Source: Emirates 24/7
Banking sector outlook remains stable amidst high oil prices and public spending
Strong oil prices and an expected 20 per cent increase in public spending will boost Oman’s real GDP by around 2.9 per cent in 2011 and growth could pick up in 2012, according to Moody’s investor service.
The agency also said its outlook for Oman’s banking sector remains stable amidst strong oil prices and a sharp increase in public expenditure, which will give rise to domestic credit in the Gulf country.
“For 2011-2012, we forecast Oman’s real GDP growth to record 2.9 and 3.9 per cent, respectively. Economic growth will likely be driven by higher oil production and elevated oil prices (which will likely remain well above Oman’s fiscal breakeven point of $58 per barrel) and accelerated government spending, projected to grow by 20% during 2011. This will likely boost the non-oil sector of the economy, which constituted 54% of GDP in 2010,” it said in a report.
The report noted that the 8th five-year economic development plan (2011-2016) approved at the beginning of 2011 includes a government capital investment of RO12 billion ($31bn) over the next five years, while total government expenditure will amount RO42bn ($109bn) for this period.
This compares with Oman’s nominal GDP of RO21bn ($55.5bn) during 2010. The report expected higher government investment to boost the non-oil sector of the economy and stimulate the banks’ medium-term lending growth It said the measures announced by the government in February to address social concerns of the protesters would likely boost retail demand and lending.
These measures include the creation of new jobs in the public and the private sector; higher minimum salaries for 150,000 workers in the private sector; and the introduction of welfare benefits for the registered unemployed.
“In our view, the short-lived political unrest in the country in February 2011 is unlikely to have a significant impact on the non-oil Omani economy and on the growth prospects of the domestic banks,” it said.
“The government’s response to protestors’ demands for better job opportunities and concerns about the cost of living helped prevent lasting disruption in the non-oil economy, supporting the banking sector.”
The report said that against the backdrop of strong economic growth, bank lending could expand by 10-15 per cent in nominal terms over the next 12-18 months.
“Our outlook for Oman’s banking system remains stable. The outlook captures Oman’s improved operating environment, reflecting high oil prices and increased government spending that will continue to fuel bank lending; (ii) banks’ solid capitalisation, which can absorb potential losses under out stress scenarios; (iii) stable funding bases and high liquidity buffers; and (iv) our expectation of adequate earnings, despite higher operating costs,” Moody’s said.
“These factors are balanced by our view that credit risk remains a key challenge for the system, even though non-performing loans (NPLs) will likely remain at low levels over the outlook period (at 3-4% of loans). This particular risk stems from high credit borrower concentrations and sizeable exposures to the fragile construction and real-estate sector.”
The report said the stable outlook is also underpinned by the sector’s solid capitalisation buffers, adding that the system had a combined Tier 1 ratio of 13 per cent as of December 2010, a sufficient buffer to absorb expected credit losses under our base-case and stress-case scenarios.
“The system also displays adequate earnings generating capabilities, with pre-provision earnings to average assets likely to approximate 2.5 per cent during 2011, broadly the same levels as last year. Profitability will likely be supported by healthy interest margins, credit growth, low provisioning requirements and an efficient cost base, despite rising staff costs.”