December 215 A&T Bank View: We expect Omani economy to grow by 4.4% and 2.8% in 215 and 216 respectively. The growth of Oman's economy will slow over 216 as falling oil production and prices begin to have a larger impact on the oil-dependent economic activity. Current decline in oil prices could hit fiscal budget further thus forcing the government to cut spending on investment projects. Further decline in oil prices would bring a turnaround in fiscal and current account surpluses and lead to deficits in both external and fiscal sectors. Oman, together with Bahrain is the most exposed country to shocks in oil prices among other GCC countries, due to their lower level of fiscal buffers and higher level of breakeven price. However, Omani economy would likely to continue growing with the help of non-oil sectors as the country aims to diversify economy from oil dependency and increase investments in non-oil sectors. Oman Vision 22 is also encouraging the establishment of an effective and competitive private sector and providing appropriate conditions for the realization of economic diversification. The numerical objective of the Oman Vision 22 is to increase the share of non-oil sector to 15% of GDP. The other targets are reducing the share of oil in GDP to 9% in 22 and raising the share of gas to 1%. According to our core view, the medium-term outlook is expected to depend on the government s ability diversify economy from oil dependency and create self-sustaining industries. We expect the government to continue investing in non-oil sector projects. If the government cuts spending and capital expenditures in order to balance the budget, it would dampen business and consumer confidence and cause economic activity to slow down, as the country needs to compensate the losses it has been facing, with non-oil sector production. Infrastructure and construction sectors together with services such as tourism and banking sectors would likely to be main triggers of the economic activity instead of oil in the medium term. Figure 1: A&T Bank Forecasts Indicator Name 212 213 214 215f 216f Nominal GDP, USD bn 75,43 77, 77,78 6,18 6,63 Real GDP growth, % y-o-y 5,8 4,7 2,9 4,4 2,8 Consumer price inflation, % y-o-y, ave 2,9 1,2 1,4 2 Current account balance, % of GDP 1,3 6,6 2-16,9-24,3 Budget balance, % of GDP -,3,9-3,4-16,6-16,6 Reserves in months of imports 5, 4,6 5,1 5,1 4,8 Figure 2: Upside and Downside Risks to Forecast UPSIDE DOWNSIDE Polit. / Soc Economic Political / Social Economic High standards of living, maintaining support for the sultan Sound banking system, open to foreign investment Implementation of public investment program to boost growth and diversify economy Growth in tourism and banking industries Transparent legal system and relatively low bureaucracy Economic diversification efforts Like other regimes in Gulf, authoritarian political system Persistent unemployment Being target for international militants Curbing oil production, weighing down GDP growth A sustained decline in oil prices Further deterioration of fiscal and current account balance, causing official reserves to deplete Demand for gas, keeping ties with global energy markets and volatility in prices Government dependence in investment projects Political developments in Middle East, damaging the potential to derail growth in tourism 1
Macroeconomic Dynamics Oman economy has grown robustly in recent years, thanks to oil production, but is projected to moderate over the medium term. We expect Oman economy to grow by 4.4% and 2.8% in 215 and 216 respectively. The non-oil sectors, supported by government investment projects, are expected to support growth while oil dependent sectors would likely to slow down as crude oil production levels off and starts declining and oil prices fall. Oman economy has taken advantage of oil production and high oil prices, which in turn supported economic activity. However, with oil production would likely to pick up in near future and decline afterwards, we expect oil sector not to be the main driver of the economy anymore. Omani authorities had seen the downward trend and started diversification efforts before oil prices recent decline and we see that as