37605942 oman economic report 2010

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OmanEconomy Report2010


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Oman Economy &Outlook

April2010

Table of Content

Executive Summary Page 3-4

Macro Economic Indicators Page 5

Gross Domestic Products Page 6-10

Public Finance, Monetary Policy & Inflation Page 11-16

Oman Budget 2010 Page 17-20

Oil & Natural Gas Page 21-24

BankingPage 25-26

Muscat Stock Market

__________________________________________________________________________________________________2 | P a g e S h u r o o q I n v e s t m e n t R e s e a r c h


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Executive Summary

Omani economy recorded a significant GDP growth rate of CAGR 22.7% duringthe period of 2003-08 owing to increased Omani crude oil prices before contracting

in 2009 the period of Global Financial Crisis. GDP contracted by estimated 20% at

OMR 18.5 bn as per provisional figure reported by Ministry of Economy from OMR

RO23.04 a year ago. During the period per capita income fell by 24% from OMR

7942 to OMR around 6000. However GDP per capita during period of 2003-08 rose

by 18% on CAGR basis to OMR 7,942 from OMR 3,535.

Oman, like its neighbors is an oil based economy which is striving to minimize its

dependency over crude and diversifying. However numbers still suggest Omansheavy reliance on oil revenues but diversification efforts are slowly started to pay

the dividends. During the year 2009 the performance of Oman economy was much

better than its regional peers as it was quite less exposed to the financial crisis

owing to prudent & proactive policies of government which weather the storm

effectively. Government managed to create liquidity in financial system while

creating the funds to counter credit crisis as well as reducing the CRR and lending

& deposit ratio lower, during the crisis period.

During the crisis oil prices crashed to USD 35/BBL from a high of USD 147/BBL

in the first quarter of FY 2009. Thereafter, crude is gaining momentum and

maintaining a healthy USD 70 a barrel from last 6 months which has increased the

investment sentiments in the oil economies. However Global demands for

commodities are firming up since beginning of the year. As Oman has planned a

deficit budget (on average rate of USD 50/BBL), we expect that oils current leve

would offer an excellent cushion for the government to go ahead with planned

expenditure and improved the economic activities as whole.

Declining inflation level is another factor that might help mitigate the impact of

the financial crisis as central bank can follow an expansionary monetary policy by

cutting its rates. We believe that Omani economy will be reporting growth o

nominal growth of 6 to 7% by the end of 2010.



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Discovery of three oilfields and a gas field by PDO recently with the combined

potential to boost Omans reserves by more than 5 per cent. Recent finds included a

major oilfield estimated to contain about 1 billion barrels of crude, and a potentially

large gas field. As per IMF and OPEC estimates oil should maintain a healthy USD

80/B going forward its full year forecast of 2010 and 2011. Oman has proven

reserves of 5.5 billion barrels of oil and 850 billion cubic meters of gas, the

International Energy Agency estimated in August 2010. Omans oil output is

expected to rise by 6 per cent to 860,000 barrels per day (bpd) this year from

812,000 bpd last year. On a USD 70/B Oman will generate huge current Account

Surplus which is likely to help the infrastructure growth driven by government which

in turn would allow private sector contribute more into economy which is improving

going forward.

Higher oil prices & economic stability will support actual surplus for 2010

Improved global economic conditions in 2010 will shed its positive impact on oi

prices that might range US$70/b to US$80/b for the year. We estimate Omani crude

price to average US$70/b for the most likely scenario and US$80/b for the best case

scenario. As 2010 budgeted deficit is based on a conservative oil price assumption

of US$50/b, actual oil prices would exceed this level. As a result Omani budget wil

most likely end up with a comfortable surplus in 2010. Moreover, the prudent

government policies during 2009 and 2010 for both fiscal and monetary fronts

will reap their benefits helping the overall economy to report 6.1% of real economic

growth as per Ministry of economy.

Macro Economic Indicators

Omani Government have been working to reform and diversify the Oman

economy through new tax laws, new privatization laws, enhancing non-oil sectors

and creating a market-friendly economic environment



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During the economic crisis, Oman government followed prudent policies whether on the fiscal or

monetary fronts with the aim of sustaining growth and supporting its monetary and financial systems.

Omani Minister of National Economy announced that Oman will continue its expansionary fiscal policy to

stimulate growth. Moreover, the government announced a stimulus package providing US$2bn for the

financial sector. Central Bank of Oman (CBO) provided funding through the exchange of reserve facilities

and market stabilization funds worth OMR 150 to support the Muscat Securities Market. Considering

government healthy position and support to financial system, Standard and Poors maintained the

Sultanates A long term and A-1 short term on its sovereign credit rating.

