Oman, is the second smallest economy in the Gulf Cooperation Council (GCC) and heavily reliant on oil and gas revenues - 2015 was 65% of the budget and 2016 is expected to increase to 72% of the budget.
With a budget balance of -4.4% forecast for 2016 we forecast that delays or cancellations in major construction programmes will occur. This can be seen with the reassessment that is occuring with the $14 billion rail programme. Feasability would suggest that the main return on investment would be to complete the Sohar to Muscat link and delay other sections.
GDP is now expected to grow by 4% by the year end having contracted 13.5% in 2015 due to the oil price collapse. Government expenditure is under huge pressure and the budget was cut 16% in 2016. Oman still expects to run a 28% defecit compared to 2015’s 16%.
With a contraction in the budget of 11% in 2016, the impact on construction awards has been to shrink by nearly 30% from 2014 to 2015, to a total of just over $10 billion in 2015. This is expected to contract further in 2016 to a nominal level of $8 billion which is broadly in line with previous five years awards.
Growth potential is likely to come in the mid-term from the government tapping institutional finance, although this is made more challenging by the recent downgrades by Moody's (to A3) and Standard+Poor (to BBB-/A3). Other forms of finance that are being worked through and have previously been applied in Oman include forms of Public Private Partnership's (PPP) which the Public Authority for Electricity & Water are examining, along with other agencies.
With tightening regional liquidity in the banking sector, private developments will be challenged to raise financing. Numerous wealthy family houses could use this opportunity to develop offerings whilst the construction market is in contraction. Oman's status as an 'off the beaten path' luxury destination makes the development of bespoke hospitality attractive.
With tourism currently representing only 2.2% GDP (2015) in Oman and tourism numbers rising to over 2 million per annum (2015), there is scope for Oman to carve a further niche for itself away from its neighbour, the United Arab Emirates (UAE). Boutique hotels are likely to remain the growth area in the mid term.
With consumer spending holding in part due to a strong disposable income per head and the UAE holding firm as a tourism destination, there are still opportunties for investment and development. These are primarily focused on mid-range hospitality and localised retail centres.
Private consumption will grow slightly in 2016 to around 37% of GDP. This could represent an opportunity for targeted, affordable retail investments.
In the mid-term, Oman will need to reorganise, reprioritise and look to continue investment within the construction industry. This will most likely take the form of social infrastructure investment - expanding transport links (roads in short-term), raising power and water capacity, improving healthcare and education provision and developing Omani housing schemes.
We expect construction inflation to go negative in the H1 of 2016, picking up again in H2 due to the market right-sizing itself, with a cut back in expatriate employees and scaling back of major industry players. Moving into 2016-2018 we will see a progressive pick up in construction inflation to historically normal levels as the industry regains ground lost in 2015 / 2016.