an advantage for the country. The government is expected to continue supporting economic activity by increasing investment in non-oil sectors especially in infrastructure sector despite falling oil revenues. Diversification would be the key priority for the government in order to erase the negative effects of oil dependent sectors. The weight of the economy would be shifted towards non-oil sectors, with infrastructure and construction sectors being main drivers. Petrochemicals, cement production and aluminum smelting are also other key sectors. However, since most of those sectors need government support and are export oriented, the sustainability of the activity would remain a key challenge. The main risk for state-led projects is that current decline in oil prices could hit fiscal budget further thus forcing the government to cut spending on investment projects. Services, such as banking and tourism are other sectors for which the government targets to increase the share among the economic activity. The investment in tourism and banking sectors would bring construction needs in turn and support other segments of the economy too. Furthermore, the government s commitment to increase the proportion of Omani nationals employed in private sector would be targeted especially towards services sectors. Combined with the good prospect for growth in the tourism industry, we see that part of economy as promising. We expect private consumption as one of the main triggers for the medium/ longer-term growth, combined with and supported by fixed investment. Rising disposable incomes, strong population growth and higher consumer confidence would likely to bolster consumption. Moreover, low level of inflation is another factor that would support consumption in the medium term. Figure 3: Components of GDP (214) & Real GDP Growth 8, 6, 16% 32% Private final consumption, % of GDP Government final consumption, % of GDP 7, 6, 5, 4, 4,4 5,5 5, 4,5 4, 3, 3,5 3% 22% Fixed capital formation, % of GDP Net exports of goods and services, % of GDP 2, 1,, 2,9 212 213 214f 215f 3, 2,5 2, Nominal GDP, USDbn Real GDP growth, % y-o-y, rhs Source: A&T Bank Research, BMI, IMF 2
Bahrain Egypt Iraq Jordan Kuwait Lebanon Morocco Oman Qatar Tunisia UAE Oman Outlook Policy Implications & Business Environment Lower oil prices that fell below country s breakeven level for fiscal budget, has been hitting fiscal and current account balances. Oman, together with Bahrain is the most exposed country to shocks in oil prices among other GCC countries, due to their lower level of fiscal buffers and higher level of breakeven price. Omani fiscal budget had been already under pressure due to high level of spending for subsidies, government support and public wage bill, which had been financed by higher oil revenues. According to National Center for Statistics and Information latest release, the State Public Revenues decreased by 46.4% during Q2 215 to reach RO 2.1 billion compared to RO.4 billion during Q2 214. This decline was attributed to the decrease of net oil revenue by 56.4%, Corporate Income Tax by 34.6%, other revenues by 28.8%, Gas Revenues by 22.3%, Capital Revenues by 12.8%, while Custom duties increased by 22.9% during Q2 215 compared to the corresponding quarter of the previous year. Public Expenditure dropped by 6.7% during Q2 215 compared to the same quarter of 214 to reach RO.3.4 billion compared to RO. 3.6 billion in Q2 214. This decrease was attributed to the drop in Contributions and Support by 2.9%, Investment Expenditure by 12.6% and Current Expenditure by 1.5% during the period under reference. However, although the country s revenues have been declining with decreasing oil receipt, the country would not choose to cut spending immediately. The adopted modest measures for the fiscal restriction is, introduction of new landing charges at all Omani airports, and a hike to natural gas tariffs for industrial users. This while it needs to diversify economic activity from oil dependency. Therefore, Oman would likely to focus on the state-led developments in non-oil segments with making investment plans especially in infrastructure segments in order not to undermine business and consumer