ANNUAL REPORT. Central Bank of Oman

Transcription

1 ANNUAL REPORT 2016 Central Bank of Oman

2 Annual Report 2016 June 2017

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4 H.M. Qaboos bin Said, Sultan of Oman

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6 CENTRAL BANK OF OMAN Board of Governors

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8 Audit Committee The Board of Governors The Executive President Internal Audit Banking Oversight Investment & Market Operations Financial Services & Operations Technical Services Corporate Services Banking Development Investment Finance Information Technology HR Planning & Development Econ. Res. & Statistics Banking Examination Treasury Payment Systems Info. Security Management HR Policies, Serv. & Employee Relations Financial Stability Banking Surveillance Bank Credit & Statistical Bureau Monetary Operations Research & Market Analysis Accounts & Banking Operations Currency Management Quality Management Organizational Dev. & Risk Management HR Pay & Benefits Insurance & Housing Loan Administration International Relations Islamic Banking International Settlements Salalah Branch Project Management Com. & Corporate Relations Sohar Branch Corporate Security Legal

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10 CONTENTS Page Foreword... 1 Chapters I. Overview and Outlook... 5 II. Output, Employment and Prices III. Oil and Gas IV. Public Finance V. Money, Banking and Financial Institutions VI. Foreign Trade and Balance of Payments Central Bank Accounts and Regulations Statistical Appendix

11 FOREWORD It is a great pleasure and privilege for the Central Bank of Oman to submit its Annual Report for the year 2016 to His Majesty, Sultan Qaboos bin Said, Sultan of Oman. Persistent lower oil prices continued to add challenges to macroeconomic performance of Oman in Economic activity, as measured by nominal Gross Domestic Product (GDP), slackened by 5.1 percent in 2016 as compared to a more pronounced drop of 13.8 percent in the previous year. The GDP component emanating from the petroleum sector registered a decline of 23.7 percent, while the non-oil sector GDP rose by 0.6 percent. The authorities have been responding with policy measures to move ahead on the path of fiscal sustainability in the medium-term. Reining in public expenditure, augmenting non-oil revenue, pursuing economic diversification are key facets of the State General Budget, The sharp decline of 27.3 percent in hydrocarbon revenue necessitated consolidation in public expenditure (5.8 percent in 2016 on top of 9.7 percent in 2015) facilitated substantially by reduction in investment expenditure (7.5 percent in 2015 followed by 11.7 percent in 2016) as well as implementing subsidy reforms. The external sector was characterized by widening of current account deficit due to steep fall in exports. In order to preserve fiscal buffers and taking advantage of relatively low cost of funds in international financial markets, the Government resorted mainly to external borrowings which elicited positive investor appetite and partly to borrowings from the domestic market which would facilitate financial deepening. The Central Bank of Oman (CBO) on its part continued its accommodative monetary policy stance, continuously monitoring the liquidity situation, and ensuring availability of adequate credit for productive activities. The CBO has also taken regulatory and supervisory measures so that banks remain well-capitalized and resilient in the face of incipient delinquency due to economic slowdown. Inflationary condition in the Sultanate remained benign in 2016 despite revision in energy prices, user fees and firming up of global commodity prices. Against this backdrop, the Annual Report for 2016 analyses developments related to the global economy, output growth, price situation, fiscal position, monetary and banking conditions, financial markets, foreign trade and balance of payments and macroeconomic outlook during the year. The CBO acknowledges with great appreciation the cooperation and support it has been receiving on a sustained basis from the Government, commercial banks and other institutions in Oman. It takes this opportunity to place on record its deep appreciation for the management and the staff of the Bank for their continued commitment to work and excellent contribution to the smooth and efficient functioning of the CBO. Hamood Sangour Al Zadjali Executive President Central Bank of Oman Annual Annual Report Report

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13 Overview and Outlook CHAPTER I

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15 OVERVIEW AND OUTLOOK World growth is estimated to have decelerated to 3.1 percent in 2016 from 3.4 percent in 2015 (IMF, 2017). However, an improvement has been witnessed in the global macro outlook since the second half of 2016 with economic activity gaining momentum and recovery in growth becoming more pronounced and pervasive, inflationary pressures resurrecting, and significant subduing of volatility in financial markets. In fact, investment, manufacturing, and trade have gained traction, experiencing much warranted cyclical upturn since the second half of 2016, mainly on the back of strong investment activities. Economic activities in advanced economies (AEs) have been propelling the recovery in world growth with main contribution emanating from the United States (US), United Kingdom (UK), Japan, Germany, and Spain. The growth in US has been mainly supported by solid consumption growth and cyclical inventory accumulations. The UK recorded solid growth amidst heightened uncertainty of referendum in favor of Brexit (i.e. leaving European Union) due to resilient spending, while surprise upturn in Japan s growth was conditioned by strong net exports. The strong domestic demand has been the main driver of growth in euro area countries. Emerging market and developing economies (EMDEs), on the other hand, have displayed mixed economic performance with China sustaining strong growth while India and Brazil experiencing slowdown. Economic activities in commodity exporting countries generally remained lackluster with steep contraction in trade and investment, despite some upturn in commodity prices. Overall, International Monetary Fund (IMF) has projected world output to grow by 3.5 per cent in 2017 and 3.6 percent in 2018, with main contribution to be coming from AEs (over the medium-term, growth drivers are, however, projected to shift from AEs to EMDEs). In EMDEs group, commodity exporting countries would account for most of the pick-up in growth during , however, their growth recovery would be modest, and not compensate for the striking decline in their growth over the last five years (IMF WEO, 2017). Solid recovery in economic activities across many advanced countries and expected robust global demand helped commodity prices to recover from prolonged trough in The pact among member countries of Organization of Petroleum Exporting Countries (OPEC) and other oil producers, coupled with expectations about robust future global demand, contributed to recovery in crude oil prices. The recovery in global commodity prices provided a much awaited relief to the commodity exporting countries by restoring some of their revenue loss, in turn, mitigating part of their economic hardship. Strengthening of commodity prices also reduced deflationary pressure and helped in propelling the global headline inflation. The annual consumer price inflation in advanced countries increased marginally to above 2 percent in February 2017, significantly higher than the Central Bank of Oman Annual Report

