50.0% 40.0% 30.0% 20.0% 10.0% 0.0% -10.0% -20.0% -30.0% * 2011** 2012** Nominal GDP (OMRmn) Growth (%)

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1 Global Research Economy - Oman January 2012 Oman Economic Overview Oman s economy expected to witness real GDP growth of 5.5% in Government estimates budget expenditure to increase 23% in Inflation expected to remain at moderate levels. MSM30 index down by 15.7% in Real GDP expected to go up by 5.5% in 2011 and 5.0% in 2012 Oman s real GDP is expected to increase 5.5% in 2011 and 5.0% in 2012 respectively (as per IMF) with higher oil prices averaging around US$99/bbl as per consensus estimates which is well above 2012 government budget of US75/bbl. The growth is driven by increasing government spending witnessed through the 2012 budget which expects expenditures up 23% from the previous year. In addition, Vision 2020 aims to shift crude oil contribution to below 10% of the GDP and increase natural gas and industrial to above 10% and 20% respectively. Oman rolls out its largest budget in history The government ratified the new budget for 2012 which is the second year of the Eighth Five-Year Development Plan ( ). The budget was issued with a historical level of expenditures at OMR10.0bn. The government continued its expansionary fiscal policy aiming to support the economic growth. According to announced figures, the new budget will report OMR1,200mn of deficit as compared with 2011 budgeted deficit of OMR850.0mn. Oman s Real Nominal GDP 30, % 14, % 25,000 20,000 15,000 10,000 5, % 30.0% 20.0% 10.0% 0.0% -10.0% -20.0% 12,000 10,000 8,000 6,000 4,000 2, % 10.0% 8.0% 6.0% 4.0% 2.0% * 2011* 2012** -30.0% * 2011** 2012** 0.0% Nominal GDP (OMRmn) Growth (%) Source: Ministry of National Economy, IMF and CBO Real GDP (OMRmn) Growth (%) Faisal Hasan, CFA Head of Research fhasan@global.com.kw Tel.: (965) Turki O. AlYaqout Financial Analyst tyaqout@global.com.kw Tel.: (965) Oman market down 15.7% in 2011 amidst sluggish trading activity Major events occurred around the world that lowered investor confidence in the MSM30 which included the Arab Spring, Euro zone Debt Crisis, US Credit Rating Downgrade and regional political tensions. The events caused the MSM30 index to decrease 15.6% in 2011 as compared to a 6.1% increase in Money Supply back on stellar growth The monetary supply of Oman (denoted by M2) stands at OMR9.5bn as of 3Q-11, up 13.8%YoY. M2 has grown by healthy double digits in the last 5 years and exhibited CAGR growth of 19.7% during the period However inflation is managed and expected to reach around 3.8% in This is mainly backed by the new government expenditures implemented during the 1H-11 to address social and economical reforms in the Sultanate. Global Investment House

2 TABLE OF CONTENTS Economic Indicators.. 3 Gross Domestic Product.. 4 Oman Oil & Gas Sector 9 Public Finance. 13 Government Debt 17 Oman Budget 18 Balance of Payments.. 21 Monetary Policy 25 Demographics Muscat Securities Market 32 Corporate Profitability 35 January

3 Economic Indicators E Economic Performance Nominal GDP (OMRmn) 14,151 16,114 23,185 18,020 22,243 25,662 Nominal GDP (USD mn) 36,754 41,851 60,217 46,801 57,770 66,650 Nominal GDP Growth (%) 19.1% 13.9% 43.9% -22.3% 23.4% 15.4% Real GDP (OMRmn) 9,177 9,794 11,052 11,176 11,634 12,274 Real GDP (USD mn) 23,835 25,438 28,704 29,027 30,217 31,879 Real GDP Growth (%) 5.5% 6.7% 12.8% 1.1% 4.1% 5.5% GDP Per Capita (USD) 14,262 15,257 21,003 14,750 20,830 23,700 Population ('000) 2,577 2,743 2,867 3,173 2,773 2,812 Oil Sector contribution to GDP (OMRmn) 6,740 7,139 11,705 7,317 10,332 2,739^ Oil Sector/GDP (%) 47.6% 44.3% 50.5% 40.6% 46.4% 48.3%^ Government Finance Government Revenues (OMRmn) 4,980 5,921 7,639 6,748 7,917 7,280 Government Expenditures (OMRmn) 4,936 5,880 7,560 7,429 7,965 8,130 Surplus/(Deficit) (OMRmn) (680) (49) (850) Government Revenues/GDP (%) 35.2% 36.7% 32.9% 37.5% 35.6% 28.4% Oil Revenues (OMRmn) 3,226 3,678 5,093 4,491 5,470 4,956 Oil Revenues/GDP (%) 22.8% 22.8% 22.0% 24.9% 24.6% 19.3% External Debt (OMRmn) 1,128 1, ,005 1,136 1,047 External Debt/GDP (%) 8.0% 6.2% 4.2% 5.6% 5.1% 4.1% External Debt/Govt. Revenues (%) 22.6% 16.9% 12.6% 14.9% 14.4% 14.4% Money Supply and Inflation M1 (end-period) (OMRmn) 1,230 1,921 1,995 2,365 2,876 3,264.6^^ M2 (end-period) (OMRmn) 4,461 6,120 7,533 7,890 8,785 9,493.0^^ Overnight Domestic Interbank Rate (%) 3.3% 1.5% 0.3% 0.1% 0.1% 0.07%^^ Inflation Rate (%) 3.4% 5.9% 12.4% 3.4% 3.2% 5.2%^^ Foreign Trade Total Goods Exports (OMRmn) 8,300 9,506 14,503 10,632 14,073 18,403^^^ Total Goods Imports (OMRmn) 4,244 6,162 8,896 6,896 7,680 11,665^^^ Trade Balance (OMRmn) 4,055 3,344 5,607 3,736 6,394 6,738^^^ Current Account Balance (OMRmn) 2, ,931 (230) 1,960 3,734^^^ Current Account/GDP (%) 15.4% 5.9% 8.3% -1.3% 8.8% 14.6%^^^ Oil Exports to Total Exports (%) 81.0% 75.8% 76.0% 65.3% 68.9% 73.4%^^^ Other Economic Indicators Oman Crude Oil Production ('000 bpd) Muscat Securities Market (MSM30) (points) 5,582 9,035 5,441 6,369 6,755 5,695 Exchange Rate (average) (OMR: USD) Source: Global Research, Central Bank of Oman, Ministry of National Economy, Ministry of Finance, IMF, OPEC ^ 1Q-11 ^^ Sep-11, ^^^IMF January

