an (un-weighted) average of % Oman UAE Source: Official sources / IMF / ThomsonReuters Ecowin N.B. Shows yearly averages. 5

6 GCC Brief 15 April 1 Weekly GCC financial market data Unit Current 1-Week Ago 1-Month Ago 3-Month Ago -Month Ago 1-Year Ago USD/BHD 1$ = BHD EUR/BHD 1 = BHD month BHIBOR % year BHIBOR % Repo Rate % SW Deposit Rate % Stock Exchange Index Index USD/KWD 1$ = KWD EUR/KWD 1 = KWD month KIBOR % year KIBOR % Discount Rate % Repo Rate % Stock Exchange Index Index Oman USD/OMR 1$ = OMR EUR/OMR 1 = OMR month OMIBOR % n/a n/a n/a n/a n/a n/a 1-year OMIBOR % n/a n/a n/a n/a n/a n/a 1-month CBO CD % Repo Rate % Stock Exchange Index Index USD/QAR 1$ = QAR EUR/QAR 1 = QAR i 3-month Repo Rate % i 1-year Repo Rate % Repo Rate % Deposit Facility % Lending Facility % Stock Exchange Index Index USD/SAR 1$ = SAR EUR/SAR 1 = SAR month SAIBOR % year SAIBOR % Repo Rate % Reverse Repo Rate % Stock Exchange Index Index UAE USD/AED 1$ = AED EUR/AED 1 = AED month AEIBOR % year AEIBOR % Repo Rate % Stock Exchange Index Index 97 1 Weekly international financial market data Unit Current 1-Week Ago 1-Month Ago 3-Month Ago -Month Ago 1-Year Ago WTI Crude Oil Spot Price US $ p/b OPEC Crude Oil Basket (1-day Av.) US $ p/b EUR/USD 1 = $ USD/JPY 1$ = GBP/USD 1 = $ Month USD LIBOR % Month EUR LIBOR % Month GBP LIBOR % US Fed Fund Rate % US Discount Rate % US Prime Rate % GB Prime Rate % ECB Refinancing Rate % MSCI GCC Stock Market Index 3 3 S&P 5 Index Index Economic data (period average) Unit 7 Unit 7 GDP USD bns GDP USD bns GDP %y/y GDP %y/y CPI %y/y CPI %y/y Current account USD bns..9.3 Current account USD bns GDP USD bns GDP USD bns GDP %y/y GDP %y/y CPI %y/y CPI %y/y Current account USD bns Current account USD bns Oman UAE GDP USD bns GDP USD bns GDP %y/y GDP %y/y CPI %y/y CPI %y/y Current account USD bns Current account USD bns Source: ThomsonReuters Ecowin, official sources, and NBK Economic Research

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