16 CHAPTER I annual average of 0.8 percent in 2016 and 0.3 percent in 2015 (IMF WEO, 2017). The revival of headline inflation in emerging market economies (EMEs) has, however, been a recent phenomenon as higher fuel prices could only outweigh the deflationary pressure emanating from earlier exchange rate depreciations lately. A pick up in oil prices is projected during averaging at US$ 55 per barrel compared to an average of US$ 43 a barrel in 2016 (IMF WEO, 2017). OPEC also expects gradual improvement in oil market conditions on the back of projected further improvement in world growth, and assumes oil price recovery to continue with US$ 5 per barrel per annum in OPEC Reference Basket (ORB) in the medium-term up to 2021 (OPEC, 2016). In the backdrop of uptick in commodity prices and pick up in global demand, IMF has projected an increase in headline inflation in both AEs and EMDEs (albeit with substantial diversity among EMDEs). rates also displayed diversity in EMEs- with few currencies coming under depreciating pressure while few experiencing appreciating pressure. Although growth in global trade volume, estimated at 2.2 percent in 2016, has been the slowest since 2009, the signs of recovery are discernible and the trade growth is estimated to pick up in , especially with expected recovery in demand and capital spending (IMF WEO, 2017). As per IMF s assessment, global trade volume is projected to grow at about 4.0 percent in The World Trade Organization (WTO) has, however, projected global trade growth in the range of 1.8 percent to 3.6 percent in 2017 and 2.1 percent to 4.0 percent during 2018, amidst deep uncertainty about near-term global economic activities and lack of clarity about monetary, fiscal and trade policies. Domestic Economic Developments Global financial conditions further strengthened since the second half of 2016, mainly reflecting improved global outlook, expectations about fiscal accommodation, and deregulation in the USA, and continued policy support from China. Nominal as well as real interest rates have risen sharply across several AEs (e.g. nominal yield on 10 year U.S. treasury bonds increased from 2.27 percent as on end-december 2015 to 2.45 percent at the end of December 2016). Long-term interest rates in EMEs also rose after the U.S. elections, though policy rate changes have been diverse. Equity markets have gained substantially both in AEs and EMDEs in the last few months due to strengthening of consumer confidence and positive macroeconomic outlook. Exchange Economic Growth The Omani economy contracted in nominal terms for the second year in a row in 2016, after a sustained robust expansion over five years ( ), mainly due to steep decline in hydrocarbon activities. Despite expansion in output, the revenues from hydrocarbon sector declined reflecting lower level of oil prices. Oman s nominal GDP contracted by 5.1 percent in 2016, on top of a drop of 13.8 percent in 2015, due to weakening of both external and domestic demand. The external demand deteriorated sharply following the average price of Omani crude falling by 28.9 percent in 2016, while domestic demand weakened due to decline in Government 6 Annual Report 2016 Central Bank of Oman