Macro Indicators Snap Shot 2009

YOY%

Indicators YOY %

Indicators

-107% -0.139 Fiscal Surplustill Nov ( OMR(

4.5% 2.87mn Population (Prov. 09(

-2% 14.22BN Exports Prov.FY 09

-20% 18.5BN GDP FY 09 Prov. (inOMR(

-44% 13.77BN OIL & Gas 12.1% 243MN PetroleumProduction/B

-2% 1.92BN Non Oil & GasExport

11.7% 4.69BN Internationalreserves

-22% 8.32BN Imports 35% 3.68BN Trade Balance tillNov

Source World Bank, IMF, Ministry of Economy & Shurooq Estimates



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Gross Domestic Product

Omani economy recorded a significant GDP growth rate of CAGR 22.7% during the

period of 2003-08 owing to increased Omani crude oil prices before contracting in

2009 the period of Global Financial Crisis. GDP contracted by estimated 20% at OMR

18.5 bn as per provisional figure reported by Ministry of Economy from OMR RO23.04

a year ago. During the period per capita income fell by 24% from OMR 7942 to OMR

around 6000. However GDP per capita during period of 2003-08 rose by 18% on

CAGR basis to OMR 7,942 from OMR 3,535. Omani economy has been on a high

growth trajectory since 2003 culminating in hefty growth of 44.0% in nominal GDP

for 2008. Omani GDP reported double digit growth rates over the period 2004-2008

On nominal terms, GDP crossed the RO20bn landmark for the first time in history to

stand at a record level of RO23.05bn by the end of 2008. This is the fifth consecutive

year of GDP growth with the Omani economy growing at a 2003-08 CAGR of 22.7%.

In real terms GDP reported a CAGR of 7.0% over the same period. According to

official figures real GDP is estimated to have grown by 13.0% in 2008 to stand at

RO11.32bn.

Nominal & Real GDP

% Nominal GDP G

Real GDP (Consta

Source-IMF, CBO & Ministry of Economy



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April2010

GDP by Economic Sector

Constituents OMR mn FY 2003

FY2004

FY2005

FY2006

FY2007

FY2008

Petroleum Activities3,481.1

4,077.7

5,875.8

6,739.9

7,229.2

11,81

Non-Petroleum Activities1,140.3

1,279.8

1,694.2

2,289.0

2,665.1

3,698.

Agriculture & Fishing 171.4 174.5 183.1 191.4 201.4 234.Services

3,609.24,072.

44,399.

85,175.

56,160.

47,547.

Financial intermediationservices

187.0 188.4 213.6 240.1 293.8 365.

Gross Domestic Product at

producers prices

8,215.09,416.

0

11,939

.3

14,155

.7

15,962

.3

22,93

Import Taxes 68.2 71.0 (56.4) (4.5) 48.0 117.GDP at Market Prices

8,283.29,487.

011,882.9

14,151.2

16,010.3

23,04

Source: Ministry of National Economy

Manufacturing sector was one of the major GDP contributors during the period of

2003-08. Its contribution has been increasing over years to account for 9.6% of tota

GDP on average over the period 2003-08. Moreover, it reported a high CAGR of 26.2%

over the same period. By the end of 2008, its contribution to total GDP grew by 40.5%

standing at OMR 2,359 mn. Manufacturing of basic chemicals rather than refined

petroleum products were the basic contributors to the sectors growth over years.

Wholesale and Retail Trade as a subcategory of the services sector contributed for

8.2% of total GDP on average over the period reporting a CAGR of 24.6%. As a result

its contribution increased from merely RO675mn in 2003 to OMR 2,030 .7mn by the

end of 2008. Generally, diversification efforts that have characterized the economy

since 2003 were the main reasonsbehind the increasing shares of both manufacturing

and services sectors over years.

Diversification efforts away from oil will play a great role in shaping growth patterns

for Omani economy for 2010 and so on. However, on the bright sight are the prudent

government policies on both the monetary and fiscal sides. Both polices are

expansionary amid a scenario of looming recession for the world economy. Moreover,



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reaping the benefits of diversification plans over the oil boom will help sustain margina

economic growth. Finally, the declining inflation level is another factor that might help

mitigate the impact of the financial crisis as central bank can follow an expansionary

monetary policy by cutting its rates. Thus we believe that Omani economy will be

reporting a marginal real growth of 1.9% for 2009 before recovering by the end of

2010. Moreover, optimistic scenario of higher oil prices will assure another year o

growth however at a slower pace.

Non-oil sector contribution growing over the years as Oman has taken measures

over the years to diversify the oil dominated GDP to withstand oil prices shocks

Generally, non-oil sector experienced double digit growth rates over the period 2004-

08. On CAGR basis, non oil GDP reported 18.5% of growth over the period 2003-08 to

increase from RO4.8bn to RO11.2bn. By the end of 2008, non oil GDP reported a

significant growth of 27.9% on top of 18.5% growth reported last year. It is important

to note that non oil GDP growth continued to surpass oil GDP growth for 2006 and 2007

mainly due to diversification plans combined with the decline in oil production. This has

helped non oil GDP to increase its share in GDP for those two years as aforementioned.

However, entering 2008, oil GDP grew much more rapidly by 63.5% as compared with

27.9% growth in non oil GDP thus increasing its share in GDP to 51.3% versus 48.7%

for non oil GDP.

Real Estate & Construction

Real estate & Construction sectors were the other two main important contributors

to GDP in the Sultanate over the years. On average both categories accounted for 4.6%

and 4% of GDP over the period respectively. Construction sector saw its share to GDP

growing over years from 3.3% in 2003 to 4.8% in 2008. Real estate contribution on the

other hand followed a declining trend over the same period from 6% in 2003 to 3.4%

by the end of 2008. However, both sectors continued to report double digit 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 wel

as residential real estate projects. By the end of 2008, both sectors accounted for 8.2%

of GDP to stand at RO1, 880mn.



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Agriculture and fishing

Other non-petroleum activities in Oman include Agriculture and fishing sector which increased by 16.5% in

2008 y-o-y to reach OMR 235 mn. On average, agriculture and fishing contributed for 1.5% of total GDP

over the period and reported a CAGR of 6.5%.

