Issue 817, 9 November 2007

Oil price boom provides welcome relief for Oman after Gonu

Surging international oil prices have helped the Sultanate to confront a range of pressures after the cyclone.

Less richly endowed with hydrocarbons than many of its Arabian neighbours, Oman has always had to manage its petroleum income with care, but this year the cost of reconstruction after Cyclone Gonu has imposed unexpected pressures (GSN 808/1). A further complication is the threat of possible further sanctions against Iran, which could disrupt Oman’s developing trade and energy partnership with the Islamic Republic.

Faced with damage estimated as high as $3.9bn, including $2.6bn for public infrastructure, after Gonu struck on 6 June, Sultan Qaboos Bin Said Al-Saeed opted to put the national five-year development plan on hold. The government needed to concentrate on priorities such as rebuilding the Qurum-Al Sarooj beach road and 12km of the Wadi Adai highway. WS Atkins is consultant for the reconstruction of the former. It is not enough simply to rebuild what has been destroyed. The replacement infrastructure is being designed to cope with repeat floods in future; the rebuilt Seeb corniche will incorporate six bridges, totalling a combined length of 1km – the biggest 360m long – spanning channels down which water could flow in the aftermath of heavy rains. Moreover, it was also soon realised that planning constraints on urban development in areas prone to flooding would have to be reviewed.

In terms of emergency command and organisation, Oman showed itself well able to cope with the challenge posed by natural disaster, but once the immediate humanitarian needs were met it obviously made sense to take stock and look at where future strategy could be tweaked to cope in any future catastrophe situation. Similar lessons have been learned in the private sector, particularly in respect of approaches to insurance. Many companies already had cover against physical losses and much of the private sector was able rapidly to return to normal trading; the direct financial impact was limited, according to the reports that listed companies sent to the Capital Market Authority. Many physical structures such as beachfront hotels survived almost unscathed. Among listed firms, the heftiest damage bill – just $3.4m – was reported by Oman Fibre Optic.

A wider range of firms suffered disruptions to production. Oman Cement Company, for example, said that an eight-day halt to sales had cost it OR400,000 ($1m); but it should more than offset this with the new business it gains in supplying reconstruction projects, even allowing for a promised official freeze on cement prices.

At the community level, and for some individual families, the cyclone did of course have a major impact. The final death toll was put at 60, while 70,000 people lost their homes. Insurers tried to settle personal claims first, before moving on to process the big payouts to business clients in August and September. Meanwhile, BankMuscat offered interest-free loans of up to OR1,500 to customers with salaries below OR500/month to help them cope with repair costs.

Financial impact

The government has been distributing cash compensation payments. In some cases these have been desperately needed. However, there is also anecdotal evidence that some households have done rather well out of the scheme, exaggerating the scale of damage to their homes and possessions and realising a useful bonus in state assistance; understandably, perhaps, given the fact that many people did suffer genuine hardship, the government appears to have given priority to speedy disbursement rather than a microscopic assessment of the value of individual losses.

In some respects the greatest early economic impacts from Gonu have been financial. Insurance underwriters were able to pass on much of the immediate cost of claims to their reinsurers. But this will feed back into the market in terms of higher premiums, both because the industry will need to rebuild its underwriting capital – by hiking prices – and because Gonu has demonstrated that a country previously regarded as little at risk of most natural disasters is vulnerable, especially at a time of global climate change. Underwriters admit that hitherto they would not have advised customers to bother with cover for storm, tempest and flood (STF); but henceforth they will be doing so. That will add to customers’ insurance costs in future.

The industry that was perhaps most impacted by Gonu was the vehicle sector, as floodwaters and storm winds tossed cars around. In Muscat alone, 10,000 vehicles were damaged. Because most vehicles did not hitherto have STF cover, vehicle leasing firms have suffered a painful blow, especially where customers then stopped making payments because they no longer had cars. This left banks that provide lease finance with loans to clients outstanding, and no collateral against which to secure the exposure – because, under a leasing contract, the vehicle itself is the security. On the other hand, over time, the need to replace wrecked cars actually helped stimulate the sector, creating new business right through the value chain.