17 Overview and Outlook expenditure by 5.8 percent. Component-wise, nominal oil sector GDP decreased by 23.7 percent in 2016, while the non-oil sector registered a growth of 0.6 percent during the period. The share of hydrocarbon sector in total exports decreased to 57.9 percent in 2016 from an average of 66.3 percent during , while its contribution to Oman s GDP at market prices dropped to 27.4 percent from an average of 47.0 percent during this period. Non-petroleum industrial activities also contracted by 3.7 percent in 2016, on top of a decline of 3.0 percent in 2015, reflecting reduced government spending and economic slowdown. Among the non-petroleum industrial activities, manufacturing activities registered a pronounced contraction of 17.2 percent in 2016 compared to a decline of 13.4 percent in On the other hand, GDP originating from construction, recorded positive growth of 10.5 percent, and from mining and quarrying, and electricity and water supply each recorded positive growth of 5.4 percent in Construction accounted for the highest share of 44.5 percent in non-petroleum industrial activities, followed by manufacturing (42.1 percent), electricity and water supply (10.7 percent), and mining and quarrying (2.7 percent). Manufacturing sector accounted for 8.5 percent of GDP in 2016, lower than the annual average of 10.4 percent in the period , and also much lower compared to the target of about 15 percent to be achieved by 2020 as part of the diversification program. The weak external demand following global slowdown mainly led to the weakening of manufacturing sector in In order to make the growth process in Oman more resilient to the external price shocks, Vision Document has set the target for the agriculture and fishing sectors to contribute about 3.1 percent and 2.0 percent of GDP, respectively by Agriculture and fishing sector registered a solid growth of 16.3 percent in 2016 as against an average growth of about 6.4 percent in the previous five years, and their share in the overall GDP improved from an average of 1.3 percent to 2.0 percent during this period. At the same time, the intensive efforts of the Government aimed at economic diversification have contributed significantly to the growth of services sector in Oman during the recent period. In 2016, the value added in the services sector exceeded that in the hydrocarbon sector, and as a result, its share in GDP improved to 53.5 percent in 2016 from an average of 39.6 percent during the previous five years. The real estate services grew by 6.2 percent in 2016, while financial intermediation sector consolidated their position and registered positive growth during the year despite overall slowdown of the economy. Tourism is among the sectors identified as part of the diversification program, however, the value addition emanating from hotels and restaurants, decreased by 0.3 percent in 2016 over the previous year. Both the Ninth Plan ( ) and Tanfeedh aim to enhance economic diversification by adopting a set of sectoral objectives, policies and mechanisms, and eventually help the economy to revive from the economic downturn. Fiscal policy by pursuing consolidation, and the monetary policy by adopting an accommodative stance are also providing requisite push to the economic forces to deal with the current macroeconomic challenges. The Sultanate s annual General Budget for 2017 included measures to rationalize expenditure, and broaden non-oil revenue, while Central Bank of Oman Annual Report

18 CHAPTER I the monetary policy is ensuring appropriate liquidity in the system so that all legitimate credit needs are met. As a result of these policy efforts, the real GDP growth is expected to be positive in 2016, despite contraction in nominal GDP. Employment The recent policy programs, including the Ninth Five Year Plan and Tanfeedh, aim at economic diversification with expanded participation of the private sector, and generating enough additional employment opportunities in Oman. The employment generation in the public sector remained subdued and grew by 1.6 percent in 2015 (as against a growth of 7.0 percent in 2014), with employment of Omanis increasing by 0.9 percent and that of expatriates by 5.6 percent. Accordingly, the share of Omanis in the public sector employment fell marginally but continued to remain at around 85 percent. On the other hand, the employment in the private sector continued to gain traction and witnessed a growth of 9.0 percent in 2016, on the top of a growth of 8.1 percent in In the private sector, the employment of expatriates increased by 9.3 percent as compared to a rise of 6.4 percent for employment of Omanis in Nonetheless, the number of Omanis employed in the private sector is rising steadily and has indeed exceeded that of in the public sector in recent years. Prices Inflationary pressure in Oman is largely conditioned by Government spending, international prices, and the movement of US Dollar due to the pegging of Rial Omani. Notwithstanding the decline in government expenditure, the average inflation based on CPI for the Sultanate stood higher at 1.1 percent during 2016 as compared with 0.1 percent in 2015 mainly due to the recovery in international commodity prices, and increase in energy prices and other user fees & charges. Nevertheless, the consumer inflation in Oman compares favorably with that of Gulf Cooperation Council (GCC) countries which is projected to rise to 3.5 percent in 2017 from 2.9 percent in Both demand and supply side factors, emanating from domestic as well as external sources, have impacted the price level in Oman. The domestic demand weakened due to the decline in government spending, modest expansion in money supply, and general economic slowdown, while external demand deteriorated as a result of lower oil prices. On the supply side factors, the world food prices recovered by 2.0 percent in 2016, while metal prices declined by 5.4 percent. With the slackening of demand for housing, pressure on house rent moderated in The change in import prices, namely unit value index of non-oil Omani imports, which had been generally rising during the recent years, declined in 2016 by 32.2 percent, making imported goods cheaper in Oman. The decline or moderation in prices in 2016 under the groups Foods & nonalcoholic beverages, clothing and footwear, communication, and recreation and culture was partly offset by 6.1 percent increase in transport due to removal of fuel subsidies. Oil and Gas After plunging significantly in January 2016 (lowest level since 2003), international oil prices, recovered subsequently but continued to be at the 8 Annual Report 2016 Central Bank of Oman