4 Gross Domestic Product GCC region witnessed a significant turnaround in 2010 as capital markets and oil prices increased and were accompanied by strong domestic demand and prudent fiscal and monetary policies. Oman s economy, the fifth largest economy in the GCC region witnessed a 4.1% increase in real GDP in Real GDP reached OMR11.6bn as compared to OMR11.2bn in On a CAGR basis, Real GDP increased by 6.0% during the period with the increase accompanied with higher oil prices, better manufacturing output and growing industrial sector. On a nominal basis, GDP bounced back and jump 23.4% in 2010 to reach OMR22.2bn as compared to OMR18.0bn enjoyed in On a CAGR basis nominal GDP increased 13.4% during the period Oman GDP 30, % 14, % 25,000 20,000 15,000 10,000 5, % 30.0% 20.0% 10.0% 0.0% -10.0% -20.0% 12,000 10,000 8,000 6,000 4,000 2, % 10.0% 8.0% 6.0% 4.0% 2.0% * 2011* 2012** -30.0% * 2011** 2012** 0.0% Nominal GDP (OMRmn) Growth (%) Real GDP (OMRmn) Growth (%) Source: Central Bank of Oman, IMF, *Provisional, **Estimates In 2010, economic factors improved strongly and Oman registered a 23.4% increase in nominal GDP in 2010, accompanied by oil prices. In 2010, labor sector increased creating 105,124 new jobs, foreign direct investment inflows were positive and domestic demand picked up. Oman produced a strong fiscal policy to beat the crisis which sustained domestic demand in addition to the monetary policy which made liquidity available enabling banks to meet credit demand. The increase in nominal GDP in 2010 was driven by the petroleum activities. Petroleum activities witnessed an increase in its share of the GDP, reaching 46.4% in 2010 as compared to 40.6% the previous year. Extraction of crude petroleum jumped 42.5% to OMR9.4bn in 2010 as compared to a 39.1% decrease reported in 2009, while natural gas extraction saw a 29% increase in GDP in 2010 to OMR912mn. Overall, petroleum activities reached OMR10.3bn in The increase in petroleum activities is due to oil prices bouncing back in international markets during Omani oil prices averaged USD76.6/bbl in 2010 as compared to USD56.7/bbl recorded in Oman Statistics Source: CBO, IMF * 2011E 2012E Nominal GDP (ROmn) 11,883 14,151 16,114 23,185 18,020 22,243 25,662 26,430 Nominal GDP (USD mn) 30,863 36,754 41,851 60,217 46,801 57,770 66,651 68,646 Nominal GDP Growth (%) 43.5% 19.1% 13.9% 43.9% -22.3% 23.4% 15.4% 3.0% Real GDP Growth (%) 4.0% 5.5% 6.7% 12.8% 1.1% 4.1% 5.5% 5.0% GDP Per Capita (USD) 12,301 14,262 15,257 21,003 14,750 20,830 23,700 24,072 Unlike other oil producing countries, Oman petroleum activities share of total GDP doesn t exceed 50% mark which proves a better diversified economy as compared to other oil producing economies. Petroleum activities reached 46% share as compared to 54% for non petroleum activities. The share on petroleum activities has been decreasing since 2005 when it was measured at 48.3%. January

5 Contribution to GDP 100.0% 90.0% 80.0% 70.0% 60.0% 50.0% 40.0% 30.0% 20.0% 10.0% 0.0% 51.7% 53.2% 56.4% 50.1% 60.3% 54.4% 48.3% 46.8% 43.6% 49.9% 39.7% 45.6% * Petroleum Activites Non-Petroleum Activities Source: Central Bank of Oman **Preliminary On the other hand, non-petroleum activities which include industry, services and agricultural activities grew its share in total GDP from 50.6% in 2005 to 53.6% in Non petroleum activities reached OMR12.3bn in 2010 as compared to OMR11.1bn in Service activities is considered the 2 nd largest sector in Oman economy in 2010, its contribution to the GDP reached 37.5% and valued at OMR8.3bn. Services activities increased 11% in 2010 due to the increase in its largest segment of whole sale and retail trade. However, on a CAGR basis services activities increased 13.7% during the period Services activities include whole sale and retail trade, hotels and restaurants, transport and communication, financial intermediation, real estate services and public administration and defense. Whole sale and retail trade is considered the largest sector within the services activities, its share to GDP reached 8.7% and 23.3% of the services sector. Wholesale and retail trade increased by 12.3% in 2010 to reach OMR1.9bn. The increase is accompanied by higher consumer spending due to the fiscal policies and a better consumer confidence which resulted after the credit crisis of On the other hand whole sale and retail trade increased on a CAGR basis of 17.7% during the period The second largest segment of the services activities is the other services segment which includes healthcare, education and community/personal services, it reached OMR1.6bn in 2010 and growing 13.4% during the same period. On a CAGR basis other services sector increased 12.2% during the period However, the slowest growing sector among the services activities is the public administration and defense sector which grew at a CAGR of 10.5% during the period to reach OMR1,500mn. January