confidence during a period in which oil dependent economies suffer. However, the government might be cautious about the amount and pace of the investment. Finally, we believe it would be difficult to cut spending for public sector wage bills and subsidies due to political considerations for the government. As budget balance turned to deficit in 214 and realized as -3,4%, we expect further deficit -16,6% in 215 due to governments inability to cut spending while revenues have been diminishing hurt by falling oil prices. Figure 4: Oman Public Spending Among Other MENA Countries 7 6 MENA-Public Spending as % of GDP (215 IMF estimates) 6 58 54 5 4 3 33 35 29 29 3 36 28 37 2 1 Source: IMF World Economic Outlook, 215 3
The country would likely to rely on its foreign exchange reserves, which covers 5.1 months of imports and is expected to diminish in near future. Another option for the country would be to depend on two sovereign funds, the State General Reserve Fund and Oman Investment Fund. The fiscal deficit, which is expected to turn to deficit, would force the government to find different ways to finance the budget and would throw the capital markets and private sector in the picture. One option would be privatization, which would support private sector. At the start of 215, the government announced that it might sell shares in oil refiner Oman Oil Refineries and Petroleum Industries Co (ORPIC), which runs refineries at Sohar and Muscat, and Abraj Energy Services, an oil exploration and production firm. Another option might be issuing of more government bonds, which in turn help the development of sovereign bond market and encourage private debt issuance. This would likely to increase financing options for Omani companies in a period where corporate lending is expected to increase. The government has already started planning to issue more sovereign bonds in 215. Falling oil prices would likely to cause current account surplus to deteriorate too and turn into deficit in the longer term. We forecast current account deficit to realize as -16,9% and -24,3% in 215 and 216 from 2% current account surplus recorded in 214. This is the result of narrowing trade surplus as we expect exports to slow down due to falling oil production and increasing energy demand of the country while import growth remains strong supported by state-led economic activity. Oil production would likely to be directed to domestic consumption rather than exports in order to meet growing energy needs of the country. Figure 5: Oman Current Account Balance & Central Bank Gross Reserves 18 16 14 12 1 8 6 4 2 13 14,4 14,3 16 16,3 16,7 17 2 1-1 -2 21 211 212 213 214 215f 216f Central Bank gross reserves (USD billion) Current account balance, % of GDP (rhs) -3 Source: IMF World Economic Outlook, 215 The Banking System Omani banks are liquid, well capitalized and profitable with domestic banks dominating other segments of the financial sector. Central Bank of Oman latest economic review report has shown that, as at the end of 214, Oman s banking sector comprised 16 conventional commercial banks of which 7 were locally incorporated and 9 were branches of foreign banks, 2 specialized banks and 2 full-fledged Islamic banks together with 6 local commercial banks operating separate Islamic windows for banking operations. The gross non-performing loans (NPLs) continued to remain low. The gross NPLs as percentage of total credit and net of reserve interest stood at 2.1% with similar ratio prevailing in December 213. The capital adequacy ratio stood at 15.4% of risk-weighted assets in December 214. Consistent with the accommodative monetary policy, the liquidity situation remained robust in the banking system during 214. 4