19 Overview and Outlook lower level and affected the oil exporting countries adversely, including Oman. Notwithstanding oil prices persisting at lower level, the hydrocarbon sector remained the mainstay of the Omani economy with its contribution to nominal GDP at 27.4 percent in However, its contribution decelerated from 34.1 percent in 2015 and 46.4 percent in The sharp decline in crude oil prices coupled with lesser increase in production explained the sharp reduction in the contribution of this sector to GDP during 2016 and it certainly did not reflect the ongoing structural change in the Omani economy. The average price for the Omani crude oil dropped by 28.9 percent to US $ per barrel in 2016 from US $ per barrel in 2015 and US $ per barrel in The average price of the Omani crude oil ranged from its lowest level of US $ in March to the peak level of US $ in the month of December during Oil production, however, increased moderately to a recorded daily average of over 1 million barrels in 2016 compared with thousand barrels during Oil and gas revenues accounted for 68.2 percent of government revenues and about 57.9 percent of total merchandise exports (including re-exports) during the year. Government Finance Oman continued to face various macroeconomic challenges, including large fiscal deficit. However, the Government has taken various policy measures to mitigate these challenges. In fact, both the Ninth Five Year Plan and Tanfeedh were drafted against this backdrop and 2016 budget, being the starting year of both programs, sets the platform for various reforms and initiatives which would help in boosting economic activities in the private sector, containing the fiscal deficit, and fostering macroeconomic stability. Notwithstanding these reform measures, total government revenue declined by 16.1 percent to RO 7,609.2 million in 2016 due to substantial fall in oil revenues (actual price of Omani oil averaged at about USD 40 per barrel as against USD 45 per barrel considered in the budget estimates). Oil revenue declined sharply by 35.4 percent to RO 3,651.2 million in 2016 compared with RO 5,656.2 million in 2015, mainly reflecting a steep decline in oil prices. On the contrary, the government revenues from natural gas, and other current receipts increased by 3.5 percent, and 13.3 percent, respectively, in The revenue from capital receipts and repayments also increased by 12.9 percent and percent, respectively, during Fiscal measures announced in the budget, however, contained the government expenditure, which declined by 5.8 percent to RO 12,908.2 million in 2016 on account of reining in expenditure on investment, and participation & other expenses by 11.7 percent and 45.9 percent, respectively. As curtailment in expenditure fell short of decline in revenues, the fiscal deficit exacerbated to RO 5,300 million in 2016 from RO 4,361.4 million in 2015 (fiscal deficit as a percentage to GDP increased to 20.8 percent from 17.2 percent in 2015). Fiscal deficit for 2016 was financed through a mix of instruments- about 73 percent through external loans, and the remaining through drawing down from reserves and issuing domestic bonds. The 2017 budget, formulated against the backdrop of continued lower level of oil prices, has reaffirmed the Government s commitment to undertake fiscal consolidation and promote macroeconomic balance. Accordingly, the 2017 budget has targeted accelerated pace of reforms, which, Central Bank of Oman Annual Report

20 CHAPTER I inter alia, included privatization of government entities, increase in corporate income tax from 12 percent to 15 percent, and introduction of excise and VAT from Total revenues are budgeted to expand by 14.4 percent to RO 8,700 million in 2017 from RO 7,608.2 in 2016, assuming a growth of 21.9 percent in oil revenue and 7.4 percent in non-oil revenue (including gas revenue). On the other hand, total expenditure for 2017 has been estimated to decline by 9.4 percent to RO 11,700 million by reining in all constituents decline in current expenditure by 8.8 percent, investment by 9.0 percent, and participation & other expenses by 18.9 percent. Consequent to estimated higher revenue mobilization, and significant rationalization of expenditure, the fiscal deficit has been budgeted to decline to RO 3,000 million in 2017 from the actual of RO 5,300 million in About 70 percent of the fiscal deficit has been budgeted to be financed through external loans, while about 17 percent to be financed by drawing down of reserves, and the remaining through domestic bonds. Overall, the fiscal position further deteriorated in 2016 mainly due to significant drop in oil revenues as actual average Omani oil price was much lower than the price assumed in the budget. The government took various fiscal measures to rationalize expenditure and mobilize additional revenues, displaying government s commitment towards fiscal consolidation. The 2017 budget has attempted to build on the fiscal reforms, and correct the fiscal imbalance through a mix of cut in expenditure, and higher revenue mobilization. Rationalization of expenditure in favour of development expenditure, proposed in 2017 budget, suggests qualitative improvement. Implementation of the 2017 budget initiatives, would, however, be key to turn around the fiscal position of Oman and nurture macroeconomic stability. Monetary Conditions The monetary policy continued with its accommodative stance during 2016 in order to support real economic activities, despite some uptick in inflation. The reserve money, the monetary base, fell by 27.6 percent in 2016 due to sharp decline in bank deposits held with CBO. Despite the sharp fall in reserve money, the increase in money multiplier enabled broad money to grow by 1.8 percent at the end of Moderate growth in broad money was, however, in tandem with slowdown in the economy. Narrow money stock (M1) also registered a fall of 7.3 percent during 2016 mainly on account of decrease in local currency demand deposits and to some extent, drop in currency held with the public. Unlike narrow money, Quasi-money witnessed a robust growth of 6.8 percent during the year, and the main drivers for the impetus were increase in local currency time deposits, and saving deposits. The outstanding credit of Other Depository Corporations (ODCs) grew by 10.1 percent as at the end of December 2016 over the corresponding period of last year (with credit to the private sector also increasing by 10.1 percent during this period). The growth in credit was partly driven by greater flexibility provided to banks in their liquidity management by treating investment in government securities as part of eligible reserves up to a maximum of 2 percent of the deposits. On the other hand, aggregate deposits held with banks increased by 5.2 percent in December Annual Report 2016 Central Bank of Oman

