Oil prices weakness had a significant impact on Omani economy, which posted a sharp slowdown in 2016. Crude oil production surged to a record high and reached 1 Mb/d thank to the implementation of the Khazzan project that boosted production by 5%. However the rise in the oil sector has struggled to offset the slowdown in the non-oil economy. Budget cuts coupled with a poor outlook for the non-oil sector depressed investment. Household consumption, which remains one the main driver of the economy, has also stalled following the freeze on civil service recruitment and sluggishness in the private sector. Household confidence hit a low point in January 2016. As a consequence, the distribution sector that rely on consumer spending dipped slightly while the construction remained robust. The situation is unlikely to change much in 2017. Authorities are expected to pursue budget cuts and maintain the moratorium on recruitment. Furthermore, the introduction of new taxes could depress the household purchasing power. Investment is also expected to be undermined by fiscal austerity measures as a significant portion of the budget is likely to be allocated to current expenditure. Projects that have not yet started could be cancelled. Inflation has been moderate in 2016 but it is likely to accelerate in 2017 on the back of higher water and electricity prices.

Public deficit declined slightly in 2016 but it remains sizeable. The weak oil prices led to a contraction in fiscal revenues that had been partly offset by the efforts made by the authorities. Indeed, while income was down by 13%, spending fell by 12%. As for 2017, the slight recovery in oil prices is expected to improve fiscal revenues which are heavily depending on oil income.  Non-oil incomes are however expected to endure the downturn in economic activity. In response to the fall in public income, the authorities are planning to increase taxes and charges on labor, as well as to introduce GCC-wide VAT, which is due to be implemented in the second half of 2017. Investment spending will, moreover, be limited to the projects already begun. Likewise, current spending, which accounts for three quarters of the State budget, is set to fall. The freeze on public wages and the halt to recruitment will be extended. The size of the public deficits will result in a considerable increase in the debt in 2017, even though it grew by more than 50% in 2016 following the signing of a syndicated loan agreement for USD 1bn from a consortium of foreign banks and a bond issue of USD 2.5bn. The authorities are expected to continue to tap on international debt market to respond to their financing needs but the recent downgrades of the Sultanate's sovereign debt by the rating agencies could increase the cost of debt service in the medium term. The banking system has been facing a liquidity squeeze caused by slower deposits and higher public borrowing. The banks, whose profitability has remained high, could see a narrowing of their margins and an increase in non-performing loans. Having peaked in 2016, the current account deficit will still be high in 2017. After oil export shirked, import needs can no longer be covered by the export values, and the trade balance will therefore enter negative territory. The authorities are, however, unlikely to review the peg of the Omani rial to the dollar, even though the hike in US rates will increase speculative pressures on a potential unpegging.

Although political risk will not materialize in the short term, there are real uncertainties over the stability of the Sultanate. The fragile health of Sultan Qaboos, who remains the cornerstone of the regime, is raising questions around his succession   in background of economic slowdown and public spending cuts that affects Omani households. Moreover, the country is facing an increasingly hostile regional environment and the situation in Yemen presents a direct risk to the Oman’s internal security.