6 GDP by Economic Activity (OMRmn) * 1Q-2011** Petroleum Activities 5,876 6,740 7,139 11,705 7,317 10,332 2,969 Oil 5,434 6,158 6,539 10,856 6,610 9,420 2,739 Natural Gas Industrial Activities 1,694 2,289 2,760 3,858 3,325 3, Mining & Quarrying Manufacturing 1,007 1,527 1,749 2,459 1,853 2, Electricity & Water Supply Construction ,142 1,179 1, Agriculture & Fishing Services 4,400 5,176 6,251 7,640 7,519 8,343 2,236 Wholesale & Retail Trade 859 1,089 1,489 2,109 1,731 1, Hotels & Restaurants Transport Storage & Communication ,193 1,082 1, Financial Intermediation Real Estate Services , Public Administration & Defense 910 1,063 1,192 1,241 1,334 1, Other Services ,123 1,268 1,407 1, Non-Petroleum Activities 6,277 7,656 9,220 11,732 11,103 12,334 3,309 Less: Financial Intermediation Services Gross Domestic Product at Producers Prices 11,939 14,156 16,066 23,068 18,000 22,201 6,152 Plus: Import Taxes (56) (5) Gross Domestic Product at Market Prices 11,883 14,151 16,114 23,185 18,020 22,243 6,153 Source: Central Bank of Oman *Provisional, **Preliminary Industrial activities make up 30.2% of the non-petroleum activities and 16.7% of the total GDP. Industrial activities reached OMR3.7bn in 2010, a 11.9% increase from the previous year. Manufacturing sector is considered the largest within industrial activities; it reached OMR2.2bn in 2010, a 59.2% share of the industrial activities and 16.7% of the total GDP during the same period. Manufacturing sector increased 18.8% in 2010 from previously recorded OMR1.9bn in As per the Vision 2020, Oman is planning to increase the manufacturing output of total GDP to 15%. Real estate and Construction sectors were the other two main important contributors to GDP in the Sultanate They accounted for 4.6% and 5.4% of GDP over the period respectively. Construction sector saw its share to GDP growing over years from 3.8% in In addition on a CAGR basis, construction is considered the second fastest growing sector after mining and quarrying, it grew 21.4% during the period to reach OMR1.2bn. Both sectors continued to report annual growth rates over the whole period. Their growth was driven by the continued expansion of physical infrastructure, together with major tourism, commercial, as a well as residential real estate projects. By the end of 2010, both sectors accounted for 10% of GDP to stand at OMR2.2bn, as compared to an 8.5% share in GDP in 2005 to stand at OMR1.0bn. Agriculture and fishing sector increased by 4.5% to reach OMR270mn in On average, agriculture and fishing contributed for 1.2% of total GDP over the period and reported a CAGR of 8.1% during the same period. As per Vision 2020, Oman is planning to increase Agriculture and fishing share of total GDP to 3.1% in 2020 with an annual growth rate of 5.6%. January

7 GDP Share Hotels & Restaurants 0.7% Real Estate Services 4.5% Financial Intermediation 3.8% Transport Storage & Communication 5.2% Other Services 7.4% Public Administration & Defence 7.5% Wholesale & Retail Trade 7.1% Oil 44.7% Financial Intermediation 4.0% Transport Storage & Communication 5.3% Hotels & Restaurants 0.8% Public Administration & Defence 6.6% Real Estate Services 4.5% Wholesale & Retail Trade 8.6% Other Services 7.0% Oil 41.6% Agriculture & Fishing 1.5% Construction 3.8% Electricity & Water Supply 1.7% Manufacturing 8.3% Mining & Quarrying 0.2% Natural Gas 3.6% Agriculture & Fishing 1.2% Construction 5.3% Electricity & Water Supply 1.0% Manufacturing 9.7% Mining & Quarrying 0.4% Natural Gas 4.0% Source: Central Bank of Oman Latest available data for GDP by expenditure type revealed the Gross Fixed Capital Formation (GFCF) growing at a CAGR basis of 21.8% during the period Oman is currently working on huge projects. As of November 30 h 2011, total projects amounted to US$115.6bn, up 13.2% from the same period a year ago. GCFC accounted for 33.6% of the GDP during 2009 as compared to 23.1% in GDP per Expenditure (OMRmn) * Gross Capital Formation at Current Prices 2,751 3,427 4,928 6,874 6,055 Gross Capital Formation as a % of GDP 23.1% 24.2% 30.6% 29.6% 33.6% Gross National Disposable Income 10,575 12,777 14,334 20,188 14,850 Net Primary Income from Abroad (393) (256) (309) (1,061) (1,080) Net Current Transfers from Abroad (915) (1,118) (1,468) 2,039 2,090 Gross National Saving 4,457 5,842 6,005 9,680 3,951 Source: Ministry of National Economy, * Provisional January

8 1Q-2011 As per latest data, Omani GDP increased 15.3% in 1Q-2011 as compared to the same period a year ago. The increase is attributed to the industrial and petroleum activities which grew by 19.2% and 17.8% to reach OMR998mn and OMR3.0bn respectively. Oil prices averaged around US$88.3/bbl in 1Q-2011, up 15.1% from the same period a year ago. Higher oil prices have led to the petroleum activity sector witness a 19.2% increase in GDP to reach OMR2.7bn, bringing its share of total GDP below the 50% mark to 48.3%. In addition services activities witnessed a 10% increase during the period 1Q-2011, with the transport, storage and communication sector witnessing the largest increase of 14.3% during the same period to reach OMR452mn. Oman GDP by Economic Sector 1Q-2011 (OMRmn) 1Q- 2010* 1Q- 2011** Petroleum Activities 2,521 2,969 Oil 2,298 2,739 Natural Gas Industrial Activities Mining & Quarrying Manufacturing Electricity & Water Supply Construction Agriculture & Fishing Services 2,034 2,236 Wholesale & Retail Trade Hotels & Restaurants Transport Storage & Communication Financial Intermediation Real Estate Services Public Administration & Defense Other Services Non-Petroleum Activities 2,941 3,309 Less: Financial Intermediation Services Gross Domestic Product at Producers Prices 5,352 6,152 Plus: Import Taxes (15) 0 Gross Domestic Product at Market Prices 5,338 6,153 Source: Central Bank of Oman *Provisional, ** Preliminary Going forward, as per IMF estimates, Oman real GDP is expected to increase 5.5% in 2011 and 5.0% in 2012, the increase should be accompanied with higher oil prices averaging around US$99/bbl as per consensus estimates which is well above 2012 government budget of US75/bbl. Secondly, growth in GDP is also attributed through the advancement of the new technologies made for extracting oil, and finally by increasing government spending which is witnessed through the 2012 budget which expects expenditures up 23% from the previous year. In addition, Vision 2020 aims to shift crude oil contribution to below 10% of the GDP and increase natural gas and industrial to above 10% and 20% respectively. Omani policymakers have been involved strongly to diversify the economy through new tax laws, better workforce, enhancing non-oil sectors and creating a market-friendly economic environment. January