21 Overview and Outlook from the level a year ago. The ratio of bank credit to GDP further improved to 86.8 percent in 2016 from 74.8 percent in 2015, while the ratio of bank deposits to GDP improved to 80.1 percent in 2016 from 72.3 percent in the previous year. Lower growth in deposits as compared to credit growth resulted in some tightening of liquidity conditions, which, in turn, led to increased competition among banks for deposit mobilization. Consequently, interest rates on deposits came under pressure and the weighted average interest rate on total deposits increased to percent in December 2016 from percent in December The weighted average interest rate on Rial Omani time deposits edged up significantly by percentage points to percent in December 2016 over the corresponding period of previous year. On the other hand, the weighted average lending rate increased by percentage points to percent in December Higher competition for deposit mobilization resulted in marginal contraction in banks overall interest rate spread during the recent period. The overnight domestic interbank call money rates also firmed up during the year 2016 as a result of some tightening experienced in the liquidity conditions. The average inter-bank call increased from percent in December 2015 to percent in June 2016 and further to percent in December Financial System The CBO continued with its financial reforms agenda in order to ensure that financial system becomes more resilient and financial stability is not undermined. Towards this end, several regulatory and supervisory initiatives were taken by the CBO during The main focus of these initiatives remained on improving financial inclusion, strengthening risk-based supervision, implementation of Basel norms, and ensuring adequate liquidity and improvements in payment and settlement systems. Consequently, banking sector remained robust and met the credit needs of all segments of the economy and in turn, supported economic diversification initiatives, despite economic slowdown and lower hydrocarbon revenues. Notwithstanding incipient delinquency due to economic slowdown, the core capital and reserves of conventional banks increased by 8 percent to RO 4.1 billion, and capital adequacy ratio further improved to 16.8 percent at the end of 2016 as compared to 16.1 percent at the end of previous year. At the same time, some deterioration in assets quality was witnessed reflecting economic slowdown and gross non-performing loans (NPLs) increased by 17.8 percent in The ratio of NPLs to total advances also moved upward to 2.1 percent at the end of 2016 from 1.9 percent at the end of Nonetheless, banking sector could weather the general economic slowdown to a large extent and maintained healthy profit levels with return on equity above 10 percent during 2016, although its net profit declined by 3.6 percent to RO million during the year (with local banks contributing maximum 97.5 percent of the profit. The CBO allowed banks investment in unencumbered treasury bills, Government Development Bonds and Oman Government Central Bank of Oman Annual Report

22 CHAPTER I Sukuk to be a part of eligible reserves up to maximum of 2.0 percent of deposits with effect from April 2016 in order to enhance liquidity with banks to meet the credit requirements. Banks in Oman have also started implementing the liquidity coverage ratio (LCR) and associated disclosure requirements, as prescribed by Basel Committee. The Net Stable Funding Ratio (NSFR), established by the Basel Committee to address the funding risk in terms of maturity structure of assets and liabilities, will become effective from January 2018 with a minimum ratio of 100 percent for banks in Oman. Furthermore, in line with international best practices, a framework for Domestic Systemically Important Banks (D-SIBs) has been operationalized and such banks will have higher capital requirements and an enhanced supervisory regime. CBO recently advised banks and FLCs to implement prudential specific provisions on restructured loans in a phased manner with achieving the stipulated 15 percent by the end of Furthermore, banks and FLCs were allowed an additional 90 days for risk classification of commercial loans related to specific projects to assist borrowers engaged in various projects of Government owned entities. CBO also permitted banks, facing certain difficulties in achieving the targeted funding to SME, to reckon non-funded credit up to a maximum of 1 percent of their total credit portfolio within the 5 percent target. Outstanding Government Development Bonds (GDBs) increased to RO 1,630 million at the end of 2016 from RO 1330 million at the end of 2015 with four new issues amounting to RO 450 million during the year. Conventional banks investments in GDBs and Government Sukuk increased by 17.2 percent to RO million at the end of Banks also invested RO million in Government treasury bills at the end of the year. Banks investment in foreign securities stood at RO million at the end of the year. The various segments of the financial markets, viz. Money, capital and forex remained orderly and stable during the year. Balance of Payments Global crude oil prices continued at lower level during 2016, despite rebounding somewhat from a low in January Consequently, the balance of payments position came under severe pressure and the current account remained in a sizable deficit during the second year in a row during Oman s current account deficit in 2016 was largely attributed to substantial decline in merchandise trade surplus, reflecting low crude oil prices. The merchandise trade surplus decreased to RO 2,406 million in 2016 from RO 3,506 million a year ago (about 31% fall), mainly due to decline in exports by 22.8 percent as imports also recorded sharp decline of 19.9 percent. The decline in exports, however, decelerated during 2016 compared to last year, reflecting some recovery in international crude oil prices. The combined deficit on services, income and current transfers stood lower at RO 7.1 billion in 2016 in comparison to RO 7.7 billion in The current account deficit increased to RO 4,737 million in 2016 (18.6 percent of GDP) from about RO 4,212 million (15.7 percent of GDP) in Notwithstanding some recovery projected in oil prices in 2017, Oman s current account is expected to remain in deficit in The capital and financial accounts witnessed much lower net inflows at about RO 1,700 million 12 Annual Report 2016 Central Bank of Oman

