Towards a sustainable future: Oman

Since coming to power in January 2020, Sultan Haitham bin Tariq Al Said has made significant strides in implementing structural reforms to shore up the economy, drive diversification and spur long-term sustainable growth

The World Bank in August said that the three GCC countries with the largest deficits in 2020, Oman included, are projected to remain in deficit throughout 2021-23, but at narrower ratios to real gross domestic product (GDP) in 2023 compared to the economic downturn in 2020.

Since January 2020 when Sultan Haitham bin Tariq Al Said was sworn in as the new ruler of Oman following the death of his cousin Sultan Qaboos, the world had its eyes glued on the Sultanate to see how the Gulf state would navigate the double whammy of the COVID-19 pandemic and low oil prices.

Oman has one of the weakest credit ratings in the Gulf region compared to its oil-rich neighbors and the country is more sensitive to volatility in oil prices, meaning it was significantly impacted by last year’s historic price crash and weak demand due to the pandemic.

Like its GCC peers, Kuwait, Qatar and Saudi Arabia, Oman depends heavily on oil which accounts for 70% of the Sultanate’s exports and government revenues. However, unlike most of them, Oman has high debt, a smaller stock of sovereign wealth assets and relies on external financing that is expected to cost more to fund amid sluggish growth due to the pandemic.

Despite a rebound in prices to more than $70 per barrel this year, the World Bank said that Oman needs to implement more reforms to achieve sustainable growth and economic diversification.

Under Sultan Haitham bin Tariq’s Vision 2040, the Sultanate has made significant strides in implementing structural reforms to boost the non-oil economy, drive diversification and spur long-term sustainable growth. As part of the government’s broader strategy to shore up the economy, Sultan Haitham restructured government and state entities including the Gulf state’s wealth funds and introduced a 5% value-added tax (VAT) in April. The Sultanate also introduced several austerity measures last year which helped it maintain access to the international debt markets.

The International Monetary Fund (IMF) expects Oman’s economy to rebound and expand by 2.5% in 2021 with around 3% average growth over the medium term, thanks to a projected increase in hydrocarbon production as well as the impact of the vaccine rollout, according to the fund’s July projection.

Fiscal woes

Since taking power in 2020, Sultan

Haitham has taken dramatic measures to rein in public spending to reduce Oman’s fiscal shortfall, but the rate of adjustment lags the revenue drop. Oman approved its budget for the fiscal year 2021 earlier in January.

“The 2021 budget targets a more efficient system of fiscal and financial management, which prioritizes fiscal balance, economic diversification and sustainability of national income,” said KPMG.

The Sultanate projected a deficit of $5.72 billion (OMR 2.2 billion), the lowest since the 2015 financial crisis, and the government said it would approach both domestic and international markets to help plug the gap. In July, Oman’s finance ministry said that it posted a year-to-date budget deficit of $2.32 billion (OMR 890.2 million) in May, as low oil prices and crude production cuts weigh on the Gulf state’s finances.

Following the surge in the actual deficit to $13.8 billion (OMR 5.3 billion) in 2016 (initially budgeted at $8.6 billion (OMR 3.3 billion), Oman seems to be successfully managing its budget shortfall and the Gulf state is on the recovery path with this year’s projected deficit lower than the deficit of 2020 by around 10% or $676 million (OMR 260 million), said PwC.

In its FY2021 budget, which is based on an oil price of $45 a barrel, Oman aims to raise as much as $4.16 billion (OMR 1.6 billion) through borrowing, which covers 73% while the remaining $1.56 billion (OMR 600 million) will be drawn from reserves as the Gulf state looks to tame its widening deficit.

Cash-strapped Oman issued a nineyear Sukuk to raise $1.75 billion earlier in June after drawing more than $11.5 billion in orders for its second international bond issuance this year after the Sultanate had raised $3.5 billion by issuing 10-year and 30-year bonds and tapping its existing 2025 bond earlier in the year.

Oman is rated ‘junk’ by all major rating agencies. S&P Global, Moody’s and Fitch Ratings downgraded Oman’s sovereign rating twice in one year, with S&P’s second downgrade to B+ (four levels into the non-investment grade) settling one grade lower than either Moody’s or Fitch’s.

In March, the Gulf state raised $2.2 billion with a loan, more than double the amount it had initially sought, from a consortium of regional and international banks. Oman also borrowed $1.56 billion (OMR 600 million) from Oman Investment Authority and another $4.6 billion (OMR 1.77 billion) through external and internal borrowings in April to partly finance its 2021 budget deficit.

According to S&P Global, the increase in the Omani government’s net debt will remain elevated through 2024, but the

rating agency expects it to decelerate relatively to 2020 levels, on the back of higher oil prices and a fiscal reform plan. The Sultanate faces large external debt maturities of $10.9 billion between 2021 and 2022, S&P Global noted and it expects the government to rely on external debt to fund the deficits and maturing debt.

OMAN’S BANKS ARE WELL-CAPITALIZED AND LIQUID DESPITE A SLIGHT INCREASE IN NON-PERFORMING LOANS RATIO AND A DECLINE IN PROFITABILITY, BUT CREDIT RISK REMAINS A CONCERN GOING FORWARD DUE TO THE UNCERTAIN OUTLOOK

– The International Monetary Fund

Fiscally fit

As Oman is weighing ways to trim its deficit and reform the economy amid dwindling crude reserves, the Gulf state asked the IMF for technical assistance in July for debt strategy and fiscal framework. The plan will see the fund developing a program that is expected to help the Sultanate to reduce its budget shortfall over the medium term by diversifying the economy and reduce the country’s reliance on international borrowing.