9 Oil & Gas Oil & gas sector recovery is considered vital for the Omani economy as it make up around 46.4% of its GDP and around 80.1% of the government revenues in As per latest data available by 9M-2011, oil and gas revenues of Oman reached OMR6.3bn and make up 76.8% of the total government revenues, proving the domination of hydrocarbon sector on the economy. Oman Oil Sector Crude Oil Production ('000 bpd) Growth (%) -0.5% -4.6% -3.7% 5.5% 7.8% 6.4% 2.6% Oil Exports ('000 bpd) Omani Blend (USD/bbl Source: Ministry Of National Economy Oman blend prices started the 2010 year at a price of USD73.4/bbl while averaging USD56.6/bbl throughout As economic indicators proved to become better oil prices followed and Omani blend reached a year high of USD83.7/bbl on June Prices fell after and ended the year at USD80.5/bbl, however averaging USD76.6/bbl throughout 2010, thus registering oil price growth of USD35.5% in The trend continued in 2011 and the Omani blend averaged around USD106.3/bbl as the Arab spring and Libya supply distribution increased premiums of oil prices. Omani Blend Omani Blend (USD/bbl) Source: Central Bank of Oman Oman oil production in 2010 reached 864,600bpd, an increase of 6.4% from the previous year. On a CAGR basis oil production has been increasing 2.1% during the period Seven years prior to 2008, oil production was decreasing in Oman, production decreased 4.6% in 2006 and 3.7% in To counter the decrease Oman developed the enhanced oil recovery technique (EOR) that increase the amount of oil extracted from a field. EOR resulted in a huge technological gain for Oman and it started to bear fruits. In 2008 oil production increased 5.5% and 7.8% in Since then Omani government is focusing on adding more value to its oil sector by utilizing hydrocarbon resources for value added chemical and energy industries in addition to investing in R&D to enhance oil production efficiently. January

10 Production and Export 1, % 8.0% 6.0% 4.0% 2.0% 0.0% -2.0% -4.0% -6.0% Crude Oil Production ('000 b/d) Oil Exports ('000 b/d) Growth (%) Source: Ministry of Oil & Gas, Ministry of National Economy Oman oil and gas sector is controlled by the government of Oman through two strategic companies, Oman Oil (OO) and Petroleum Development Oman (PDO). PDO is Oman s main exploration and production company, which accounts for more than 70% of the oil production, and most of it natural gas. Oman Oil is a commercial company that is fully owned by the government of Oman. It lays its focus on energy investments to enhance the energy sector of Oman, diversify the Oman economy, create jobs and generate revenues to the government. By 2010, 8 oil producing companies operate in Oman, including Occidental Petroleum. By 2010, PDO produced 553,000bbl/day as compared to 552,000bbl/day in 2009, a mere 0.2% increase. The mere increase in production was due to the delay in a major Harweel 2AB oilfield which streamed mid PDO managed to increase production through its new oil wells, better reservoir management. However, the major increase in Oman oil production is through Occidental Mukhainza oil field which witnessed production increase of 52.4% in 2010 to reach 99,200bbl/day. During the same year, Ministry of Oil in Oman discovered 93mn bbl of oil in new field discoveries. Oil Exports Oil exports reached 718,400/bpd a decrease of 2.4% on a YoY basis. 93.2% of total oil exports in 2010 were shipped to East Asian countries. China holds the largest share of 40.9% of Omani oil exports reaching 304,932/bpd. Japan followed with a 13.9% share of Omani oil exports reaching 103,836/bpd. India became a major oil trade partner with Oman since Oil exports to India increased 768.8% from exporting 8,767/bpd in 2008 to 103,014/bpd in Omani Oil Exports Malasiya 0.7% Taiwan 7.1% 2009 Singapore 1.7% Japan 16.6% Others 0.9% Singapore 3.8% Malasiya Taiwan 0.0% 4.4% 2010 Others 3.6% Japan 13.9% Korea 6.1% China 31.7% USA 6.0% India 11.5% Korea 10.3% Thailand 13.4% China 40.9% Thailand 10.6% India 13.8% USA 2.8% Source: Ministry of Oil & Gas, Ministry of National Economy January

11 Oman is focusing thoroughly to develop its oil and gas sector. In 2010 it initiated several projects including using Polymer injection field at Marmul field to add 10,000bpd, in addition to steam injection at Amal field to increase production costing USD1.4bn and expected to be completed Currently Oman has projects in the oil and gas sector valued at USD23.5bn, including its mega project Duqm Refinery and Petrochemical Complex valued at USD13bn. Natural Gas There are more than 18 gas companies developing the gas sector in Oman. Discovering new fields and boosting production is a major goal for the Omani government to fulfill its Oman Vision 2020, which seeks transformation of Oman s economy through diversification and aims to increase natural gas to above 10%. Currently natural gas sector make a 4.1% share of the total GDP in 2010 reaching OMR912mn, up 29% from Notably, natural gas as revenues accounted for 11.7% of the total government revenues in 2010 amounting to OMR929.9mn, a 27.1% increase from the previous year. As of 2010, Oman has natural gas proven reserves of 24.4tcf, a 0.4% share of the total world reserves. During the same period Oman produced 91.1MNCM of natural gas, up 7.2% from the previous year, of which 18.5% is associated gas. On a CAGR basis natural gas production increased 5.0% during the period Natural Gas Production 1,400,000 1,200,000 1,000, , , , , ,200,000 1,000, , , , ,000 - Production (TCF) Associated Non-Associated Source: Ministry of Oil & Gas, Ministry of National Economy During 2010, 225.9mcf of natural gas was used for power generations including electricity. 21.4mcf are used for industrial area, and the largest chunk of natural gas uses is for industrial projects which consumed 673.4mcf. Finally oil fields used 256.1mcf of natural gas. Natural Gas Uses in Oman Million Cubic Feet Uses 1,068,632 1,097,031 1,176,791 Power Generation 192, , ,953 Industrial Areas 19,444 21,318 21,406 Industrial Projects 571, , ,384 Oil Fields 285, , ,048 Fuel 67,302 78,834 78,312 Re-Injection 102,158 92,942 95,134 Flared 49,602 50,824 45,694 Other 66,025 13,097 36,908 Source: Ministry of National Economy January