23 Overview and Outlook in 2016 as against about RO 4,617 billion in 2015, reflecting substantial decline in the contribution of the rest of the world to bridge the domestic saving-investment gap. In the backdrop of higher current account deficit and lower net inflows under current and financial account, the overall balance of payments position registered a large deficit of RO 3,521 million during 2016, which was funded by drawing down from foreign exchange reserves by the equivalent amount. Net foreign exchange reserves of the CBO (net of valuation adjustment) decreased by RO 943 million and Government reserves declined by RO 2,578 million in As at the end of 2016, the gross foreign assets of the CBO stood at RO 7,791 million, providing merchandise cover for around 11 months of imports of the merchandise goods (net foreign assets, however, provided import cover of about 8 months). Macro Outlook Global Prospects The recovery in world growth has gained traction since the second half of 2016 with pick-up in economic activities becoming more profound and diversified on the back of cyclical upturn in manufacturing, investment and trade. Although growth in global trade in 2016 was the lowest since 2007, signs of recovery are clearly visible and it is expected to pick up in , especially with expected recovery in demand and capital spending. The unemployment rate has fallen significantly across several countries, for example, dropping to 4.4 percent in the US in April 2017 which is the lowest jobless rate since May The strong economic recovery is also reflected in prices momentum as deflationary forces have dissipated across several advanced and emerging market economies. Inflationary pressures have resurfaced, after remaining subdued for a number of years, due to resurgence in commodity prices, including crude oil, on the back of strong global demand (recovery in crude oil prices also reflect the supply cut). At the same time, the volatility in global financial markets has been very low, reflecting overall exuberance, and equity markets have gained substantially both in AEs and EMDEs in the last few months. All the indicators, viz. upturn in manufacturing, investment and trade, firming up of commodity prices, and exuberance displayed by financial markets, especially equity markets, suggests robust global outlook over the medium-term. As per the IMF s projections, the world growth is estimated to increase from 3.1 percent in 2016 to 3.5 per cent in 2017 and 3.6 percent in 2018 with major contribution likely to come from AEs. The US growth is projected to accelerate to 2.3 percent and 2.5 percent, respectively, during 2017 and 2018 from 1.6 percent in 2016 on expected solid consumption spending and assumption of an expansionary fiscal policy stance. The growth in the UK is projected to increase to 2.0 percent during 2017, before decelerating to 1.5 percent in The Euro area is expected to grow at similar pace in 2017 (1.7 percent) before slowing down somewhat in 2018 (1.6 percent). After expansion in growth to 1.8 percent in 2016, Germany is also projected to experience slowdown during The growth momentum in Japan, driven by net exports during 2016, is expected to continue with growth projection at 1.2 percent during Central Bank of Oman Annual Report

24 CHAPTER I The headline inflation is also projected to increase in both AEs and EMDEs mainly due to uptick in commodity prices. As per the IMF s projections, inflation in AEs group will increase to 2.0 percent in 2017 from 0.8 percent in 2016 (and will stabilize at about that level over the next few years) and in EMDEs group, inflation will increase to 4.7 percent from 4.4 percent during this period. Notwithstanding low growth in 2016, the IMF has projected global trade growth at about 4 percent in On the other hand, World Trade Organization (WTO) has projected global trade growth in the rage of 1.8 percent to 3.6 percent in 2017 and 2.1 percent to 4 percent during 2018, amidst deep uncertainty about near-term global economic activities and lack of clarity about monetary, fiscal and trade policies. Overall, the robust global outlook projected during has been primarily shaped, inter alia, by the anticipated expansionary fiscal policy in the US, projected cyclical recovery in manufacturing, and uptick in commodity prices. Some of the downside risks, viz., tightening of financial conditions in EMEs due to capital outflows; fiscal expansion in the US falling short of expectations, weak balance sheet problems in parts of Europe and emerging markets, etc. may, however, affect the global outlook over the medium-term. The Regional Economic Outlook for Middle East, North Africa, Afghanistan & Pakistan (MENAP) region for 2017, brought out by the IMF in April 2017, has been largely shaped by somewhat higher commodity prices and stronger global trade. The fiscal and external positions are likely to improve for MENAP region in general and GCC region in particular during due to recovery in oil prices projected under the baseline scenario. IMF has projected oil prices averaging US$ 55 per barrel during compared to an average of US$ 43 a barrel in Organization of the Petroleum Exporting Countries (OPEC) also expects gradual recovery in oil prices with increment of US$ 5 per barrel per annum in OPEC Reference Basket (ORB) in the medium-term up to Notwithstanding rebound in oil prices, the IMF has projected growth in the GCC countries to decelerate significantly to 0.9 percent during 2017 from 2.0 percent in 2016 before recovering to 2.5 percent in Outlook for Oman Lower hydrocarbon prices continued to weigh on the overall macroeconomic scenario in Oman, notwithstanding various reform measures undertaken by the authorities to improve fiscal balance, and propel economic diversification to reduce dependence on the oil sector. Both the current account balance and fiscal balance remained in large deficit for the second consecutive year during 2016, mainly due to continued lower level of oil prices. The output in hydrocarbon sector declined by 23.7 percent, while nonhydrocarbon sector output grew marginally by 0.6 percent in Overall nominal GDP (at market prices) contracted by 5.1 percent in 2016, lower than contraction of 13.8 percent during 2015, mainly due to decline in both government spending and net external demand. Inflation, however, inched up from 0.1 percent in 2015 to 1.1 percent during 2016, partly reflecting the increase in electricity and fuel prices. The Government resorted to borrowing through loans and bonds from both domestic as well as external sources to finance 14 Annual Report 2016 Central Bank of Oman

