Oman aims to diversify funding options to finance fiscal deficit

Despite a fall in the international price of oil in the run-up to its launch, the government’s 2015 budget is based around a 4% increase in government spending (on budgeted as opposed to actual expenditures in 2014), to OR14.1bn ($36.5bn). The budget, which forecasts government revenues to stand more or less unchanged on 2014 figures at OR11.6bn ($30bn), is based on forecast average oil production of 980,000 barrels per day (bpd), which is thought to be close to Oman’s current maximum capacity, and an average price for Omani oil of $75 per barrel. According to the IMF, the breakeven oil price for the country’s budget stood at $108 in 2014. This gives a budget deficit of OR2.5bn ($6.5bn), which the authorities plan to finance using fiscal surpluses from previous years.

Although oil production for the first seven months of the year was roughly in line with targets, at 975,000 bpd, the daily average price for the first seven months of the year stood at $59.90 per barrel, according to National Centre for Statistics and Information (NCSI) data, and as of August prices stood at roughly $50 per barrel. Total government revenues declined by 36.3% in the first half of the year, with oil revenues having fallen by 46.1%, while expenditures were down 6.4% to OR5.8bn ($15bn) for the period, giving a deficit of OR1.92bn ($5bn), suggesting the government’s deficit target for the year is likely to be overshot. The IMF projects a fiscal deficit of 14.8% in 2015.

Creditworthiness

In February 2015 credit rating agency Moody’s moved to change the outlook on Oman’s current A1 rating from stable to negative. Standard & Poor’s (S&P) downgraded its long-term credit rating for Oman from A to A-minus the same month, alongside those of many other oil-dependent countries. However, in a statement in September fellow ratings agency Fitch said that while Oman, as well as Saudi Arabia and Kuwait, would all record double-digit deficits in 2015, these would likely narrow in 2016 “as capex is scaled back and oil prices start to recover.” Then in November 2015, S&P cut Oman’s long-term local and foreign currency sovereign credit ratings to BBB+, keeping a negative outlook, saying it projects a sharp increase in government and current account deficits over 2015-18 period.

Debt

Financiers say the authorities retain ample room for taking on new debt. “The country’s debt-to-GDP ratio is low and the government easily has capacity to borrow another $40bn-45bn,” Lo’ai Badie Bataineh, head of investment management at Oman Arab Bank, told OBG. The debt-to-GDP ratio stood at 4.8% at the end of 2014, down from 4.9% a year earlier, based on a total debt stock of OR1.53bn ($4bn), though the IMF predicts that government debt will rise to 25% of GDP if the government draws down on its fiscal buffers, or to 70% of GDP if it preserves such buffers at current levels. The state is also diversifying its funding options. In October 2015 the government issued its first sovereign sukuk (Islamic bond). The OR200m ($517.8m) five-year sukuk was oversubscribed, with the programme expanded to OR250m ($647.3m) to accommodate the strong order book.

Fiscal Reforms

Bataineh said he believed 2016 could see the government issue foreign-currency-denominated debt. However, he added that the authorities would likely prefer to limit borrowing as much as possible and instead pursue fiscal reform policies to reduce the deficit, such as cutting subsidies.

In May 2015 Ananthakrishnan Prasad, the head of the IMF’s mission to Oman, told media that the urgency for implementing such reforms had increased in recent months. In its May 2015 brief the fund called on the authorities to take measures to limit rising expenditures, for example by limiting subsidies and expansion in public employee numbers and wages, and to increase non-oil government revenues. It identified options to achieve the latter, including imposing taxes such as value-added tax (VAT) and income tax, and expanding existing tax categories.

In November 2014 an advisory body to the government had also recommended measures including levies on liquefied natural gas exports and telecommunications companies revenues as well as raising existing royalties in the mining industry. In September 2015 local media reported that the Supreme Council of Planning would apply so-called zero-budgeting to development projects, by refusing to allocate additional funds to such initiatives should their budgets over-run, while the Financial Affairs and Resources Council said it had formed a working group to study other methods to reduce spending.

Possible Retrenchment

In the first half of the year spending was down 6.4% on actual spending in the same period in 2014, with current expenditure reduced by 0.7% and investment expenditure down 6.8%. Some infrastructure projects have been slowed or halted as a result, and Rashad Ali Abdullah Al Musafir, acting CEO of Bank Sohar, told OBG there were early signs of delays in government payments to contractors, which he said would be problematic for the SME sector in particular. “The government is still spending, but there are some delays in payments from a procedural angle, and some contractors are now facing challenges because of payment delays,” he said. “While large firms can hold out, smaller companies can go under very quickly as a result of such delays.” Further retrenchment may be on the way. “There have been no announcements of spending cuts or project cancellations, but general sentiment is that a slowdown is coming,” said Bataineh.

Subsidies

Another key measure being considered to bring down spending is a reduction in subsidies. The Central Bank of Oman put the value of these, together with other current transfers, at OR514.4m ($1.3bn) in 2014. However, this does not include all forms of price support, some of which are covered under the “participation and other expenses” element of the budget, and the IMF estimates the value of subsidies in 2014 at OR1.8bn ($4.7bn) and predicts that they will rise to OR2.8bn ($7.2bn) in 2015.

Such a move has been under consideration since before the drop in the price of oil. “There has been a great deal of discussion about lifting subsidies over the last three to four years; however with the oil price having fallen and several other GCC countries having moved to cut their subsidies, it’s becoming more likely that the Omani government will also move to do so,” said Bataineh, speaking in August 2015. He added that while there had also been discussions across the region of introducing VAT, the Omani government was likely to consider subsidy cuts before raising taxes.

The authorities doubled natural gas prices for cement firms in 2015, and in June Darwish Al Balushi, the minister for financial affairs, said that the sultanate would soon move to reduce fuel subsidies, arguing that they were not effective in achieving their goals as they did not specifically target the poor.