1.8.214 1.9.214 1.1.214 1.11.214 1.12.214 1.1.215 1.2.215 1.3.215 1.4.215 1.5.215 1.6.215 1.7.215 1.8.215 1.9.215 1.1.215 Oman Outlook Total deposits in commercial banks increased by 6.8% to reach RO. 18.5 billion during the first half of 215 compared to RO. 17.3 billion during the same period of 214. This increase was attributed to the rise of private sector deposits by 7.5%, government sector s deposits (ministries, government corporations and public enterprises) by 6% during the first half of 215 compared to the same period of 214. Total credit (loans) increased by 8.9% during the first half of 215 compared to the corresponding period of 214 to reach RO.17.8 billion compared to RO.16.4 billion during the first half of the previous year. This increase in total credit was attributed to the rise of credit awarded to the government sector (ministries, government corporations and public enterprises) by 1.5% during the first half of 215 compared to the corresponding period of the previous year. Also, the credit provided to the private sector increased by 9.8% to reach RO.15.6 billion during the first half of 215. Consumer loans represented 39 % of total bank credit to sectors during Q2 215 reaching RO.7 billion rising by 9.7% above the level of the corresponding period of 214. Figure 6: Oman Total Credits &Private Sector Deposits (OMR billion) 18,5 18, 17,8 17,9 18, 18,2 18,3 12, 11,8 17,5 17, 16,5 16,3 16,5 16,6 16,8 16,9 16,9 17,1 17,4 17,5 17,4 11,6 11,4 11,2 16, 11, 15,5 1,8 15, 1,6 Total Credits (OMR billion) Private Sector Deposits (OMR billion) Source: Central Bank of Oman, Statistical Bulletin, December 215 We expect lending activity will continue its increasing trend amid increasing demand for credit from the construction, manufacturing and import trade sectors, which accounted for a quarter of total lending. On the other side, the government conservative fiscal policy from 216 and onward could limited the credit growth rates in the coming period. Foreign Trade Omani export basket is not all diversified as approximately 84% of its exports were connected to the fuels and mining products in 214 with the basket of countries that Oman exports is well diversified. The other exported items are organic chemicals, aluminum and articles, plastics, fertilizers and iron and steel. The major export partners were China (43%), UAE (1,3%) and South Korea (8.2%); whereas the three major import partners of Oman were UAE (32.5%), EU (12.7%) and Japan (12.2%). Imports are concentrated in manufacturing industry. Vehicles other than railway, tramway, machinery, nuclear reactors, electrical equipment, mineral fuels, oils, distillation products and iron and steel articles are the main imported products by the Oman. 5
1.6.214 1.7.214 1.8.214 1.9.214 1.1.214 1.11.214 1.12.214 1.1.215 1.2.215 1.3.215 1.4.215 1.5.215 1.6.215 1.7.215 964,5 947,9 945,2 942,5 945,1 956,3 946 889,7 883,1 921,1 988,7 926,8 1.15,5 921,8 1.84,9 992,4 1.193,4 969,4 1.317,6 1.212,3 1.254,1 1.684,6 1.695,8 1.581,5 1.831,8 1.916,8 1.748, 1.58, Oman Outlook Figure 7: Oman Export and Import Partners (214) Import Partners Value (Million Euro) Share (%) Export Partners Value (Million Euro) Share (%) World 21,384 1, World 38,836 1, UAE 6,943 32,5 China 16,78 43, EU 2,714 12,7 UAE 3,984 1,3 Japan 2,612 12,2 South Korea 3,186 8,2 China 1,26 4,8 Taiwan 2,739 7,1 India 924 4,3 Japan 1,522 3,9 USA 923 4,3 Saudi Arabia 1,54 3,9 Saudi Arabia 877 4,1 Thailand 1,29 3,1 Brazil 832 3,9 India 1,182 3, South Korea 783 3,7 Pakistan 1,97 2,8 Thailand 352 1,6 USA 547 1,4 Source: European Commission, Directorate-General for Trade According to National Centre for Statistics and Information latest release, total value of Merchandize Exports decreased by 32.1% at the end of June 215 compared to the corresponding period of the previous year to reach RO.1.1 billion. This decline was attributed to the drop in oil exports value by 39%, re-export value by 32.1% and non-oil exports by 9.8% during the period under reference. Imports value dropped by 1.1% at the end of June 215 compared to the same period of 214 to reach RO.5.5 billion due to the decrease in the value of transport equipment by 24.4% and the value of live animal by 5.5% during the same period. Figure 8: Oman Export and Import Figures 2 18 16 14 12 1 8 6 4 2 Merchandise Imports (OMR million) Merchandise Exports (OMR million) Source: Central Bank of Oman, Statistical Bulletin, December 215 6