Given state-owned enterprises’ increasing role in the country’s economy, the IMF urged Omani authorities to develop a “sovereign asset-liability management framework to get a better picture of the sustainability of the public sector beyond the central government budget.”

The Central Bank of Oman (CBO) disbursed $20.8 billion (OMR 8 billion) in extra liquidity to banks in March as part of the Gulf state broader strategy to cushion the economy from the impact of the pandemic. However, Moody’s said that although the stimulus package that was unveiled by CBO will mitigate the impact

of the pandemic on the economy, “the reduction in (capital conservation buffers) is credit negative for banks because it lowers their minimum regulatory solvency capital requirements during a difficult time.”

The central bank also ordered Oman lenders to slash banking fees, adjust capital and credit ratios, and allow repayment postponements for up to six months, particularly for small and medium businesses. According to KPMG, Oman’s economic stimulus plan seeks to improve the investment and business environment, support small businesses, protect the labor market and the banking sector.

The IMF said Omani banks are wellcapitalized and liquid despite a slight increase in non-performing loans ratio and a decline in profitability, adding that credit risk remains a concern going forward

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due to the uncertain outlook. Despite the impact of coronavirus on the global banking sector, Oman’s banking sector remains in a relatively resilient position underpinned by strong capital buffers and liquidity. However, the sharp plunge in oil prices and difficult operating environment strained asset quality and earnings.

Banks across the Gulf region have been consolidating to improve economies of scale, reduce operating and funding costs, and boost profitability and efficiency. Oman is no exception and regulators have long supported mergers across the financial services sector. Oman Arab Bank completed the acquisition of Alizz Islamic Bank through a share swap deal in July 2020 in a transaction that created a lender with more than $8.3 billion (OMR 3.2 billion) in assets.

Economic overhaul

Sultan Haitham bin Tariq is leaving no stone unturned in his efforts to bolster flagging public finances, slash subsidies, introduce VAT and restructure government-related entities as part of medium-term plan to overhaul the economy. Cash-strapped Oman started levying a delayed 5% VAT in April 2021 following the lead of Gulf neighbors.

The VAT is aimed at ensuring the Sultanate’s financial sustainability after the Gulf state accumulated huge amounts of debt over the past few years to compensate for its dwindling oil revenues. Oman expects to get around $780 million (OMR 300 million) from the implementation of vat this year. Trimming public debt and restructuring public institutions and companies is one of a series of steps taken by the Sultanate to improve fiscal efficiency after sensitive reforms had lagged for years.

Since coming to power, Sultan Haitham merged several state entities, including the sovereign wealth funds, and appointed finance and foreign affairs ministers and a central bank chairman – portfolios that were held by the late Sultan Qaboos. Oman merged the State General Reserve Fund and the Oman Investment Fund in June 2020 into a new wealth fund Oman Investment Authority, a new entity with $17 billion assets under management.

Oman established a new state-owned energy company, Energy Development Oman (EDO), as part of the government’s efforts to use its largest oil block to raise debt. The energy firm owns a 60% interest in Block 6, which is one of the biggest crude deposits in the region and has a

production capacity of 650,000 barrels a day. Royal Dutch Shell holds 34% in Block 6 while Total owns 4%.

The Sultanate is also in talks with Saudi Arabia which is considering developing an industrial zone in the country. A Saudi delegation, led by Investment Minister Khalid al-Falih visited Oman in August, the latest step as the two Gulf neighbors looks to consolidate and expand the economic relations and mutual investments between the two states, according to state-run Saudi Press Agency.

THE STIMULUS PACKAGE THAT WAS UNVEILED BY THE CENTRAL BANK OF OMAN WILL MITIGATE THE IMPACT OF THE PANDEMIC ON THE ECONOMY, BUT THE REDUCTION IN (CAPITAL CONSERVATION BUFFERS) IS CREDIT NEGATIVE FOR BANKS BECAUSE IT LOWERS THEIR MINIMUM REGULATORY SOLVENCY CAPITAL REQUIREMENTS DURING A DIFFICULT TIME

– Moody’s

Structural reforms

Although Omani authorities dismissed the reports, the Sultanate plans to introduce an income tax on high earners in 2022, according to a 2020-2024 economic plan that was released by the finance ministry last November. The move, which is expected to shore up the economy of the Gulf region’s largest oil producer outside OPEC, is aimed at trimming Oman’s deficit down to 1.7% of GDP by 2024.

However, the implementation of the plan which is unheard of in the oil-rich Gulf region is still currently being studied. As part of the Gulf state’s medium-term fiscal plan, Oman is also considering redirecting state subsidies on electricity and water to only those groups who need

it, rather than subsidizing all users. The Sultanate also plans to expand its visafee exemption to more than 100 countries in a bid to boosts tourism.

Oman also announced in June that it would start granting long-term residence visas to foreign investors as part of the country’s wide-ranging reforms to fix its finances. The decision to introduce a new investment residency program mirrors the visa reforms by the UAE in recent years to offer longer-term residencies and citizenships, to investors and certain professionals.

The dual shocks of COVID-19 and low oil prices tossed the world economy into the greatest recession since World War II, but Sultan Haitham has introduced several reforms including the implementation of VAT and Oman’s 20202024 economic plan to make government finances sustainable.