Research

Oman
Economy Report 2010
 April
Oman Economy & 2010
Outlook

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

Banking Page 25-26

Muscat Stock Market

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Executive Summary

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.

Oman, like its neighbors is an oil based economy which is striving to minimize its
dependency over crude and diversifying. However numbers still suggest Oman’s
heavy 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 oil’s current level
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 of
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 Oman’s 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. Oman’s 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 oil
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 will
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 Omani
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 Poor’s maintained the
Sultanate’s ‘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 Surplus 4.5% mn 2.87 (Population (Prov. 09
(till Nov ( OMR
2%- BN 14.22 Exports Prov. 20%- 18.5BN GDP FY 09 Prov. (in
FY 09 (OMR
44%- BN 13.77 OIL & Gas 12.1% MN 243 Petroleum
Production/B
2%- BN 1.92 Non Oil & Gas 11.7% BN 4.69 International
Export reserves
22%- BN 8.32 Imports 35% BN 3.68 Trade Balance till
Nov
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 (OM

Source-IMF, CBO & Ministry of Economy

% Nominal GDP Gr
Real GDP (Constant
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GDP by Economic Sector

Constituents OMR mn FY FY FY FY FY FY
2003 2004 2005 2006 2007 2008
Petroleum Activities 4,077. 5,875. 6,739. 7,229. 11,816.
3,481.1
7 8 9 2 6
Non-Petroleum Activities 1,279. 1,694. 2,289. 2,665.
1,140.3 3,698.4
8 2 0 1
Agriculture & Fishing 171.4 174.5 183.1 191.4 201.4 234.6
Services 4,072. 4,399. 5,175. 6,160.
3,609.2 7,547.2
4 8 5 4
Financial intermediation
187.0 188.4 213.6 240.1 293.8 365.1
services
Gross Domestic Product at 9,416. 11,939 14,155 15,962 22,931.
8,215.0
producers prices 0 .3 .7 .3 7
Import Taxes 68.2 71.0 (56.4) (4.5) 48.0 117.4
GDP at Market Prices 9,487. 11,88 14,15 16,01 23,049.
8,283.2
0 2.9 1.2 0.3 1
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 total
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 sector’s 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 reasons behind 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 marginal
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 of
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 well
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
sector’s 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.

Oman’s 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 oil
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 lion’s 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 oil
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 sector
surpluses are playing a dominant role in revamping the fiscal position of the Sultanate’s
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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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 central
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 anti

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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.

Oman’s 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 level
of 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
FY FY FY FY FY FY CAGR Q1'0
OMR mn
2003 2004 2005 2006 2007 2008 03-08 9
2,83 2,99 3,57 4,46 6,12 7,53 7,58
Domestic Liquidity (M2) 22%
1 4 3 1 0 3 7
1,12 1,23 1,92 1,99 2,18
Money (M1) 804 907 20%
8 0 1 5 2
Currency with public 304 329 383 471 563 629 16% 608
1,35 1,36 1,57
Demand deposits in RO 500 578 745 759 22%
8 6 4
2,02 2,03 2,44 3,23 4,19 5,53 5,40
Quasi Money 22%
7 7 5 2 9 8 5
Savings deposits in local 1,00 1,40 1,64
647 734 851 21%
currency 9 9 2
Time deposits in local 1,77 2,89
953 850 791 963 25%
currency 8 7
Deposits in foreign 1,21
400 421 765 954 906 18%
currency 3
Margins 28 31 38 47 58 94 27%
(of which foreign currency (400 (421 (765 (1,21
(954) (906) 18% (569)
deposits) ) ) ) 3)
1,42 1,63 2,26 2,74 3,89 4,36 4,26
Foreign Assets 25%
2 9 0 5 5 1 4
1,38 1,38 1,67 1,92 3,66 4,40 4,43
Central Bank 26%
2 3 5 8 1 0 1
Commercial Banks 40 257 585 818 233 (39) -199% (166)
1,41 1,30 1,31 1,71 2,22 3,17 3,32
Domestic Assets 18%
0 5 3 6 5 2 3
(457 (1,15 (2,40 (2,44
Claims on Government (net) 54 (84) (652) -314%
) 4) 5) 5)
Government Borrowings 422 444 255 229 152 167 -17% 141
(369 (527 (712 (1,30 (2,57 (2,58
Government Deposits (881) 48%
) ) ) 5) 2) 6)
Domestic claims on private 3,05 3,25 3,66 4,40 6,02 8,67 8,89
23%
sector 8 9 7 6 5 7 7
Claims on Public Enterprises 69 87 112 196 365 469 47% 456
1,77 1,95 2,00 2,23 3,01 3,56 3,58
Other items (net) 15%
1 7 8 3 2 9 5

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Monetary authorities 1,01 1,12 1,25 2,70 2,90 2,95