25 Overview and Outlook fiscal deficit and consequently, debt to GDP ratio shot up from 12.8 percent at the end of 2015 to 31.4 percent at the end of Notwithstanding the decline in the net foreign assets of the CBO, the gross and net foreign assets provided cover for around 11 months and 8 months of merchandise goods imports, respectively, at the end of 2016, improving forex reserves adequacy. The banking sector also continued to be robust with high capital adequacy, despite economic slowdown, albeit some uptick in delinquency. The credit growth at 10.1 percent outweighed growth in deposits at 5.2 percent during 2016, implying some liquidity tightness which led to rise in interest rates on both deposits and loans but the increase in the former was higher than the latter. Going forward, the hydrocarbon sector is expected to further slowdown in 2017, despite some recovery in oil prices, due to lower production as part of the OPEC and other oil producers agreement. Although oil prices are expected to further recover somewhat, Oman oil price would remain much lower than the external breakeven level. As per IMF s projection, oil prices are expected to average at about US$ 55 per barrel during compared to an average of US$ 43 a barrel in At the same time, planned fiscal consolidation is expected to slow down the growth of the nonhydrocarbon sector. Overall, the slowdown in the Omani economy is expected to continue during Nonetheless, the progress on macroeconomic reforms, such as introduction of excise and value added tax (VAT), approval for legislations on labour and foreign direct investment (FDI) would be paramount for shaping the medium-term outlook of the Omani economy, especially in the backdrop of expectations about low hydrocarbon prices. Continuation of other ongoing fiscal reforms, viz., reduction in subsidies, containing current expenditure and prioritizing capital expenditure etc. would also remain a main catalyst for future macro outlook. Furthermore, the economic diversification with increased participation of the private sector would pave the way for sustainable growth in the economy, and therefore, emphasis on the same as part of the 9th Five Year Development Plan and Tanfeedh need to be increased. Government has already taken various measures to promote tourism, and expand manufacturing sector, but approval of the legislation on FDI would usher in increased participation of foreign investors, and accelerate the pace of economic diversification in the economy. CBO, on its part, has been facilitating the economic diversification by pursuing accommodative monetary policy and ensuring adequate liquidity in the system so that the legitimate credit needs of all sectors of the economy are met at reasonable cost. Central Bank of Oman Annual Report

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27 Output, Employment and Prices CHAPTER II

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29 OUTPUT, EMPLOYMENT AND PRICES Economic activities in the Sultanate remained subdued in 2016 despite expansion in hydrocarbon output due to low oil prices. The growth rate of nominal GDP continued to contract, albeit with moderation at 5.1 percent in 2016 following a drop of 13.8 percent in 2015 as against uninterrupted robust growth in the previous five years from 2010 to Oman experienced a sharp drop in net exports, widening of fiscal and current account deficits, and a rapid rise in Government debt. As a policy response, the Sultanate s annual State General Budget for 2017 has been formulated to attain expenditure restraint, broadening of nonoil revenue, and greater economic diversification (Table 2.1 & Chart 2.1). Component-wise, nominal petroleum sector GDP decreased by 23.7 percent in 2016, while the non-petroleum sector registered a growth of 0.6 percent during the period (Chart 2.2). With the oil sector still key to the Omani economy, low oil prices have brought to the fore several challenges to the Omani economy in The share of hydrocarbon exports to total exports which averaged 66.3 percent during decreased to 57.9 percent in Secondly, oil and gas revenue as a proportion of total government revenue fell to 68.2 percent in 2016 as compared to the average of 83.6 percent during the period 2011 to Thirdly, the share of petroleum sector activity in Oman s GDP at market prices dropped to 27.4 percent in 2016 from the average of 47.0 percent in the period Employment generation in the public sector got dampened in 2015 due to general economic slowdown while employment in the private sector gained traction in Employment in the private sector for which data are available for 2016 gained momentum with a 9.0 percent increase over the previous year (Table 2.5). Growth of public investment for creating physical infrastructure in the country and the general upswing in the construction sector contributed significantly in strengthening the country s capital formation. While consumption demand was sustained, investment activities, particularly by the private sector, were held back due to prevailing uncertainties. External demand was stifled due to contraction in global merchandise trade. As imported inflation is a key determinant in Oman s headline inflation rate, determinants such as, inter alia, increase in inflation rates of its trading partners, and fluctuations in global commodity prices are expected to shape the price situation in the Sultanate. The average inflation based on CPI for the Sultanate stood higher at 1.1 percent during 2016 as compared with 0.1 percent in 2015 mainly due to the recovery in international commodity prices, less-thananticipated reduction in government spending in Oman, and increase in energy prices and user fees. Policy authorities have undertaken measures to minimize the adverse impact of low oil prices on Central Bank of Oman Annual Report