1.1.214 1.2.214 1.3.214 1.4.214 1.5.214 1.6.214 1.7.214 1.8.214 1.9.214 1.1.214 1.11.214 1.12.214 1.1.215 1.2.215 1.3.215 1.4.215 1.5.215 1.6.215 1.7.215 1.8.215 1.9.215 1.1.215 Oman Outlook We expect oil production to peak in the medium term and then decline in the longer term with domestic demand for energy continuing to increase, supported by investment projects, causing net energy exports to drop. Furthermore, our core view sees stronger demand for imports in terms of both capital and consumer goods, meaning an unfavorable effect on the net exports. Since Oman would likely to increase its domestic manufacturing capacity and develop its transport and logistics infrastructure, we see an increase in petrochemical and metals exports. After international sanctions were partially removed for Iran, exports to the country has been recovered with stronger Iranian import demand, which is a possible advantage for Omani exports. When we consider Oman s limited domestic production capacity, increasing pace of infrastructure investment seems likely to boost demand for raw material and capital goods demand from outside, leading a rise in imports. Turkey & Oman: Although trade relationships with Turkey have developed in recent years with bilateral trade reached to 52 million dollar in 213, it is still under potential. Oman imports mainly basic metals, machinery and equipment from Turkey while main export items are basic metals and chemicals and chemical products. Trade balance is in favor of Turkey. The latest data from Turkish Statistical Institute has shown that, in the ten month period of 215 (January-October 215) Turkey exports to Tunisia decreased by 32,9% in compared to same period of the previous year and released as USD 284 million. In the same period, Turkey imports from Tunisia decreased by 33,6% and released as USD 56,6 million. Figure 9: Oman-Turkey Foreign Trade Statistics 12 1 8 6 4 2 2 18 16 14 12 1 8 6 4 2 Turkey export to Oman (USD thousand) Turkey import from Oman (USD thousand, rhs) Source: Turkish Statistical Institute 7
Figure 1: Most exported goods & total exports to Turkey Thousand $ 21 211 212 213 214 Manufacture of basic metals 15.376 15.73 4.778 134.713 78.717 Manufacture of chemicals and chemical products 2.36 38.316 41.676 11.869 18.554 Manufacture of rubber and plastics products 1.56 212 2.599 2.519 2.186 Manufacture of textiles 1.979 1.71 1.258 892 1.284 Manufacture of other non-metallic mineral products - 22 486 26 17 Total 39.464 56.558 52.849 15.394 11.364 Figure 11: Most imported goods & total imports from Turkey Thousand $ 21 211 212 213 214 Manufacture of coke, refined petroleum products and nuclear fuel 563 35.83 45.43 94.164 244.552 Manufacture of basic metals 38.657 45.976 66.287 92.21 92.5 Manufacture of electrical machinery and apparatus n.e.c. 16.812 27.662 15.877 3.971 3.637 Manufacture of machinery and equipment n.e.c. 17.916 24.27 24.6 29.558 26.821 Manufacture of food products and beverages 12.765 19.18 17.749 18.42 21.594 Total 129.311 214.651 268.46 373.988 491.49 Source: Turkish Statistical Institute Figure 12 and 13 analyze the recent trends and developments and current opportunities in manufacturing and agricultural sector exports to Oman. The recent trend has shown that, in manufacturing products, construction materials, electrical machinery, white goods and furniture sector and aluminum building materials showing opportunities in Oman market. While in agriculture sector; tomato paste, biscuit and poultry meat sector could increase its export share in the coming period. 8
Figure 12: Trends & opportunities for Turkey s manufacture exports to Oman Sector Potential Items Oman's imports 214 (million dollar) Turkey Export to Oman 214 (million dollar) Turkey's export to Oman (first 9 months of 214, million dollar) Turkey's export to Oman (first 9 months of 215, million dollar) First 5 countries in Oman's imports & their share (%) 214 Pipe and Fittings Pipes and Fittings of Iron and Steel 566,345,87,57 UAE (37) China (26) Saudi Arabia (11), Italy (5) United States (4) Construction Materials Iron & Steel Building Materials 664 1 53,4 78 UAE (64) Turkey (9) Qatar (5) of Saudi Arabia (4) India (3) Automotive and Parts Industry Automotive industry 1122 3,88 2,8 3 Japan (37) UAE (29) USA (5) China (4) Business and mining machinery Construction and Mining Machinery 512 8,7 4,8 4,8 UAE (33) China (19) UK (1), Japan (8) South Korea (5) Pumps and Compressors Pumps and compressors 