12 Oman is engaged strongly in LNG exports, dominated by the Oman LNG Company and Qalhat LNG Company. Oman managed to export around OMR1,176.2mn of LNG in 2010, up 21.3%. Oman LNG managed to export 8.9mn metric tons and Qalhat LNG exported 3.3mn metric tons. Demand in 2010 outpaced supply, which induced Oman to import 5.1MNCM per day from Dolphin Energy. As Oman diversifies its economy natural gas need is getting bigger, and the government is pursuing new energy projects as power consumption reaches all time high gross production of 19,844Gw/H and is estimated to be increasing 8% per annum. The year 2010 was a year to remember for the gas industry in Oman. It made several important gas discoveries, including Burhaan West field which contributed to 1.5MNCM/day of natural gas, the development of Kauther gas plant which boosted production 7% to 95,000bpd and the Saih Rawl Central Processing which lead to a 20% increase in LPG output. On the expertise side, PDO is believed to have drilled the deepest well in the Middleast region reaching 7,000m in search for deep gas. Finally PDO have discovered a huge oil and gas field which has a potential of 800mn/boe. January

13 Public Finance Oman s 2010 budget witnessed a significant turnaround due to positive oil prices which reduced its budget deficit from OMR680.3mn in 2009 to OMR48.8mn deficit in There was a 17.3% increase in revenues as oil and gas revenues increased 21.8% and 27.2% respectively in Oil revenues reached OMR5.4bn as compared to OMR4.5bn enjoyed in On the other hand gas revenues increased 27.2% to reach OMR929.9mn due to higher natural gas production which increased 7% during the period. On the other hand, other revenues which include tax and non tax revenues declined 4.1% to reach OMR1.5bn. Meanwhile, expenditures witnessed a average 7.2% increase to reach OMR7.9bn in 2010, as current expenditures was boosted 13.6% to OMR7.8bn. Investment expenditures increased 2.2% to reach OMR2.6bn. State Budget (OMRmn) * 2011E Revenues 4, , , , , ,280.0 Net Oil Revenues 3, , , , , ,956.0 Gas Revenues Other Revenues 1, , , , , ,404.0 Expenditures 4, , , , , ,130.0 Current Expenditures 3, , , , , ,760.0 Defense & National Security 1, , , , , ,650.0 Civil Ministries 1, , , , , ,730.0 Interest on Loans Gas Production Expenditures Oil Production Expenditures Investment Expenditures 1, , , , , ,532.0 Development Expenditure for Civil Ministries , , , ,200.0 Capital expenditure for Civil Ministries Oil Production Expenditures Gas Production Expenditures Participation & Subsidy to Private Sector Fiscal Surplus (+) / Deficit (-) (680.3) (48.8) (850.0) Financing (43.8) (40.2) (78.4) Grants (Net) (36.8) 4.6 (20.3) 21.3 (24.7) - Drawing from Reserves Net Loans Received Development Bonds (Net) (80.0) (130.0) (80.0) (100.0) Surplus Balance Transferred from Previous Years Net Change in Govt. Accounts (122.5) (18.0) (40.1) - (57.8) - Source: Ministry of National Economy, Central Bank of Oman *Provisional, E-Estimated Budget Revenues grew at a CAGR of 8% during the period , accompanied by higher oil prices witnessed during the five year period which are well above the assumed oil prices for the budget and actual price. Importantly, oil and gas revenues dominate the state revenues, acquiring a share of 80.8% in 2010 and an average of 77.9% during the period Deficits for 2010 have been easily financed by the government without drawing from reserves, as compared to 2009 which were drawn from the government reserves. Non-oil revenue has been witnessing a continuous decrease since 2006, which reached 18.5% in Non oil revenues include tax and non tax revenues. Tax and non tax revenues has been increasing 8.1% on a CAGR basis during the period showing the efforts of Oman to diversify the economy. Tax revenues which are comprised of income tax on companies and establishments, company January

14 participation in technical/training projects, fees & licenses, and custom duties reached OMR707.6mn as of yearend 2010 which is a decline of 7.1% from Income tax on companies and establishment make up 38.5% share of the tax revenues, reaching in 2010 OMR272.6mn and growing 33.7% on a CAGR basis during the period Other tax revenues including company participation, fees, and custom duty make up a 17.1%, 17.6% and 25.4% respectively of the tax revenues. Tax Revenues * Licenses Fees on Communicati on Services 3% Company Participatiom in Technical/Tr aining Projects. 13% Fees on Licenses & Others 14% Custom Duties 21% Income Tax on Companies & Establishme nts 49% Licenses Fees on Communicatio n Services 1% Custom Duties 25% Fees on Licenses & Others 18% Company Participatiom in Technical/Trai ning Projects. 17% Income Tax on Companies & Establishment s 39% Source : Ministry of National Economy and Central Bank of Oman * Provisional Data, ** Company Participation in Technical/Training Projects Tax revenues by category revealed that the two categories of Income tax on Companies & Establishments and Custom Duties accounted for more than 65% of tax revenues during 2009, and recorded a 64% in Custom duties revenues continued to report double digit growth rate for the sixth consecutive year standing at OMR179.6mn, a 13.6% increase from The second largest contributor of revenues, fees on licenses and others reported a turnaround in revenue and grew by 12.0% standing at OMR124.4mn. Non-tax revenues on the other hand witnessed a 3.5% increase in 2010 after reporting a 15% decrease in Revenues reached OMR756.6mn. The mere increase is mainly attributed for a 56.7% increase in interest on bank deposits and lending, 9% in water revenues, and a 13% increase in other income. Income from government grants is the largest contributor of non tax revenues, acquiring a 50.2% share. Income from government grants reached OMR379.9mn in 2010, increasing 0.3% from 2010 and 0.7% on a CAGR basis from Non-Tax Revenues Interest on Bank Deposits & Lending 2.4% Others 24.7% % Postal Revenues 0.5% Water Revenues 7.3% Income from Government Investments 51.8% Airport Revenues Port Revenues 0.1% Public Communicati on Services Toll 4.9% Surplus from Public Authorities 3.4% Rent from Government Real Estate 1.1% Interest on Bank Deposits & Lending 3.7% Others 27.0% 2010* Postal Revenues 0.1% Water Revenues 7.7% Income from Government Investments 50.2% Airport Revenues 4.0% Public Communicati Port on Services Revenues 0.0% Toll 5.0% Surplus from Public Authorities 1.2% Rent from Government Real Estate 1.1% Source : Ministry of National Economy and Central Bank of Oman January