Electricity & water Supply

Despite contributing marginally for 1.3% of total GDP on average for the period, Electricity and water

supply registered a growth of 6.3% by the end of 2008 to stand at OMR 196.8mn. Looking forward, the

sectors contribution is expected to increase as the projects in power and desalination plants get on

stream. Finally, it is important to note that, increasing focus on non-oil sectors for future growth is playing

an important role in driving the Omani GDP growth for the near future. As a result, the non oil sector

contribution is expected to grow further as development plans puts focus on diversification.

Omans GDP growth rates were mainly backed by the oil boom over the period 2004-08. This could

be depicted from nominal GDP growth rate that continued to follow the same trend as Oman crude oi

price. The year 2008 was no different as the reported 44.0% growth rate was backed by oil sector. Both

oil production and prices hiked during the year by 6.85% and 55.1% respectively. Oman crude oil price

was a huge contributor for GDP growth during 2008 as it reported an average level of US$101.1/b for the

year 2008, or 55.1% growth over US$65.2/b for 2007. Similarly, oil production increased by 6.85% to

0.79mn b/d by the end of 2008 up from 0.71mn b/d reported for 2007.

Exports, Imports & Trade Balance Trend



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Source: Central Bank of Oman, IMF, Ministry of National Economy & CBO

Composition of Export

same period.

Both exports and imports continued to increase over the period however exports

increased at higher CAGR of 29.6% as compared with 27.4% for imports. On one side,

exports (F.O.B) increased from OMR 5, 144.9mn in 2004 to OMR 14,502.9mn by the end

of 2008. On the other side, imports (C.I.F) increased from OMR 3,381.9mn to OMR

8,896.3mn over the same period. On annual basis, exports reported its highest growth

rate of 52.8% by the end of 2008 on top of 14.4% of growth reported for 2007. However

it is important to note that such growth in exports is mainly backed by oil and gas exports

that accounts for the lions share of total exports, around 80% on average.



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Public Finance

Oman has adopted an expansionary fiscal policy since 2003 which aimed for diversifying

the economy. Such policy was supported by the ongoing increase in revenues mainly

from oil and gas. Expenditures were mainly focused on investment expenditures much

more than current expenditures. On CAGR basis this could be shown over the period

2003-08 as both revenues and expenditures grew by 18.8% over the period. The oi

boom has helped total revenues to increase significantly from RO3.3bn in 2003 to a

record level of RO7.8bn by the end of 2008. Generally, oil and natural gas secto

surpluses are playing a dominant role in revamping the fiscal position of the Sultanates

economy. Net oil revenues reported 17.9% of growth, increasing from RO2.3bn to

RO5.3bn over the period 2003-08. Similarly, gas revenues grew much rapidly reporting

59.9% increasing from RO87.0mn to RO909.9mn by the end of 2008. Finally, it is

important to note that the increasing oil and gas revenues supported fiscal surplus which

was used to retire public debt public debt year after year and contributing to the

significant addition to foreign assets.

Public Debt is declining owing to continued surplus reported by the Omani

economy

Omani economy continued to accumulate surpluses over the last five years, owing to the

upward rally of average oil prices. On CAGR basis, fiscal surplus grew by 18.6% from

RO116.4mn in 2003 to RO272.7mn in 2008. On annual basis, fiscal surplus increased

more than five folds to a record level of RO272.7mn for 2008 amounting to 1.2% of the

GDP. Thus, the improved fiscal position over years has allowed the government to reduce

public debt from 13.9% of GDP in 2004 to 4.2% by the end of 2008.



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April2010

In absolute terms, public debt continued to decline significantly over the past five years

to report a CAGR of -7.5% over the period. Public debt declined from RO1.3bn in 2004

to RO964.8mn in 2008. Consequently, debt service also retreated from RO447.7mn in

2002 to RO354.3mn in 2008 reporting a declining CAGR of -5.7%.

Monetary Policy

Central Bank of Oman (CBO) faced of challenges during the year 2008 as year

witnessed major changes where facing the ongoing inflationary pressures were the

ultimate goals for monetary policy during the first half. However, by the end of the

year the financial turmoil and credit crunch had pushed almost all centra

banks around the world to face the challenge of stabilizing their economies,

and injecting liquidity in respective financial systems. This definitely meant

changing the targets of monetary policies from a contractionary policy during first half to

adopt a loose monetary policy aiming for providing more liquidity and stabilizing banking

systems by second half.

Oman follows a fixed exchange rate regime as its currency pegged to the US dollar

Such regime exerts pressures on Omani monetary policy framework to maintain the

pegged rate and to manage domestic liquidity. Therefore, Interest rates as a monetary

tool always moves in relation to the policy rates of the Fed. CBO adopted ant



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April2010

inflationary monetary policy as the increase in money supply and credit had to be

contained during the first half of 2008 therefore CBO raised the reserve requirement

ratio for commercial banks from 5% to 8% of deposit liabilities. Moreover, lending ratios

were tightened from 87.5% to 85% and then to 82.5%.

However international financial crisis and credit squeeze by the end of the year

and CBO reduced reserve requirements for banks back again to 5%. Similarly, CBO

eased the lending ratios back to 87.5% to avoid credit contraction. Further important

measure was taken keeping the window open to sell up to US$2bn to local banks

allowing them to meet their liquidity requirement.