85,636,36 1,13 UAE (27) USA (15) Italy (14) India (8) Germany (5) Pipe and Fittings Electrical machines and cables Electrical machinery and Cables Fitters plumber wares, valves 281,677,599,846 UAE (29) Italy (15) China (1) India (9) United States (6) Electric transformers, motors and generators 255 7,7 5,9,829 UAE (35) India (14) USA (1), China (9.6), Italy (6.2) Cables and wires 25 17 14,2 8,5 UAE (36) South Korea (14) Saudi Arabia (13) USA (11) India (1) White goods White goods 24 5 3,4 5,1 UAE (32) China (15) Italy (13) Thailand (12), India (5) Furniture Aluminum building materials Electrical machinery and Cables Pipe and Fittings Home textiles Furniture and parts thereof Aluminum parts of structures Electrical switches, fuses Plastic pipe, profile and plastic construction materials Blankets, bed linen, table linen, kitchen cloths 22 5,4 4 7,5 UAE (36) China (24) Malaysia (6), Italy (5.4), Egypt (5) 127,321,276,628 UAE (77), Bahrain (6) Saudi Arabia (6) China (4) United States (1) 86 1,7 1,2 2,1 UAE (58) Germany (9) United Kingdom (5) China (5) USA (4.6) 73 2,8 2 3,1 UAE (35) USA (13) Germany (1) China (6) Italy (5) 53 1,4 1,3,472 UAE (76) China (9) Pakistan (5) India (3) Malaysia (1.4) 9
Figure 13: Trends & opportunities for Turkey s manufacture exports to Oman Sector Potential Items Oman's imports 214 (million dollar) Turkey Export to Oman 214 (million dollar) Turkey's export to Oman (first 9 months of 214, million dollar) Turkey's export to Oman (first 9 months of 215, million dollar) First 5 countries in Oman's imports & their share (%) 214 Vegetable Oils Vegetable and animal oils 244,559,396,452 Indonesia (46), UAE (2) Ukraine (11) Malaysia (1) United States (7) Poultry Meat Poultry Meat 117 1,1,888,729 Brazil (59) UAE (16) USA (1) France (9) Argentina (4) Confectionery and Chocolate Products Confectionery and chocolate products 116 4,2 2,9 2,5 UAE (31) France (18) Italy (15) Switzerland (1) United Kingdom (4) Dairy products Cheese 68,934,684,869 UAE (26) Egypt (24) Saudi Arabia (19) Denmark (14) Germany (3) Fresh Fruits and Vegetables Citrus 46,148,19 UAE (39) Egypt (21), Lebanon (15) South Africa (11) Pakistan (8) Tomato paste Tomato paste 25 8,9,217,718 Turkey (35) China (18) Portugal (15) USA (12) UAE (8) Biscuit Sweet Biscuits 18,42,21,377 UAE (51) UK (11) Italy (8) India (6) Germany (6) Biscuit Waffles 9,3,375 7,9,4 UAE (65) Italy (13) Poland (9) Singapore (5) Turkey (3) Bakery Flour 4,4,3,281 UAE (72) India (21) Cyprus (5) Turkey (1) Source: Republic of Turkey Ministry of Economy. 1
Economic Research Department erd@atbank.com.tr www.atbank.com.tr Ayşe Özden Maral Haçikoğlu Manager Specialist aozden@atbank.com.tr mhacikoglu@atbank.com.tr (212) 373 62 / 1191 (212) 373 62 / 1196 DISCLAIMER: Investment information, comments and recommendations stated here, are not within the scope of investment advisory activity. Investment advisory service is provided in accordance with a contract of engagement on investment advisory concluded between brokerage houses, portfolio management companies, non-deposit banks and clients. Comments and recommendations stated here rely on the individual opinions of the ones providing these comments and recommendations. These opinions may not fit to your financial status, risk and return preferences. For this reason, to make an investment decision by relying solely to this information stated here may not bring about outcomes that fit your expectations. This report has been prepared by A&T Bank Economic Research solely for the information purposes of its readers. While reasonable care has been taken to ensure that the information contained herein is not untrue or misleading at the time of publication, A&T Bank makes no representation that it is accurate or complete. The information contained herein is subject to change without notice. Neither A&T Bank nor any of its officers or employees accepts any liability for any direct or consequential loss arising from any use of this report or its contents. Copyright and database rights protection exists in this report and it may not be reproduced, distributed or published by any person for any purpose without the prior express consent of A&T Bank. All rights are reserved. 11