While five-year budget plans are always an invaluable tool for government economists and those involved in the finance industry, after the upset and uncertainty of 2005-10, economic forecasting is of interest to absolutely everyone. But while the recession was the story of the last five years, the focus of the next five is the progress of the recovery and ensuring its continued success.
When it comes to economic forecasting, Oman-based financial services firm United Securities has seen a number of budgets come and go, with the directors personally having an even greater wealth of experience. With economic stability and confidence among investors forming a key part of the organisation’s business, the global situation and local stability are of great importance.
Mustafa Ahmed Salman, Chairman and CEO of United Securities and a key player in Omani commerce for over 30 years, explains that despite the recent extreme turbulence, the recovery is already cementing itself. “There is no doubt that in 2010 we have definitely seen a global pattern of recovery, especially when looked at in comparison to the results for 2009,” he says. “However it still remained below expectations, even in the Middle East, which suffered much less than other parts of the world. Nevertheless, we expect to recover these ratios in 2011 and see a return to solid growth in the region. On a global level, recovery will almost certainly be guided by US economic conditions and corporate earnings, which will deliver repercussions to most of the world.”
According to Mr Salman, the most important recovery strategy to be incorporated into all countries’ five year plans is government spending, particularly over the next two to three years. “Even now in the countries that are leading the recovery – that is to say India, China and, on the other side of the world, America – we see that government spending is the cornerstone of their recovery plan,” he says. “We cannot expect private companies to have much involvement in the recovery just yet, unless they work in areas that will see government expenditure, such as infrastructure.”
He also cautions against continuing with short-term solutions over the longer term, such as the Federal Reserve’s Quantitative Easing II programme. “There is no doubt that, while ‘printing money’ goes against traditional economic reasoning, it was the right thing to do at the time and it helped the world to quickly recover from the crisis. It was a very good short-term strategy, but it is possible that in five years time we may even see some negative effects from QE2, which is why it cannot continue as a long term solution.”
Realistic expectations of recovery are also important. “The growth rates immediately before the recession in 2007-8 were extraordinarily high, but businesses and governments got used to them and saw them as normal,” he explains. “We must realise that a return to stable growth is actually a return to 2005-6 levels. We are expecting growth to return to these levels in 2011-12 and that this will produce stability and prosperity world-wide.”
Investment for growth
This return to growth over the next five years will be as strong in the Middle East as anywhere else, presenting an ideal opportunity for investors. The Middle East was fortunate as it was not hit as hard as other areas of the world and recovered more quickly. Part of the reason for this quicker recovery is that the region’s economy is guided by oil rather than other sectors such as banking. This guiding force has produced some very strong growth in the Gulf States, particularly in Oman and Qatar. “For 2011 onwards we are recession free and, providing of course that there is no sudden drop in oil prices, we expect to see very strong growth,” says Mr Salman.
The five year plans for the budgets of the GCC are once again a key component of this recovery. The most important element of these budget plans is government spending strategies, which are focused largely on improving infrastructure, particularly in Oman, Saudi Arabia, and Qatar. “In Oman, the next five year plan is very strongly focused on infrastructure spending, with a 113 percent increase from the previous five year plan in terms of total investment size, with a similar rate of growth in this area planned in Saudi Arabia,” explains Mr Salman.
“Qatar is of course hosting the 2022 Football World Cup, so this five year plan and the next one will naturally be focused on the $100bn investment planned for that project. But it is not only an event that will benefit Qatar but the Middle East as a whole and the GCC in particular.”
The GCC countries are well known for the comprehensive nature of their economic strategies and their successful planning. As such, these Arab states are keenly aware of their reliance on oil as an income stream – it provides up to 70 percent of the countries’ revenue – and have appropriately incorporated potential for fluctuations in the market into their budgets for the next five years. While the price per barrel of crude oil currently stands at $85-$90, the five year plans of the GCC countries assumed a budgeted price of $50-$60 per barrel. Taking this into account ensures that there will be enough surplus available to see them through the intervening years should this happen. Nevertheless, with Qatar alone holding 15 percent of the world’s gas and oil supplies, the region’s prosperity largely depends on the price of these commodities.
However, the governments of the GCC are working to shift themselves from this sole dependency, and the investment in infrastructure going on all over the region is an integral part of that shift. “The five year plans will open up so many new areas and, in Oman, will increase employment by 10 percent, creating around 275,000 new jobs for Omanis,” says Mr Salman. The level of government spending that will drive this job creation over the next five years will be double that of the previous period – $78bn compared to $36bn. “Government spending in Oman will mainly be focused on expanding and improving the road network, airport construction, education and a large level of investment in town planning. In our opinion, this is a very good decision on the part of the government and a strategy that will change Oman for the better – it will bring the country into a new era.”
Rebalancing the economy
All of these developments present a significant opportunity for foreign investors. The Muscat Securities Market (MSM), the only stock exchange in Oman, has been faring well despite the downturn. Mr Salman has been intimately involved with the exchange since its inception in 1989.
“The MSM was up as a whole during 2010 by around six percent,” he says. “Taking into account the government’s budget plans and expectation of growth through its projects for this year, our view at United Securities is that the MSM is expected to grow by up to 13-15 percent during 2011 on stronger earnings growth momentum. We have based this on the capability for growth in the construction sector, which will be helped by an increase in government spending in this area over the last five years.
“Oil prices are a part of these calculations too but if you look at the budget, Oman is working to reduce its dependency on oil as a source of government revenue from 80 percent to below 60 percent by 2020,” he says.
“The tourism sector is an important part of this shift and is starting to deliver a good return on investment. Undoubtedly this is the right time to make this rebalancing of the economy.”
Looking at the overall outcome of the 2011-15 five year plan, Mr Salman expects the GDP of Oman to increase by 6.1 percent. “All the plans and strategies that are in place here will mean that Oman will become a place of great interest to global investors from many sectors,” he says. “Opportunities are already opening up and with the completion of new roads, their numbers will increase even more. Of particular interest will be the tourism and retail sectors and we encourage global investors to look at those growth areas. The petrochemical and industrial sectors will, of course, remain important for foreign investment opportunities and for the country’s economy.
Additionally, the new port and dry dock of Al-Duqm, located on the eastern seaboard, will be completed within the next five years. This development will position Oman as a key strategic hub for global companies wishing to trade in the Middle East and Asia, particularly India.”
All of these factors make it clear that, over the next five years, Oman will become a key player on the international scene outside of the traditional areas of oil and petrochemicals. While maintaining steady growth and a strong position in these industries, it offers those looking to do business overseas the opportunity to enter into a country that has an increasing range of options for investment in a growing number of business areas. The completion of this next five year plan will bring about opportunities that are equally important for companies looking to strategically expand their investment portfolio in growth markets as it will be for the country itself.