Omans monetary policy led the growing money supply at a brisk pace. The broad

money (M2) comprising of narrow money (M1) and quasi money continued to grow at a

brisk rate over the last four years. On CAGR basis, M2 increased significantly over the

period 2003-08 from OMR 2.8bn to OMR 7.5bn at a rate of 21.6%. On annual basis, M2

continued to report double digit growth rates of more than 20% over the last four years

thus mirroring the ongoing economic boom since 2005. By the end of 2008, M2 reached

OMR 7,533 mn, or 23.1% increase over OMR 6,120 mn reported for 2007.

Quasi money is responsible for major part of growth as it accounts for more than 70%

of monetary base on average over the period. On the other hand, M1 -representing the

aggregate currency with public and demand deposits in OMR, accounted for 30% on

average. On CAGR basis, M1 and quasi money reported 19.9% and 22.3% of growth

respectively over the period. By the end of 2008, quasi money rather than M1 was

responsible for money supply growth. This is mainly as M1 increased at a lower rate of

3.8% as compared with 31.9% of growth for quasi money. M1 increased marginally to

reach OMR 1,995 mn after reporting a record growth rate of 56.3% in 2007. This was

mainly traced back to Demand deposits in RO as it almost stagnated at the same leveof OMR 1,366 mn reporting a marginal growth of 0.6%. Such growth rate is to be

compared with 79% of growth reported for 2007.



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Money Supply

OMR mnFY

2003

FY

2004

FY

2005

FY

2006

FY

2007

FY

2008

CAGR

03-08

Q1'0

9

Domestic Liquidity (M2)2,831

2,994

3,573

4,461

6,120

7,533

22%7,587

Money (M1) 804 9071,128

1,230

1,921

1,995

20%2,182

Currency with public 304 329 383 471 563 629 16% 608

Demand deposits in RO 500 578 745 7591,358

1,366

22%1,574

Quasi Money2,027

2,037

2,445

3,232

4,199

5,538

22%5,405

Savings deposits in localcurrency 647 734 851 1,009 1,409 1,642 21%

Time deposits in localcurrency

953 850 791 9631,778

2,897

25%

Deposits in foreigncurrency

400 421 7651,213

954 906 18%

Margins 28 31 38 47 58 94 27%

(of which foreign currencydeposits)

(400)

(421)

(765)

(1,213)

(954) (906) 18% (569

Foreign Assets1,422

1,639

2,260

2,745

3,895

4,361

25%4,264

Central Bank1,382

1,383

1,675

1,928

3,661

4,400

26%4,431

Commercial Banks 40 257 585 818 233 (39) -199% (166

Domestic Assets1,410

1,305

1,313

1,716

2,225

3,172

18%3,323

Claims on Government (net) 54 (84)(457

)(652)

(1,154)

(2,405)

-314%(2,4

5)

Government Borrowings 422 444 255 229 152 167 -17% 141

Government Deposits

(369

)

(527

)

(712

) (881)

(1,30

5)

(2,57

2) 48%

(2,5

6)Domestic claims on privatesector

3,058

3,259

3,667

4,406

6,025

8,677

23%8,897

Claims on Public Enterprises 69 87 112 196 365 469 47% 456

Other items (net)1,771

1,957

2,008

2,233

3,012

3,569

15%3,585



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Monetary authorities 1,014

9711,124

1,252

2,700

2,901

23%2,954

Commercial Banks758 986 884 981 311 668 -3% 631

Source: Central Bank of Oman and Ministry of National Economy

Interest Rate

As for average interest rates, they are broadly in conformity with US interest rates

movements due to the fixed exchange rate regime. Generally, deposit interest rates

followed an upward trend for 2006 and 2007. Following ahead, it followed a

declining trend for the first half of 2008 then picked up marginally towards the end

of the year. Entering the year 2009, the international scenario of declining interest

rates due to financial crisis was seen in Oman as well. Both deposit and lending

rates for RO and foreign currencies followed a declining trend up to the end of May

2009. However, it is important to note that rates on foreign currencies declined more rapidly than RO

rates. Foreign currency deposit rates declined from 2.407% in December 2008 to 1.407% by the end of

May 2009. Similarly, foreign currency lending rates declined from 3.206% to 3.018% over the same

period.

Inflation

Inflation levels in Oman were in the range of 2% since 2000 till 2006. However, the year 2006 picked the

change in inflation trend that was coupled with ongoing increase in oil prices as well as economic growth

in Oman as well as in other GCC countries along with Global trend. As a result, inflation picked from 3.4%



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April2010

in 2006 to record levels of 5.9% by the end of 2007 and finally 12.4% for 2008. On

CAGR basis, Omani inflation as measured by the growth rate in Consumer Price

Index (CPI) increase by 4.8% over the period 2003-08 as the general index hiked

from 99.1 points to 125.2 points while climbing to 129.5 in 2009.

Index (2000=100) FY 2003

FY2004

FY2005

FY2006

FY2007

FY2008

FY200

Food, beverage and tobacco 100.4 101.6 105.7 111.4 123.9 150.6 151.Clothing, Textile & Footwear 96.1 96.4 97.0 96.8 98.0 102.2 104.Furniture, & Housing Material 93.3 93.1 93.5 94.4 97.4 105.3 109.Medical Care 89.4 90.2 90.3 91.0 91.3 93.3 97.4Transport & Communication 98.8 99.8 101.3 103.1 103.5 106.4 107.Recreation & Entertainment 94.0 92.6 89.9 91.2 93.1 98.5 100.Educational Services 103.7 104.3 106.3 107.6 113.5 121.8 128.Personal care items and otherservices

105.7 109.1 113.0 125.2 135.0 154.8 170.

