As is the case with other Gulf countries, Oman’s recent economic growth owes much to an effective mix of hydrocarbons production, government spending and a supportive regulatory environment. Yet, real gross domestic product (GDP) growth in the country is estimated to have fallen to 3.6% in 2014, according to Standard & Poor’s, a drop from previous years when figures regularly exceeded 4.5%. With oil accounting for about half of Oman's GDP as well as three quarters of government revenue, the recent price drop in the commodity, if sustained, is likely to hit Oman’s fiscal position and growth trajectory over the longer term.
The country's relatively high cost of oil production, along with elevated government expenditures, has seen its fiscal break-even price increase from about $78 a barrel in 2011 to about $100 a barrel in 2014, according to the International Monetary Fund. As such, budget deficits are expected in the coming years. For now, however, the government is planning to push ahead with an expanded 2015 budget, which includes significant spending on infrastructure to stimulate private sector growth.
Budget pressures
“Despite lower international oil prices, the state general budget for 2015 endeavours to continue the investment spending required for maintaining real economic growth at 5%, supported by the non-oil sector, which is expected to grow by 5.5% in real terms,” says Hamood Sangour Al Zadjali, executive president of the Central Bank of Oman (CBO).
While the government is facing the prospect of budget deficit of about 8% of GDP, Oman is nevertheless well positioned over the medium term to weather the challenge of lower oil prices. Much of the country's current strength, from the resilience of its banking sector to its ongoing, successful drive towards economic diversification, is due to the work of the CBO.
“The banking sector in Oman continued its positive growth trend in 2014. Despite lower oil prices, the CBO will continue to enhance the role of the banking sector in the [country's] economic development by encouraging credit growth to productive sectors, including small and medium-sized enterprises [SMEs], and promote saving behaviour among the population,” says Mr Al Zadjali.
SME focus
In one of the central bank’s more notable directives, Omani lenders will be required to allocate 5% of their total loan portfolios towards SMEs by December 2015. While this requirement is high – and many bankers recognise the pressure this will place on their lending activity – few doubt the benefits this will ultimately deliver. According to the CBO, SMEs currently contribute about 15% to 20% towards Oman's GDP, compared with 58% for the EU and 51% for the US.
“To encourage lending to SMEs, the prudential requirement for banks to lend to these businesses has been relaxed in terms of general provisioning requirements and risk weightings. There is no doubt that financing SMEs is a challenge but given the concerted efforts of the government and the CBO, it is expected that banks will be able to make the lending to SMEs commercially attractive so that there is more incentive to lend to this sector,” says Mr Al Zadjali.
Moreover, the introduction of Islamic banking to Oman in late 2012 was followed by the central bank’s bold step of establishing a centralised sharia board in October 2014. The first of its kind in the Gulf region, the board will bring much needed harmonisation and credibility to a financial sector that, in other jurisdictions, can be characterised by discord and fragmentation.
“Islamic banking in the sultanate is progressing very well. Islamic banks are opening up new segments and players and thus adding to the competitive environment, not only in terms of efficiency and innovation, but by also providing the consumers [with a choice] between conventional and Islamic banking products,” says Mr Al Zadjali.
Beyond this ongoing reform agenda, few regional regulators can lay claim to a track record of banking sector supervision like that of the CBO. This is particularly true for the way in which it has made Omani lenders more resilient and risk averse. Today, the system as a whole is in excellent health.
“A key element of ongoing financial sector reforms has been the fine-tuning of the prudential and supervisory framework by developing sound risk management systems, enhancing transparency and complying with international standards and best practices. The CBO is well ahead in the implementation of the Basel III framework, with final guidelines issued in November 2013,” says Mr Al Zadjali.
