China to support Oman's economic rebound in 2024

To:

Al-Monitor Pro Members

From:

Sebastian Castelier

Business journalist covering Gulf economies

Date:

May 10, 2023

Bottom Line:

Oman is expected to have one of the Middle East’s lowest growth in 2023 at 1.7%, down from 4.3% in 2022. However, in 2024 it is expected to boast the region’s highest growth at 5.2%, the International Monetary Fund (IMF) forecasted in April 2023. An IMF spokesperson told Al-Monitor the acceleration in 2024 will be primarily due to an “expected resumption in oil production” following the end of 2022/2023 OPEC+ voluntary output cuts. “In addition, non-hydrocarbon activities are also expected to continue expanding supported by still high oil revenues, robust manufacturing activity and investment, and the authorities’ reforms.” Oman’s economic trajectory follows IMF’s positive forecast for the Middle East and North Africa region, where growth is projected to increase from 3.1% in 2023 to 3.4% in 2024.

Background Facts:
  • The first round of OPEC+ cuts that started in November 2022 did little to slow Oman’s output. In the first quarter of 2023, Oman produced 25.11 million barrels of oil monthly on average, versus a monthly average of 25.78 million in 2022. 2024 will be a strong year for Oman’s fossil fuels. The May-December 2023 cut of 40,000 barrels per day agreed with OPEC+ is expected to have ended, and the Block 10 at the Saih Rawl gas field, launched in early 2023, is expected to produce more than 0.5 billion cubic feet of gas daily. Also, the Duqm refinery, scheduled to start by the end of 2023, would be operating at full capacity to refine 230,000 barrels of crude oil products daily.
  • China’s reopening will support Oman’s oil exports. China is Oman’s top client, absorbing 82% of its oil exports in 2022. Domestic consumption in the world's second-largest economy picked up after it abandoned its zero COVID-19 policy in December 2022. The IMF expects China’s economy to expand by 5.2% in 2023 and 4.5% in 2024, driven by public and private consumption. The International Energy Agency said a resurgent China will be a strong offset to sluggish industrial activity in developed economies and will account for 90% of global oil demand growth in 2023. In March 2023, Oman's oil exports to China rose 8.6% compared to a year earlier. 
  • Still, the IMF projection left analysts scratching their heads. “It is still a complete mystery; no one can seem to figure it out. It is odd to drop off so much and then to surge by so much the year after. I cannot really pin what will be driving that,” said Dominic Pratt, an Oman analyst at the Economist Intelligence Unit, a research firm. 
  • Cedric Berry, an analyst at the credit rating agency Fitch, told Al-Monitor the IMF might be anticipating “a strong rebound, possibly linked to foreign direct investment inflows or a strong confidence effect” in the construction sector, following a “sharp fall” in 2021-2022. The industry accounted for 7.7% of Oman’s GDP in 2021. The country has long restricted foreign real estate ownership. But a March 2022 ministerial decision allowed non-Omanis who invest more than $1.3 million to own residential, commercial and industrial properties in a few governorates. Growth in the construction sector would act as a catalyst for the local cement, steel, and aluminum industries. 
  • Oman’s leading non-hydrocarbon sector, services, is private consumption-driven and accounts for about half of the GDP. The purchasing power of Oman’s consumers was protected throughout the 2021–2023 global inflation surge thanks to energy subsidies, governmental price caps on essential items, and a pegged currency that offset imported inflationary pressures. Oman’s inflation peaked at 4.4% in January 2022 before subsiding to 1.6% in March 2023 - the IMF forecasts 1.9% in 2023 and 2.4% in 2024. Therefore, the demand side is likely to keep stimulating the economy going forward, supported by employment rising “at a healthy pace,” the IMF report noted. External factors would also boost the service sector, especially tourism, which is expected to “fully recover [to pre–pandemic levels] by 2024,” an Omani official said.  
  • Government spending, which accounted for a third of total consumption in 2021, is also likely to support economic growth in 2024. First, Oman deferred some of its fiscal consolidation measures as higher fossil fuel revenues boosted state coffers and protests threatened social stability in 2021. Second, Oman repaid some of its debts to reduce the debt burden, thus freeing up resources to support the economy in 2024. Domestic debt fell by $2.3 billion and external debt by $6 billion in 2022, bringing total public debt at the end of the first quarter of 2023 to $43.2 billion.
  • Oman’s economic sectors of the future, such as renewable energy, green hydrogen and mining, are long-term plays and will not contribute directly to 2024 growth. Still, $20 billion worth of green hydrogen contracts signed last year could start to support GDP growth via spending on research and development, services and construction.
Alternative Scenarios:

Scenario 1: A global recession sinks Oman’s revenues and, consequently, its growth

Economists are divided. Technical indicators such as the deepest inversion of the US yield curve since 1981 are viewed by many investors as a time-honored recession signal, as put by Reuters. Others argue this time around that it is different. If historical data are any indication, 79% of the times the US 2/10 year yield curve has inverted since 1900, a recession followed, a financial advisory firm found. Why does it matter to Oman? The global economic outlook, in other words, the gravity of energy markets, is a key to Oman’s economy. Since 2012, fossil fuel exports have accounted for an average of about three-quarters of government revenues.

Scenario 2: OPEC+ cut lasts longer than anticipated

A global recession strong-arms the oil cartel to curtail supply well into 2024 to support prices at a level that suits the needs of OPEC+ heavyweights, especially Saudi Arabia. The kingdom needs oil prices close to $100 to afford the economic overhaul planned by Crown Prince Mohammed bin Salman and secure political acquiescence through its social contract, Bloomberg Economics estimated.

Conclusion - Most Likely Scenario:

The yield curve is of little help in predicting a recession’s depth and length, and it takes an average of six to 36 months following the inversion for economic downturns to happen, if ever. In other words, the impacts of a global rate-hike cycle started in 2022 to fight inflation will come with a lag. In the meantime, Oman will expect to keep selling crude oil above the price needed to balance its budget, known as ​​fiscal breakeven oil price and estimated by the IMF at $72.2 per barrel for 2023. Oman’s client base, dominated by China, will act as a hedge. The first government budget surpluses in more than a decade came in 2022 (4.9% of the GDP) and is projected to reach 2.3% in 2023, according to Fitch. However, Oman is more conservative, forecasting a budget deficit of $3.38 billion with oil prices at $55 per barrel. External factors like tourism and FDI add to it. Decouple from fossil fuel revenues? Not just yet. “We will see a slight erosion of the dependency on the hydrocarbon sector as other industries start to take a foothold, but Oman’s structural dependency on oil and gas revenues is going to stay for a long time,” Pratt said. 

Contributor Background:

Sebastian Castelier has been reporting on GCC countries since 2016, with a focus on how the oil-rich region navigates the long-term energy transition economically, socially and politically. He has been a contributor to Al-Monitor since 2019 and writes for various publications, including Haaretz, Al Jazeera, The Independent and Le Temps, among others.

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