Rent, Maintenance,Electricity, Water & Fuel

98.7 98.4 98.4 100.2 106.6 118.9 129.

General Price Index 99.1 99.8101.

7105.

2111.

4125.

2129

5Source-Ministry of Economy

Reasons for the ongoing inflation over the last three years are well documented including factors such

as pegging the Omani Riyal against the US Dollar, higher liquidity as a result of oil prices, higher public

expenditure by the government to ramp up the infrastructure to sustain the high growth rate of GDP and

imported inflation appearing in the form of food, beverage and tobacco that are

imported from outside GCC. As a result of pegging against the US dollar, the Central

Bank of Oman mirrored any US fed rate cuts which added up to the inflationary

pressures. Also, the rise in CPI during the recent years could be explained by the

weakening US dollar (and hence a relatively weak Oman riyal which is pegged to the

US dollar) against the currencies of Omans main suppliers, which has increased the

local-currency cost of Imported goods.

Oman Budget 2010

Omans Budget for the year 2010 estimated total revenues of OMR 6.38 billion as

against OMR 5.61 billion in FY2009, an increment of 14% on a Y-o-Y basis. On the

contrary total expenditure for the 2010 year has been projected to reach OMR 7.18



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April2010

billion as compared to OMR 6.42 billion in FY2009, leading an increase of 12% on a Y-o-Y basis. Taking

into consideration upon these assumptions for the fiscal year of 2010, Omans predicts a budget deficit of

OMR 800 million for the year 2010 which forms about 3.48% of FY2008 GDP.

Budget 2010 ( OMRmn)

Actual2007

Budgeted 2008

Actual2008

Budgeted

2009Actual2009*

Budged 20

Revenue5,920.6

0 5,400.007,638.

705,614.0

0 6,019.606,380

0

Net oil Revenue 3678.20 3610.005093.1

0 3522.00 3986.70 4050.

Gas Revenue 810.90 620.00 909.90 670.00 643.30 800.0

Other Revenue 1,431.50 1,170.001,635.7

0 1,422.00 1,389.60 1,530

Expenditure5,880.4

0 5,800.007,560.

206,424.0

0 6,159.307,180

0

Current Expenditure3,857.5

0 3,550.004,420.

404,020.0

0 3,590.904,432

0Defense & NationalSecurity 1,663.40 1,360.00

1,775.10 1,545.00 1,525.60 1,615

Civil Ministry 1,898.70 1,905.002,348.4

0 2,149.00 1,805.00 2,480

Interest on Loans 77.7 55 50.8 54 37.9 45

PDO 162.8 180 181.8 196 160.3 212

LNG & Oil Condensates 54.9 50 64.3 76 62.1 80InvestmentExpenditure

1,697.30 1,865.00

2,280.80

1,919.00 2,167.00

2,1280

Civil Ministry 838.5 7451,235.2

0 821 1,226.40 970

PDO 476.9 670 649.1 679 648.8 725Gas ProductionExpenditures 381.9 450 396.5 419 291.8 433

Subsidy to Private Sector 325.6 385 401.4 485 401.4 620

Fiscal Surplus/Deficit 40.20 -400.00 78.50 -810.00 -139.70 -800.*indicates figures till Nov 2009

Source: Ministry of National Economy, Ministry of Finance and Central Bank of Oman



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April2010

During the 2010 year crude oil is expected to remain around $70 to $80 a

barrel; however the Government of Oman has assumed an average oil price of

$50 a barrel, which in return shows the amount of conservatism the Oman

Government withstands. During 2010 fiscal year, the government predicts around

10% increase in oil production as compared to 2009 fiscal year production levels

The government of Oman plans to achieve an average oil production of 900,000

barrels per day by the end of 2010; this is mainly due to enhanced oil recovery

systems that are being implement in many of the oil fields. The target set for oil

production in the 2009 fiscal year was surpassed and with that type of track

record, Omans government will most likely be achieving its production target set

by 2010.

Omans total revenue is budgeted at OMR 6.38 billion from which Oil and Gas

revenues add up to 76% of the total revenues. On a basis of a conservative

approach, the oil revenues were estimated at an average oil price of $50 a barre

and therefore the oil revenue is most likely to be more or less OMR 4.05 billion

during the 2010 fiscal year.

Omans total expenditure is budgeted at OMR 7.18 billion as current spending is likely to rise by OMR 330

million to OMR 2.5 billion. According to the 2010 budget, Education and training spending has the biggest

share; which is expected to rise by 10.5% to OMR 874 million. A number of new health centers are

planned for the 2010 year and accordingly Health sector collected OMR 294 million, an increase of 8% on

a Y-o-Y basis. Defense and security current expenses are estimated to be at OMR 1.615 billion, an

increase of 4.5% on a Y-o-Y basis. Overall Oil & Gas production current expenditure is expected to



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April2010

increase by 4.1% on a Y-o-Y basis to OMR 292 million as compared to OMR 272

million in the 2009 fiscal year.

Infrastructure Development & Employment creation is the main focus area

in the Budget

Investment expenditures are estimated to grow by 10.9% as compared with 2.9%

of growth budgeted for 2009. Thus investment expenditures are estimated at

RO2.13bn for 2010 as compared with RO1.92bn budgeted for 2009. Increased

investment expenditure decided by the government is a matter of policy to continue

with key infrastructure and development projects.

