Oman and Yemen Country Risk Report Q2 2016
Uncertainty over the health of Sultan Qaboos bin Said al-Said, whohas governed Oman since 1970, is bringing the succession questionto the fore. We see major risks in the succession process. Governanceis set to become more unpredictable in the future, and theOmani political system – with the Sultan enjoying all-encompassingpowers – is largely unsustainable in its current form.
Tightening liquidity conditions, public spending cuts, and weak exportgrowth will present headwinds for Oman's economy and corporatesector over 2016. Growth will weaken to 2.3% in real terms, comparedto the annualised rate of 3.5% recorded between 2010 and 2014.
The fall in oil prices will leave Oman posting budget and current accountdeficits for years. While the country can rely on the debt andloan markets for the time being, the need to implement new taxesand curb spending will test the regime's popularity.
Oman is well positioned to benefit from improvements in Iran's relationswith the West. The relaxation of the international sanctionsregime on Iran will provide an upside factor for Omani exports andinvestment inflows.
The escalating tensions between Iran and Saudi Arabia threatento undermine Oman's long-held position of regional neutrality.
Although the country's careful balance between Tehran and therest of the Gulf is likely to be maintained as long as Sultan Qaboosbin Said is in power, his successor could struggle to navigate thesame middle ground.
Government efforts to attract Omani nationals to the private sector(known as 'Omanisation') will continue to meet with limited success.
We expect the government to adopt a more flexible approach overthe coming years to accommodate the concerns of companies amida weakening economy. In the long term, improvements in educationwill be a more effective driver of job creation than strict 'Omanisation'targets.
Dropping the rial's peg to the US dollar would provide little benefit tothe Omani economy, and is not our core scenario. Nevertheless, therisk of a forced devaluation will grow throughout the coming years,given the deterioration in Oman's fiscal and external dynamics andthe country's low foreign reserve buffers
We expect the formation of a fragile federalised state in Yemen, and thepolitical situation will remain highly unstable over the coming decade.
Political and social instability will continue for many years. Thedivisions between the internationally-recognised government andthe Houthi rebels shows no signs of being solved.
The economic outlook is uninspiring, with growth remaining sluggishover the next five years. Our core scenario sees businessactivity continuing to be negatively impacted by civil unrest, whilepersistent attacks on the country's hydrocarbon infrastructure willweigh on exports.
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