Previous Quarterly Editions
Expropriation Risk: 41 41 41 40 ►Political Violence Risk:36 37 35 35 ►Terrorism Risk:5 5 5 5 ►Exchange Transfer and Trade Sanction Risk: 55 55 55 54 ►Sovereign Default Risk:47 47 37 37 ►
TREND ►
Geopolitical alignmentEast 1 2 3 4 5 West
Alignment five years agoEast 1 2 3 4 5 West
Degree of contestationSettled 1 2 3 Contested
In keeping with its trademark foreign policy neutrality, Oman has avoided taking sides in the West’s proxy confrontation with Russia. Oman remains a vital player in regional diplomacy in the Middle East, owing to its close relations both with Gulf Cooperation Council countries and with Iran, and has hosted and led negotiations on the 2015 Iran nuclear deal and the conflict in Yemen. In addition, Oman was instrumental in securing the freedom of two U.K. nationals this year, who had been in detention in Iran for years.
Oman is improving its business environment for domestic and foreign investors. In late March, the Muscat Stock Exchange announced that it was allowing 100% of foreign ownership in joint stock companies in Oman. This is intended to revive the local exchange, increasing its liquidity and strength, but also to signal a greater openness to foreign capital in general.
The exchange also revealed Oman aims to list 35 state-owned enterprises in the next five years, with plans to take one or two oil companies public. Oman, like its Gulf peers, is looking to capitalise on high energy prices to list upstream and downstream assets in the energy sector. OQ, the state energy firm, is looking to raise USD500 million from a share sale in its drilling unit, Abraj Energy. Oman intends to use the cash to finance development spending in the non-oil economy focused on port infrastructure and tourism, and to move up the hydrocarbons value chain with a focus on petrochemicals.
More asset sales are expected with the moves towards privatisation, including public-private partnerships, and encouraging foreign investment suggest expropriation risks will be very low in coming years. Even so, the entrenched economic interests of politically well-connected merchant families mean market access will be challenging.
In past years, Oman has seen bouts of popular anger on the streets, fuelled mainly by rising unemployment and perceptions of official corruption. There have also been popular calls for jobs, higher salaries, reduction in the government’s media control, and for reduced numbers of foreign workers, to help Omanis find private sector jobs. The late Sultan Qaboos raised the minimum wage and expanded the social safety net, among other responsive measures.
Under Sultan Haitham, societal pushback is likely against the public sector austerity and tax measures, and their wider economic effects, demonstrated by the unemployment protests in May last year. Pushback is also likely against the phasing out of electricity and energy subsidies.
The current high oil price environment – partly a consequence of the disruption of the Russia-Ukraine crisis and which is expected to last through to at least 2023 – will generate fiscal surpluses that will increase pressure on the sultan to extend government largesse to Oman’s unemployed. Public sector hiring will also likely accelerate, in an effort to appease Omanis.
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Oman has no terrorism due to effective policing and security provisions. This situation is unlikely to change in coming years, although signing a hypothetical peace treaty with Israel could open the way for radical groups to target government and Western assets.
Oman has adequate buffers to finance goods imports and maintain the currency’s peg to the U.S. dollar. Reserves usually hover around the equivalent of six to seven months of imports. The stability of the reserves is sensitive to oil prices and is therefore rising with the current strength of oil market conditions. Higher oil prices would help bolster reserves, but Oman will also need strong foreign investment inflows to pre-empt foreign exchange pressures that would arise from a future oil price downturn, something that could happen if new oil exporters enter the market and when the Russia-Ukraine crisis is eventually resolved.
In August, Fitch upgraded Oman’s credit rating by one notch. Prior to the upgrade, the agency had downgraded Oman four times since initiating its coverage in 2017. Standard and Poor’s followed suit with an upgrade. This reflects Oman’s fiscal strength, with oil prices trading at well above Oman’s fiscal break-even price of around USD80 per barrel.
Oman has said it will use the windfall to step up repayments of its external debt in 2022-23, which will further reduce default risk. The country has also emerged in the Gulf as a reform stand out, staying the course in a fiscal balance programme, lowering its debt, and introducing a value-added tax last year. An expected fiscal surplus of 5.4% of GDP this year will reverse nearly a decade of budget deficits, giving Oman the fiscal space to strengthen its foreign currency reserves. This will further contain default risks.
Oman’s neutrality has earned it the nickname ‘Switzerland of the Middle East’. The outsized diplomatic clout that this gives the sultanate means it has often protected this neutrality from its more powerful neighbours, Saudi Arabia and the United Arab Emirates (UAE). For instance, Oman resisted pressure to join the Saudi-led blockade against Qatar in 2017-21.
However, Oman, along with Bahrain, is among the Gulf’s weakest economies. While Oman is the world’s largest non-OPEC oil exporter, its reserves are dwindling, and the country’s complicated topography means its oil wealth is harder to exploit. During periods of low oil prices, such as the oil price crashes of 2015 and 2020, the
strain on Oman’s public finances has constrained the government’s ability to finance a bloated public sector wage bill, giving rise to protests by unemployed Omanis. The government has therefore had to improve relations with Saudi Arabia, to secure investments and financial support. This has made Oman’s foreign policy increasingly susceptible to its principal financial backers, Saudi Arabia and the UAE.
In an effort to reduce its dependence on oil as a growth and revenue driver, Oman has sought to benefit from its strategic geographic location to draw foreign investment. Unlike most Gulf states, Oman, which lies in the Indian Ocean, does not rely on the
volatile Strait of Hormuz for seaborne trade, increasing its appeal as a logistical hub. One foreign partner that has sought to capitalise on this advantage is China. Chinese firms are anchor investors in the Special Economic Zone of Duqm, where they are building port infrastructure and investing in the refining sector. Meanwhile, China accounted for about 86% of Oman’s oil exports in 2020, up from 41% in 2010. This makes China a crucial economic partner for the sultanate.
In contrast, Oman’s relations with the West revolve around the sultanate’s track record in regional diplomacy. Oman is not a big purchaser of U.S. defence systems, nor does it host U.S. military bases.
However, the sultanate has been an important U.S. military partner of long standing, including providing the U.S. Navy access to the strategically located ports of Duqm and Salalah. While the Trump administration preferred dealing with the UAE and Saudi Arabia, the Biden administration knows well the value of Oman’s regional role. Many Biden administration officials negotiated the 2015 Iran nuclear deal under Barack Obama’s presidency which Oman facilitated. Now back in office in the Biden administration, those officials recognise it is in U.S. strategic interests for Oman to maintain its foreign policy independence. This view has been vindicated by Oman’s role in bringing about a ceasefire in the Yemen war which is a key priority of the Biden administration’s Middle East policy.