The most important focus of the government is the ongoing support for private

sector as subsides to the sector is estimated at RO620mn, or 27.8% of growth. As

per the Ministry of Economy, Oman is allocating around RO937mn for new projects

during 2010 with the aim of creating 4000 jobs for Omani nationals. Such

projects include; construction of a number of new schools, operation and

maintenance of Al Ghubra portable desalination plant and construction of a number

of new health centers in addition to the implementation of a large number o

services projects. Finally as per the Minister, the ongoing support for capita

expenditure will support the Omani economy to report 6.1% of real economic

growth by the end of 2010.



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Crude Oil

Sultanate of Oman, the GCC oil producing country which is not enrolled in OPEC

alongside Kingdom of Bahrain, but follow OPEC prices carefully through its Oman

crude, a mix of heavy and light crude While compared with other GCC countries

Oman still remains small in term of reserves. KSA hold 21% of the total proven oi

reserves, Kuwait holds 8.5% as opposed to Oman which holds 0.4% of reserves. To

compensate, Oman uses a variety of enhanced oil recovery (EOR) techniques, these

methods are used to raise production levels.

Oman has easy access on foreign investments which helped attract foreigncompanies to operate on the oil and gas sector. During the period of 1960-Present

Omani government and foreign companies have worked together to explore different

oil and natural gas fields, major fields include Fahud, Ras-AlHamra, Mina al Fahal

Yibal and Rima. Oman oil and gas sector is controlled by the government of Oman

through two strategic companies, Oman Oil (OO) and PDO.

PDO is Omans main exploration and production company, which accounts for

more than 70% of the oil production, and most of it natural gas. PDO is a

shareholding company owned 60% by Oman government, 35% share goes to Roya

Dutch Shell. 4% to Total and a 2% share by Partex. In 2008, PDO produced

556,000bbl/day of oil.

Oman Oil is a commercial company that is mainly owned by the government of

Oman, it was incorporated in 1992 to pursue investment opportunities in the energy sector inside and



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April2010

outside Oman. Investments of Oman Oil include a 20% share in oil exploration in

Caspian Offshore concession in Kazakhstan, a 7.5% share in China Gas Holding, a 40%

share in Oman Polypropylene. Oman Oil 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.

Source Ministry of Economy

Oil productions of Oman have reached 297 mn bbl in 2009 as compared to 277mn bb

in 2008, a rise of 7.22%. However, average oil prices per barrel in Oman however

dropped by 43.9% to OMR 56.7 USD/BBL from US$101.06 compare to 2008. Further

on a CAGR basis oil production has been decreasing 0.7% during the period 2004-

2008, while on a nine year period from 2000, oil production decreased 3% during the

period 2000-2008 this is attributed to lower declining reserves.

Y-o-Y basis oil revenues decreased b 37% on the export front. Country wise

exports to China and Malaysia have witnessed the biggest hits with oil export to china

declining 21.8% to reach 27.4mn bbl and 80% for Malaysia which export reached

0.665 bbl during the period Jan-Apr 2009. On the other hand Korea and Taiwan

witnessed the highest increase in oil exports. Oil exports to Korea increase 90.9% to

reach 10.6mn bbl and 70.6% increase to Taiwan to reach 5.7mn bbl.

On the long run, exports to China are expected to increase owing to improved

economic condition in the world and higher GDP growth forecast for 2010 and so on

which in return will increase the demand on oil. World oil demand is expected to

average 86.3 mn bpd in 2010 as estimated by International Energy Agency (IEA). The

decline in OECD oil demand is expected to outweigh demand growth from Non-OECD

countries. World oil demand growth will come largely from China, India, Middle East

and Africa as per IEA estimates.

Natural Gas



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April2010

Oman Vision 2020 seeks transformation of Omans economy through diversification. Oil and Gas revenues

accounted for 79.9% of the total government revenues. 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. PDO

is mainly involved in developing, operating natural gas field in Sultanate of Oman. In 1962, Yibal-1 the

largest oil field lead to the discovery of natural gas in Oman, and by 1978 Oman had its first major gas

plant. During the period to 2009, PDO was able to discover new major gas field, develop LNG projects and

supplying gas to the nation.

The proven gas reserves of Oman in 2008 reached 34.6 tncf which make up 1.2% of the

Middle Eastern reserves and 0.5% of the world reserves. Gas reserves remained the

same in 2008 as compared to 2007 but on a CAGR basis Omani gas reserves increased

4.5% during the period 2000-2004 and decreased 0.3% during the period 2004-2008

Natural Gas production in 2008 reached 1.069.6tncf as compared to 1.070.7tncf in

2007, a 0.1% decrease in production. Of the natural gas produced in 2008, 221.3bncf

was associated production and 848.2bncf was non associated. On a CAGR basis from

2004-2008, natural

gas production increased 6%, showing efforts of economic diversification.

Natural Gas Production

Omani Government has been spending hugely on projects to enhance oil and gas

production. PDO is currently spending more than US$3.8bn in capital and operating

expenditure. Its considered one of the few oil companies to implement the Enhanced

Oil recovery (EOR) projects based on certain technologies including miscible gas

injection, steam injection, and polymer injection. Oman is scheduled to develop

Harweel plant to make it the worlds biggest miscible gas development plant. In centra

Oman PDO is developing a steam injection plant where it will contribute 40,000bbl/day

of new oil. As per new projects, PDO is working on producing a new gas production

station at Haban.