15 Hydrocarbon revenue/total revenue share have increased from 77.1% in 2006 budget to 80.8% in 2010 budget. However, Non oil revenues/total revenues have decreased from 22.9% in 2006 budget to 18.5% in 2010 budget. Oil prices are expected to increase in the future, this will help lift total revenues and diversification plans will help increase non oil revenues. Non-Tax Revenues Interest on Bank Deposits & Lending 2.4% Others 24.7% % Postal Revenues 0.5% Water Revenues 7.3% Income from Government Investments 51.8% Airport Revenues Port Revenues 0.1% Public Communicati on Services Toll 4.9% Surplus from Public Authorities 3.4% Rent from Government Real Estate 1.1% Interest on Bank Deposits & Lending 3.7% Others 27.0% 2010* Postal Revenues 0.1% Water Revenues 7.7% Income from Government Investments 50.2% Airport Revenues 4.0% Public Communicati Port on Services Revenues 0.0% Toll 5.0% Surplus from Public Authorities 1.2% Rent from Government Real Estate 1.1% Source : Ministry of National Economy and Central Bank of Oman * Provisional Data Expenditures Expenditures in Oman increased 7.2% during 2010 reaching OMR7.9bn. The increase is ignited by a 13.6% increase in current expenditures. Current expenditures witnessed an increase of 13.6% in 2010 making up 60.2% of the total expenditures reaching OMR4.7bn. Current expenditures include defense & national security, civil ministries, gas production, oil production and interest on loans. Spending on civil ministries makes up more than 50% of the current expenditures. Currently it makes up 54.5% share of current expenditures. On a YoY basis, civil ministries spending amplified 17.9% to reach OMR2.6bn while growing at a CAGR of 9.5% during the period Most of the civil ministry s spending is directed to salaries and allowances. Salaries make up 31.8% of the civil ministries expenditures in 2010, down from 35.2% in Salaries are 10.5% of the total government expenditures. On a YoY basis, salaries increased 6.7% while growing at a CAGR of 12.6% during the period The average salaries& wages share of total expenditures for Oman has been around 10.4% during Oman Expenditures (OMRmn) * 2011E Expenditures 4, , , , , ,130.0 Current Expenditures 3, , , , , ,760.0 Defense & National Security 1, , , , , ,650.0 Civil Ministries 1, , , , , ,730.0 Interest on Loans Gas Production Expenditures Oil Production Expenditures Investment Expenditures 1, , , , , ,532.0 Development Expenditure for Civil Ministries , , , ,200.0 Capital expenditure for Civil Ministries Oil Production Expenditures Gas Production Expenditures Participation & Subsidy to Private Sector Source: Ministry of National Economy, Central Bank of Oman *Provisional, E-Estimated Budget January

16 Defense & national security expenditures, the second largest segment of expenditures reached OMR1.8bn in 2010, a 9.4% increase from the previous year. Together, defense & national security and civil ministry expenditures makes up 93.9% of the current expenditures and 56.5% of the total expenditures. Gas production expenditures witnessed an increase among other current expenditures; it increased 4.2% in 2010 to reach OMR75.2mn. On a CAGR basis, it increased 10.1% during the period Current expenditures grew at a CAGR basis of 6.2% during the past five years. Capital or investment expenditure on the other hand, has been growing at a CAGR basis of 16.6% during the period as compared to current expenditure growth of 7.9% during the same period. However in 2010, capital investments decreased 3.5% to OMR2.6bn due to decreasing oil and gas spending. Oil spending decreased 11.9% to reach OMR613.5mn, while gas spending decreased 20.4% to reach OMR287.3mn in The decline in spending on hydrocarbon sector occurred after 5 years of increasing spending on the sector. In addition, spending was cut due to the Omani strategy to branch out new sector to face pressure from declining oil prices. Oman is putting efforts to direct significant resources to long term investments in infrastructure and developmental projects. Expenditure by Type 80.0% 70.0% 60.0% 50.0% 40.0% 30.0% 20.0% 10.0% 0.0% Current Expenditure Investment Expenditure Source: Central Bank of Oman Investment expenditures share of total expenditure has been increasing throughout the past five years, it was measured at 28.4% in 2006 before jumping to 32.6% in Of the capital expenditures, development expenditure for civil ministries witnessed 33.8% in 2009 to reach OMR1.6bn, in addition it makes up a 49.5% shares of the total investment expenditures. Oil and gas production expenditures increased 1.1% as oil expenditures increased 7.2% while gas expenditures decreased 9%. On a CAGR basis hydrocarbon production expenditures increased 25.9% during the period Investment Expenditures Gas Production Expenditur es 13% 2009 Gas Production Expenditures 11% 2010* Capital expenditur e for Civil Ministries 2% Oil Production Expenditur es 26% Developme nt Expenditur e for Civil Ministries 59% Capital expenditure for Civil Ministries 2% Oil Production Expenditures 24% Developmen t Expenditure for Civil Ministries 63% Source: Central Bank of Oman January

17 Oman Government Debt Oman s accumulation of surpluses ended in 2008, since then Oman reported two consecutive years of deficits. In 2010, deficit reached OMR48.8mn. Since 2008 Oman accumulated more public debt. Public debt increased 4.1% in 2009 and 14.1% in 2010 to OMR1.1bn.Oman managed to maintain debt to GDP levels at an average of 5.8% during period. In 2010, debt to GDP decreased to 5.1% as compared to 5.6% the previous year. Debt to GDP 1, , , , * Public Debt (OMRmn) Debt to GDP % 9.0% 8.0% 7.0% 6.0% 5.0% 4.0% 3.0% 2.0% 1.0% 0.0% Source: Central Bank of Oman However, public debt continued to be maintained over the past five years to report a CAGR of 0.2% increase over the period. Public debt inclined from OMR1.12bn in 2006 to OMR1.13bn in Consequently, principal repayments increased from OMR105.6mn in 2006 to OMR169mn in 2010 reporting a increasing CAGR of 12.5%. Government Debt Indicators (OMRmn) * Stock of Debt 1, , , ,136.2 Principal Repayments Interest Payments Debt Indicators** Debt to GDP Ratio % 8.0% 6.2% 4.2% 5.6% 5.1% Debt Services Ratio %*** 0.6% 2.2% 1.1% 0.8% 0.5% Source: Ministry of National Economy, Central Bank of Oman *Provisional The debt to GDP ratio decrease was also attributed to the 23.4% increase in nominal GDP. January