30 CHAPTER II Percent Chart 2.1: Nominal GDP Growth and Change in Oil Prices Growth in Nominal GDP % change in oil price (Omani Crude) Annual Growth (%) Chart 2.2: Oil Production, Petroleum & Non-Petroleum Activities % Growth in Petroleum GDP (left scale) % Growth in Non-Petroleum GDP (left scale) Oil Production in mn. barrels (right scale) In Million Barrels Table 2.1 Output Indicators Items * 2016** GDP at current market price (R.O. Million) Annual Growth (%) GDP at constant 2010 prices (R.O. Million) NA Annual Growth (%) NA GDP Deflator NA Annual Growth (%) NA Share in GDP at Current Market Price (in per cent)# 1. Petroleum Activities Crude Petroleum Natural Gas Non-Petroleum activities Agrl. and Fishing Industry Services Activities Components of GDP (in per cent) a. Private Consumption NA b. Government Consumption NA c. Capital Formation (investment) NA d. Exports-Imports (goods and services) NA * Provisional ** Preliminary NA:Not Available # Shares may not add up to 100 because two items are not considered here, i.e. net import taxes and financial intermediation services indirectly measured. Source: National Center for Statistics and Information. 20 Annual Report 2016 Central Bank of Oman

31 Output, Employment and Prices the Omani economy and more importantly to revive the domestic economy from the downturn. While the policy of fiscal consolidation pursued by the Government during 2016 attempted to contain deterioration of fiscal metrics, accommodative monetary policy kept the liquidity condition at comfortable level enabling commercial banks to meet all genuine credit demand. Despite the contraction of GDP in nominal terms, the real GDP growth is expected to be positive in 2016 driven by rise in crude oil production and subdued GDP deflator. In the current macroeconomic situation, diversification of the economy is the key to augment the non-hydrocarbon growth and increase employment opportunities. With the decline in oil prices, there has been contraction in petroleum sector s nominal GDP contribution, while the nonoil sector witnessed a modest growth. In recent years, there have been intensified efforts related to developing the financial sector, financing the private sector, improving investment climate, and promoting Small and Medium Enterprises (SMEs). The policy authorities have made progress in 2016 in implementing the 9th Development Plan broadly drawing from the Vision 2020 in order to give impetus to economic diversification and resilience. The National Programme for Enhancing Economic Diversification, Tanfeedh envisages to address the urgent need to translate strategic plans into detailed roadmaps, with continued focus on higher investment in identified areas through public-private partnerships and smoothening of impediments. Petroleum Activities Petroleum activities play a vital role in the overall economic growth of the Sultanate despite the reduction of its share in GDP in Chapter III provides an analysis of the economics of the hydrocarbon sector in Oman in the context of recent developments in the world oil market. Production of crude oil continued to gain traction in 2016 as compared to solid growth witnessed in Crude oil production showed modest expansion at annual rate of 2.6 percent in 2016 to about 368 million barrels compared to a rise of 4.0 percent to 358 million barrels in The daily average production of crude oil in the Sultanate rose from thousand barrels during 2015 to thousand barrels during Notwithstanding the increase in production, the nominal GDP emanating from the hydrocarbon sector registered a fall of 23.7 percent in 2016 as compared to a pronounced decline of 36.6 percent in the previous year (Table 2.2). The decline in the direct value addition from crude oil was more pronounced at 27.5 percent in contrast to a modest rise of 2.7 percent in the case of natural gas during The contraction of nominal GDP in the hydrocarbon sector was primarily attributed to fall in the prices of crude oil and gas in the international markets following higher supply, lack of adequate demand and global slowdown. The Sultanate s crude oil production during January-March 2017 decreased by 4.2 percent to 87.1 million barrels from 90.9 million barrels in January-March During January- March 2017, the daily average production of crude oil dropped to thousand barrels from thousand barrels during the corresponding period a year ago. The Omani crude oil prices averaged US$ 40.1 per barrel during 2016 as compared to Central Bank of Oman Annual Report

32 CHAPTER II Percent Percent US$ 56.5 per barrel during 2015 and US$ per barrel during During January-March 2017, the international prices for Omani crude oil averaged US$ 50.4 per barrel as compared with US$ 34.8 per barrel during January-March In the backdrop of cyclical fluctuations in commodity prices in general and oil prices in particular, concerted efforts to pursue economic diversification are becoming more critical in recent period. Oman s diversification program is largely shaped by the natural endowment of the country i.e., oil and gas, which are increasingly being used by a variety of other industries such as fertilizer, petrochemicals, aluminium, power generation and water desalination. Although associated value additions in these industries are essentially indirect contribution of the oil and gas sector, these are reflected in the performance of the non-petroleum activities. As oil and gas are the primary source of industrialization and diversification in Oman, its indirect contribution to overall GDP is also crucial as its direct contribution. As the production of hydrocarbon sector was sustained, the impact of the low oil prices on the non-petroleum activities in Oman was somewhat contained in While crude oil production was 368 million barrels in 2016, its export was 322 million barrels which indicates that a significant portion of crude oil is being used by the existing and new refineries. Similarly, out of the total gas production in 2015, the bulk of it was used domestically in gas-based industries, mainly in industrial projects, oil fields and for power generation. In terms of direct contributions, oil and gas accounted for 22.8 percent and 4.7 percent of GDP in 2016, respectively (Table 2.1). Non-Petroleum Industrial Activities The policy authorities have made progress in 2016 in implementing various programmes and initiatives to give impetus to economic diversification and resilience. The Vision 2020 is an approach that steers the Sultanate towards a sustainable and diversified economy as well to create favorable conditions for economic progress. The Government aims to use the oil and gas revenues to achieve economic diversification while playing its role towards the provision of health, education and social services, training citizens and developing their skills, and pursuing such policies aimed at promoting decent standard of living. 22 Annual Report 2016 Central Bank of Oman