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April2010

Currently BP is undergoing a test on a potential gas field in Oman which could boost gas

output by 50%. The field Khazzan-Makarem in central Oman is expected to have around

40TCF in place. BP was awarded the field development in 2007 and spent more than

US$650mn to develop, but it faces obstacles for output where depth of gas is reached

nearly 5,000 meters, but if bringing the field into production will help supply shortfalls in

requirements and will increase production per day by 50%. Gas revenues in 2008 stood

at RO909.8mn which constituted 11.4% of the total government revenues as opposed in

2007 gas revenues stood at RO810.9mn and constituted 13.7% of the government

revenue. On a CAGR basis, gas revenues increased a substantial 38% during the period

2004-2008.

Oil and Gas sector of Oman continued to have the major play in the economy of Oman

together they accounted for 51.3% of the nominal GDP in 2008, 79.9% of government

revenues, and 14.3% of total expenditures. On the other hand Oman is following the

Vision 2020 where it will continue its effort to diversify the economy.

Banking

Year 2009 provided mixed results for the Omani banks after recovering from the Credit shocks and rising

provisioning levels to cover the bad loans. However Omani Banking Sector managed to escape the crisis

impact quickly. The Omani economy is expected to a however at a lower rate of 1% in 2009. Though, the

current economic environment presents numerous challenges ahead, the enhanced spending by the

government (leading to a RO810mn budget deficit for 2010) and the eco-political stability should help tide

over this crisis.

We expect that Omani banking sector would recover much faster than its GCC peers being less expose to

international markets and believe that though it has the capability to weather the current crisis, profitable

growth would be at its sustainable level. In the medium term, we are positive on the sector considering

its relative insulation to the real estate sector exposure and lower loan losses unlike its counterparts in the

GCC region.

Profitability Index of Omani Banks

Net Profit (OMR mn) FY 2008FY

2009 Y-o-Y Chg

Bank Muscat 93.7 73.7 -21.3%



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National Bank of Oman 45.4 21.1 -53.5%Oman International Bank 29.5 21.5 -27.0%

Bank Dhofar 23.7 25.4 7.2%Ahli Bank 5.9 8.5 43.9%Bank Sohar (2.3) 8.0 254.3%Cumulative 195.9 158.3 -19.2%

Source-Financial statements at MSM

In the Year 2009 most of the large cap banks like Bank Muscat, National Bank of Oman reported decline in

their net profits and smaller or new banks have gained in the absence of lending b the big 3 in our

opinion. The combined profits of the listed Omani banks dropped by 19% in 2009 from OMR 196 mn to

OMR 158.3 mn. Nation Bank of Oman was the biggest loser as its profit fell 54% compare to peer average

fall 19%. However Bank Dhofar manage to report a small profit of 7% among the bigger banks. Bank

Sohar & Ahli Bank continues to grow despite of tough lending conditions and reported a smart gain of 254

& 44 percent YoY profit growth.

Capital adequacy

The Omani banks are well capitalized. In comparison to its regional peers wherein the centra

banks/governments are infusing capital to boost its Tier I capital and in turn to improve its total capita

adequacy ratio (CAR), the Omani banks are better placed (without any capital infusions by the Central

Bank so far) within a range of 13.0% to 23.4% as at the end of 2009.

Asset Growth

The Omani banking sector has manage to stay in positive in 2009 in terms of asset growth owing to

higher lending by new and mid cap banks those were not exposed to external lending ( read GCC or

International). Total Asset improved marginally however b 1.4% however loans and advanced moved up

by almost 6%. On the other hand total Customers deposits too increase by 5.3%. These

assets & reserves amounted to around 75% of GDP at the end of 2008, while the

governments debt remained very minimal. This was reflected by Moodys reiterating

their stable outlook on Omans A2 investment-grade

Sovereign rating. The overall assets of the Omani banks increased at an impressive rate

of 37.8% from OMR 8,457.6mn in 2007 to OMR 11,653.0mn at the end of 2008

Customer deposits increased from OMR 5,230.5mn at the end of 2007 to OMR

7,713.0mn at the end of 2008 thereby registering a YoY growth of 37.1%.

Total Assets (OMR Loans & Advances to Customers Deposit



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mn) Customers (OMR mn) (OMR mn)

BankFY

2008

FY

2009

Y-o-YGrowth

(%)

FY

2008

FY

2009

Y-o-YGrowth

(%)

FY

2008

FY

2009

Y-o-Grow

(%Bank Muscat 6,028 5,851 -2.9% 3,728 3,838 3.0% 3,173 3,068 -3.3National Bank ofOman

1,984 1,798 -9.4% 1,401 1,361 -2.9% 1,342 1,261 -6.0

Oman InternationalBank

1,018 1,039 2.1% 627 615 -1.9% 729 730 0.1%

Bank Dhofar 1,324 1,487 12.3% 1,018 1,194 17.3% 972 1,101 13.3

Ahli Bank 456 616 35.0% 375 444 18.2% 319 467 46.2

Bank Sohar 843 1,025 21.6% 634 787 24.0% 548 832 51.9

Cumulative11,654

11,816

1.4% 7,7848,23

85.8% 7,083 7,460 5.3%

Muscat Stock Market

MSM is one of the best regulated Stock market in the Middle East. And also one of the best in the term of

corporate governess and transparency. MSM has reported a CAGR return of 31% during the period of

2006-9 whereas most of the regional indices reported a negative return during the same period. Even

since 2007 MSM is the only exchange which has a positive return till date.