18 2011 Budget Oman budget of 2011 is laid out in accordance with the Eighth Five Year Development plan The Eighth five year plan estimates revenues to reach OMR37.5bn during the period , and an average expenditure of OMR42.7bn during the same period. During the period Oman expects to record a real GDP to grow 5% and nominal GDP of 6% in addition to target inflation rate of 4%. The 2011 budget estimated to report OMR850mn of deficit as compared with OMR48.8mn of estimated deficit last year. Oman aims to counter the slow cycle through increasing government expenditure on major development projects on the health, education and hydrocarbon sector aiming at diversifying the economy even if this would result in deficit. The 2011 budget is computed on an average oil price of USD58/bbl Budget (OMRmn) 2010* 2011E % Change Revenues 7, , % Net Oil Revenues 5, , % Gas Revenues % Other Revenues 1, , % Expenditures 7, , % Current Expenditures 4, , % Defense & National Security 1, , % Civil Ministries 2, , % Interest on Loans % Gas Production Expenditures % Oil Production Expenditures % Investment Expenditures 2, , % Development Expenditure for Civil Ministries 1, , % Capital expenditure for Civil Ministries % Oil Production Expenditures % Gas Production Expenditures % Participation & Subsidy to Private Sector % Fiscal Surplus (+) / Deficit (-) (48.8) (850.0) % Financing % Grants (Net) (24.7) - NM Drawing from Reserves NM Net Loans Received % Development Bonds (Net) % Surplus Balance Transferred from Previous Years - - NM Net Change in Govt. Accounts (57.8) - NM Source: Central Bank of Oman *Provisional, E-Estimated Total revenues are estimated at OMR7.2bn, around 8% down from OMR7.9bn provisional figures in 2010 budget. The majority of Omani estimated revenues for 2011 were on account of oil and gas revenues, accounting for around 80.9% of total 2011 revenues. The oil revenues for 2011 are estimated at OMR4.9bn, a decrease of 9.4% from OMR5.5bn provisional figures for The decrease is due to the conservative policy Omani government has been implementing, assuming a average oil price of USD58/bbl. Gas revenues are set to report 1.1% decline for 2011 with its estimated budget at OMR946mn. As for non-oil revenues for 2011, they are budgeted at OMR1.4bn, up 10% the budget estimate for 2010 and 4.1% below the provisional figures for 2010 budget. January

19 Total expenditures for 2011 were estimated at OMR8.1bn, up 12% from the budget expenditure for About 19.8% of the budgeted expenditure is allocated to the oil and gas sector reaching OMR1.6bn. The budget allocated will be contributed to subsidies on electricity sector and provide capital for companies. Following it are the education and health-care sector as they account for 11.4% and 4.1% respectively of the total expenditure for 2011 budget. 9M-2011 As per recent data released, 9M-2011 budget witnessed a growth of 44.3% in net revenues reaching OMR8.3bn as compared to OMR5.7bn enjoyed during the same period a year ago. The increase is attributed to a 62.7% and 19.1% increase in oil & gas revenues respectively. Oil revenues reached OMR6.4bn while gas revenues reached OMR806.5mn. The increase in hydrocarbon revenues was accompanied by the rise in Omani Blend increasing 41.3% during the period 9M-2011 as compared to 9M Other revenues decreased 3.4% reaching OMR1.1bn as compared to OMR1.2bn. On the other hand, expenditures during the 9M-2010 witnessed a 25.8% increase to reach OMR7.4Bn. Expenditure on defense & national security witnessed a 19.5% increase to reach OMR1.5bn while expenditure on civil ministries increased 21.5% to reach OMR1.9bn. Oil and gas expenditure recorded single digit growth, up by 9% and 3.9% respectively. 9M-2011 Budget Update (OMRmn) 9M- 2010* 9M- 2011* % Change Revenues 5, , % Net Oil Revenues 3, , % Gas Revenues % Other Revenues 1, , % Expenditures 5, , % Current Expenditures 3, , % Defense & National Security 1, , % Civil Ministries 1, , % Interest on Loans % Gas Production Expenditures % Oil Production Expenditures % Investment Expenditures 1, , % Civil Ministries 1, , % Oil Production Expenditures % Gas Production Expenditures % Participation & Subsidy to Private Sector % Actual Expenses Under Settlement , % Fiscal Surplus (+) / Deficit (-) (111.6) N/M Source: Central Bank of Oman *Provisional January