971 23%
4 4 2 0 1 4
Commercial Banks 758 986 884 981 311 668 -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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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 FY FY FY FY FY FY
2003 2004 2005 2006 2007 2008 2009
Food, beverage and tobacco 100.4 101.6 105.7 111.4 123.9 150.6 151.3
Clothing, Textile & Footwear 96.1 96.4 97.0 96.8 98.0 102.2 104.5
Furniture, & Housing Material 93.3 93.1 93.5 94.4 97.4 105.3 109.4
Medical Care 89.4 90.2 90.3 91.0 91.3 93.3 97.4
Transport & Communication 98.8 99.8 101.3 103.1 103.5 106.4 107.3
Recreation & Entertainment 94.0 92.6 89.9 91.2 93.1 98.5 100.4
Educational Services 103.7 104.3 106.3 107.6 113.5 121.8 128.4
Personal care items and other
105.7 109.1 113.0 125.2 135.0 154.8 170.3
services
Rent, Maintenance,
98.7 98.4 98.4 100.2 106.6 118.9 129.3
Electricity, Water & Fuel
101. 105. 111. 125. 129.
General Price Index 99.1 99.8
7 2 4 2 5
Source-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 Oman’s main suppliers, which has increased the
local-currency cost of Imported goods.

Oman Budget 2010

Oman’s Budget for the year 2010 estimated total revenues of OMR 6.38 billion as
against OMR 5.61 billion in FY’2009, 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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billion as compared to OMR 6.42 billion in FY’2009, leading an increase of 12% on a Y-o-Y basis. Taking
into consideration upon these assumptions for the fiscal year of 2010, Oman’s predicts a budget deficit of
OMR 800 million for the year 2010 which forms about 3.48% of FY’2008 GDP.

Budget
Budget 2010 ( OMR Actual Budgete Actual ed Actual Budget
mn) 2007 d 2008 2008 2009 2009* ed 2010
5,920.6 7,638. 5,614.0 6,380.0
Revenue 0 5,400.00 70 0 6,019.60 0
5093.1
Net oil Revenue 3678.20 3610.00 0 3522.00 3986.70 4050.00
Gas Revenue 810.90 620.00 909.90 670.00 643.30 800.00
1,635.7
Other Revenue 1,431.50 1,170.00 0 1,422.00 1,389.60 1,530.00
5,880.4 7,560. 6,424.0 7,180.0
Expenditure 0 5,800.00 20 0 6,159.30 0
3,857.5 4,420. 4,020.0 4,432.0
Current Expenditure 0 3,550.00 40 0 3,590.90 0
Defense & National 1,775.1
Security 1,663.40 1,360.00 0 1,545.00 1,525.60 1,615.00
2,348.4
Civil Ministry 1,898.70 1,905.00 0 2,149.00 1,805.00 2,480.00
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 80
Investment 1,697.3 2,280. 1,919.0 2,128.0
Expenditure 0 1,865.00 80 0 2,167.00 0
1,235.2
Civil Ministry 838.5 745 0 821 1,226.40 970
PDO 476.9 670 649.1 679 648.8 725
Gas Production
Expenditures 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 -800.00

*indicates figures till Nov 2009
Source: Ministry of National Economy, Ministry of Finance and Central Bank of Oman

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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 Omani
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, Oman’s government will most likely be achieving its production target set
by 2010.

Oman’s 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 barrel
and therefore the oil revenue is most likely to be more or less OMR 4.05 billion
during the 2010 fiscal year.

Oman’s 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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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 of
services projects. Finally as per the Minister, the ongoing support for capital
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 Omani
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 oil
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 foreign
companies 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 Oman’s 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 Royal
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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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 bbl
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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Oman Vision 2020 seeks transformation of Oman’s 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. It’s 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 world’s biggest miscible gas development plant. In central
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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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

FY
Net Profit (OMR mn) FY 2008 Y-o-Y Chg
2009
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 central
banks/governments are infusing capital to boost its Tier I capital and in turn to improve its total capital
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
government’s debt remained very minimal. This was reflected by Moody’s reiterating
their stable outlook on Oman’s 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 Deposits
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mn) Customers (OMR mn) (OMR mn)

Y-o-Y Y-o-Y Y-o-Y
FY FY FY FY FY FY
Bank Growth Growth Growth
2008 2009 2008 2009 2008 2009
(%) (%) (%)
Bank Muscat 6,028 5,851 -2.9% 3,728 3,838 3.0% 3,173 3,068 -3.3%
National Bank of
Oman
1,984 1,798 -9.4% 1,401 1,361 -2.9% 1,342 1,261 -6.0%
Oman International
Bank
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%
11,6 11,8 8,23
Cumulative 1.4% 7,784 5.8% 7,083 7,460 5.3%
54 16 8

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

31-Dec- 31-Dec- 31-Dec- 31-Dec- 31-Dec- YTD Change Since
Index
05 06 07 08 09 Change Since 2007 Jan 06
Musca
4,875 5,582 9,035 5,441 6,369 17.05% 14.10% 31%
t
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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Bahrai
2,196 2,218 2,755 1,804 1,458 -19.17% -34% -34%
n
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%
Abu
5,203 3,000 4,552 2,390 2,744 14.79% -9% -47%
Dhabi
Doha 11,053 7,133 9,580 6,886 6,959 1.06% -2% -37%

Source Bloomberg

Historical MSM performance 2004 2005 2006 2007 2008 2009

in %
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 contracting
by 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,
availability or use would be contrary to law or regulation or which subject Shurooq Securities Co LLC
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 independent
judgment. Investor should judge the suitability of the securities to their need.

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