MSM is one the most promising and performing stock markets is the region. MSM yield this year stood at

17.05% up from 5582 to 6986 as on Sep 30, 2007. Market capitalization of MSM stood at OMR bn which

around 50% of its reported GDP of 2009.

MSM relative performance over years

Index31-Dec-

0531-Dec-

0631-Dec-

0731-Dec-

0831-Dec-

09YTD

ChangeChange

Since 2007Since

Jan 06Muscat

4,875 5,582 9,035 5,441 6,369 17.05% 14.10% 31%

Saudi 16,713 7,933 11,039 4,803 6,122 27.46% -23% -63%

Kuwait 11,533 10,067 12,559 7,783 7,005 -9.99% -30% -39%



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Bahrain

2,196 2,218 2,755 1,804 1,458 -19.17% -34% -34%

Egypt 6,325 6,973 10,550 4,596 6,209 35.09% -11% -2%

Dubai 7,426 4,127 5,932 1,636 1,804 10.22% -56% -76%AbuDhabi

5,203 3,000 4,552 2,390 2,744 14.79% -9% -47%

Doha 11,053 7,133 9,580 6,886 6,959 1.06% -2% -37%

Source Bloomberg

Historical MSM performancein %

2004 2005 2006 2007 2008 2009

MSM 30 22.27 44.45 14.49 61.88 -39.78 17.05

Banking & Investment 22.17 53.56 4.84 71.5 -46.23 41.59

Industry 33.63 35.54 34.25 60.4 -46.89 72.31

Services & Insurance 11.67 31.52 17.63 52.03 -28.45 6.89

Muscat Securities Market is a free float index and has three sub indices called Banking & Investment

Industry, and Services & Insurance. MSM30 index is a capitalization weighted index of the 30 most highly

capitalized, liquid, and profitable companies listed on the Muscat Securities Market. The index was

developed with a base level of 1000 as in June 1990. Banking & Investment sector has the lion share in

the total index weight of MSM30 index which is around 52.5%, where Bank Dhofar and Bank Muscat hold

the largest market share of 10.34% and 10.26% respectively in Banking & Investment sector. Services &Insurance sector consists of only seven companies and hold a remarkable market share weight of 27.3%

in the MSM30 index. Oman Telecommunication and Renaissance Services constitute 9.7% and 5.7% of the

total Services & Insurance sectoral index. Industrial sector is the last sectoral category amongst the

MSM30 index which holds a market share of about 20.2%. Cement sector stocks such as Raysut Cement

and Oman Cement cover the largest bulk in the Industrial sector of about 7.2% and 4.6% respectively.

On a historical basis since January 2006, MSM30 index and its sub sectors have performed significantly

well to support their index levels. After falling sharply in the 2008 year due to collapse in global equity

markets, MSM30 and its sub sectors posted minimal losses as compared to other regional markets and its

sub sectors. During the 2009 year, MSM30 index touched a high of 6,786 and a low of 4,188 before

closing the year at 6,369. Banking & Investment sector closed the year at 9,375 after hitting a high of

10,701 and a low of 4,919. Industrial sector touched a high of 8,223 and a low of 3,203 before closing the

year at 7,447. Services & Insurance sector closed the year at 2,702 after surfacing a low of 2,092 and a

high of 2,904.



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During the 2009 year, MSM30 index managed to gain 17.5% on a Y-o-Y basis led by a support on

Industrial and Banking stocks. Industrial sector outperformed the benchmark index and garnered gains of

more than 70% on the back of Al Hassan Engineering (+270%), Oman Flour Mills (+212%), Oman

Cement (+149%), Al Anwar Ceramic Tiles (+88%), and Oman Cables Industry (+62%). Banking &

Investment sector as well outperformed the benchmark index to collect gains of more than 40%

supported by Bank Dhofar (+98%), Bank Sohar (+89%), Ahli Bank (+46%), Oman International Bank

(+35%), and Bank Muscat (+3%). Services & Insurance sector posted less significant gains of about 7%

during the year due to decline in index heavyweight Oman Telecommunication (-18%); however Galfar

Engineering and Renaissance Services propped up to gain 25% and 23% respectively during the 2009

year.

During the past 5 years size of market have improved significantly added by liquidity & volumes

which have substantially increased at MSM.

Turnover rose from 593 mn to OMR 3663 mn a CAGR growth of almost 130% before contractingby 33% in F 2009. Volume moved up from 272 mn to 6092 mn during the period.



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Disclaimer

This report is not directed to, or intended to or use by any person or entity who is a citizen of or

located in any locality, state, country or other jurisdiction where such distribution, publication,

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to any registration or licensing requirements within such jurisdiction. This is report is provided for

information purpose only. This report is based on information generally available and is deemed

reliable but no assurance is given as to its accuracy or completeness. Shurooq Securities Co LLC is

not accountable for any decision based on the content of this report. The investor will not indemnify

Shurooq Securities Co LLC and its officers, employees and staff against any loss or damage or other

liabilities (including Cost), which may suffer as a result of reliance on such reports. Neither the

information nor the opinions contained are to be construed as an offer to buy and sell securities

mentioned above. This report is not to be relied upon in substitution for the exercise of independentjudgment. Investor should judge the suitability of the securities to their need.

37605942 oman economic report 2010

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