20 2012 Budget The government ratified the new budget for 2012 which is the second year of the Eighth Five-Year Development Plan ( ). The budget was issued with a historical level of expenditures at OMR10.0bn. The new budget was prepared after the backdrop of global financial crisis and after the Arab Spring movement in Bearing this in mind, the government continued its expansionary fiscal policy aiming to support the economic growth. According to announced figures, the new budget reports OMR1,200mn of deficit as compared with last year s historical budgeted deficit of OMR850.0mn. The government continued to support its views on the importance to counter ignite the growth cycle through increasing government expenditure on major development projects aiming at diversifying the economy even if this would result in deficit and enhancing the labor market through the creation of 36,000 in the public sector and military, and new employments in government companies reaching 2,000. Omani Budget (OMRmn) Revenues 6, , ,800.0 Net Oil Revenues 4, , ,100.0 Gas Revenues ,100.0 Other Revenues 1, , ,600.0 Expenditure 7, , ,000.0 Education ,300.0 Healthcare Military 1, , ,565.0 Oil & Gas 1, , ,300.0 Housing Civil Ministries , ,034.0 Subsidies 1, , ,431.0 Surplus/Deficit (800.0) (851.0) (1,200.0) Source: Ministry of Finance Total revenues are estimated at OMR8.8bn, around 20.8% up from OMR7.3bn estimated in 2011 budget. As usual, the majority of Omani estimated revenues for 2012 were on account of oil and gas revenues which will comprise around 81.8% of total revenues. The oil revenues for 2012 are estimated at OMR6.1bn, an increase of 23.2% from OMR4.9bn estimated for 2011 budget. Such increase is due to major assumption for the current budget where oil price is set at USD75/bbl as compared to USD58/bbl assumed last year. Similarly, gas revenues are set to report 16.3% of growth for 2012 estimated at a new billion threshold, OMR1.1bn. As for non-oil revenues for 2012, they are estimated at OMR1.6bn, up 15.7% from OMR1.4bn budgeted for Total expenditures for 2012 are estimated at OMR10.0bn, up 23% from OMR8.1bn estimated for The increase in total expenditure is traced back to current expenditures estimated to increase by rate of 62% in 2012 as compared to a decline of 13.8% in investment expenditures. As a result current and investment will maintain the same average shares in total expenditures as last year accounting for 64% and 36% respectively. Under current expenditures, the budgets for civil ministries and defense & national security continued to represent the largest shares of 30.3% and 15.6% respectively. Civil ministries expenses are estimated to increase by another 153% over 2011 budgeted level. Defense and national securities expenses are estimated to increase merely by 5.2%. As for investment expenditures, they are estimated to decline by 13.8% as compared with 20.7% of growth budgeted for Thus investment expenditures are estimated at OMR3.6bn for 2012 as compared with OMR4.1bn budgeted for Generally, the decreased investment expenditure is due to the 20% decrease in oil and gas sector and a 17% decline in subsidies. As per the Ministry of Economy, Oman is allocating around OMR1.8bn for new projects during 2012 with the aim of creating 36,000 jobs for Omani nationals. Such projects include construction of a number of new roads, construction of 29 schools, building 5 new hospitals, establishments of fishing harbors and construction of centralized markets. January

21 Balance of Payments Current account balance returned to surplus after reporting its first preliminary deficit over the five year period in Current account surplus reached OMR1,960mn in 2010 as compared to a deficit of OMR230mn suffered in Goods balance was the major contributor to the overall surplus in 2010, goods increased 61.4% to reach OMR7,200mn backed by a 42.6% increase in oil exports. Oil exports contributed to 61% of the total exports. In addition natural gas exports and other exports contributed strongly to the increase in Oman s good exports, increasing 21.2% and 32.4% respectively in 2010 after witnessing declining growth in 2009 due to the credit crisis. Imports, reached OMR6,873mn in 2010, up 11.4% in On the other hand, services balance, income balance and transfers balances continued to account negatively over the whole period. As for services balance, Oman continued to be a net debtor of services reporting OMR1,833mn of deficit. Similarly, income balance and current transfers balance reported OMR1,214mn and OMR2,193mn of deficit respectively by the end of The current account surplus for the full year 2010 may stand the second highest in the last decade. Rise in energy prices over 2010, can be explained as one of the major reasons behind the rise in the surplus. It should be noted that hydrocarbon sector constitute 69% of total exports as of Current Account to GDP Ratio 25,000 20,000 15,000 10,000 5,000 - (5,000) * 18.0% 16.0% 14.0% 12.0% 10.0% 8.0% 6.0% 4.0% 2.0% 0.0% -2.0% -4.0% Current Account Balance (OMRmn) Current Account as % of GDP Nominal GDP (OMRmn) Source: Central Bank of Oman *Provisional The current account to GDP ratio, which saw it s lowest in 2009 (-1.3%), jumped to 8.8% in This is still below the high of 16.8% seen by the country in 2005 January

22 Balance of Payments (OMRmn) * A. Current Account 1,991 2, ,931 (230) 1, Goods 4,100 4,501 3,979 6,541 4,460 7,200 Exports (F.O.B) 7,187 8,300 9,494 14,503 10,632 14,073 Oil 5,160 5,576 6,020 9,423 5,978 8,527 Natural Gas 888 1,145 1,180 1, ,176 Other Exports ,291 1,963 1,849 2,448 Re-Exports ,003 1,516 1,835 1,922 Imports (F.O.B) (3,087) (3,799) (5,515) (7,962) (6,172) (6,873) 2. Services (848) (994) (1,311) (1,557) (1,486) (1,833) Services (Credit) Travel Transportation Insurance Communication Other services Services (Debit) (1,209) (1,499) (1,959) (2,261) (2,109) (2,510) Travel (257) (274) (289) (329) (346) (386) Transportation (404) (476) (663) (978) (806) (1,025) Insurance (109) (128) (216) (227) (240) (275) Communication (16) (17) (18) (21) (17) (14) Other Services (423) (604) (773) (706) (700) (810) Balance on Goods & Services 3,252 3,507 2,668 4,984 2,974 5, Income (393) (256) (309) (1,061) (1,160) (1,214) Income (Credit) Compensation of Employees Other Investment Income Income (Debit) (687) (926) (1,140) (1,483) (1,411) (1,455) Direct Investment Income (588) (776) (902) (1,286) (1,190) (1,225) Other Investment Income (99) (150) (238) (197) (221) (230) Balance on Goods & Services & Income 2,859 3,251 2,359 3,923 1,814 4, Current Transfers (868) (1,072) (1,411) (1,992) (2,044) (2,193) Current Transfers (Credit) Current Transfers (Debit) (868) (1,072) (1,411) (1,992) (2,044) (2,193) Worker Remittances (868) (1,072) (1,411) (1,992) (2,044) (2,193) Capital & Financial Account (584) (1,209) 1,387 (1,482) 948 (938) Capital Account (6.0) (37.0) (20.0) 21.0 (25.0) Financial Account (578.0) (1,172.0) 1,069.0 (1,462.0) (913.0) Net Errors & Omissions (330.0) (121.0) (421.0) (448.0) Overall Balance 1, , Reserves assets (1,077.0) (849.0) (2,404.0) (702.0) (297.0) (574.0) Central Bank (330.0) (224.0) (1,710.0) (765.0) (168.0) (339.0) Government Reserves (747.0) (625.0) (694.0) 63.0 (129.0) (235.0) Source: Central Bank of Oman *Preliminary January