Sustaining the green shoots of an economic recovery

Moody’s estimates that higher oil prices will account for around half of the expected reduction in the fiscal deficit to less than 2 per cent of GDP in 2021 from 18 per cent of GDP in 2020.

The Sultanate of Oman’s economic recovery, after several years of malaise brought on the global downturn and coronavirus pandemic, is truly under way. Oil prices are buoyant, the budget deficit is shrinking, and employment creation for Omanis is on the uptrend.

This recovery, coinciding with the 51st National Day of the Renaissance, is even more satisfying because of the Omani government’s commendable success in halting the spread of the coronavirus infection through its aggressive vaccination drive.

The outlook has never been more promising.

In its latest report on the country’s fiscal performance, the Ministry of Finance announced that resurgent oil prices averaging $57.4 per barrel during the first nine months of this year helped slash the Sultanate of Oman’s budget deficit to RO 1,030 million, representing an impressive 58 per cent decline compared to the corresponding figure of RO 2,448 million for the January – September period of 2020.

By the end of September 2021, public revenue increased by 22.6 per cent to RO 7,367.6 million as compared to RO 6,011.8 million registered in the same period of 2020.

Over the past months, the Sultanate of Oman witnessed some improvement in oil prices that averaged US$57.4 at the end of the 3rd quarter of 2021, which has raised net oil revenue to RO 3,908.5 million and gas revenue to RO 1,422.0 million.

Hydrocarbon exports have remained the primary revenue earner for the country. While daily oil production slid slightly to an average of 957,000 barrels per day during the January – September 2021 period, down from 959,000 bpd during the corresponding period of 2020, average oil prices were significantly higher this year.

It rose to an average of $57.4 per barrel this year, up from $49.1 per barrel for the period under review last year.

This uptick in oil prices translated into net oil revenue of RO 3,908.5 million this year, up from RO 3,0038.9 million for the corresponding period of 2020, representing a growth of 28.6 per cent.

Likewise, gas revenues surged 38 per cent to RO 1,422 million this year, up from RO 1,030 million in 2020.

Also buoying public revenues during the first nine months of this year was a 45.2 per cent jump in current revenue to RO 2,004.1 million, up from RO 1,380.3 million for the corresponding period of 2020.

Non-tax revenue amounted to about RO 1,034.1 million, which included RO 613.3 million of dividends was received from various government investments. Additionally, tax and fees revenue totalled RO 969.9 million.

Spending for the period was also kept in check. Total expenditure amounted to RO 8,397.6 million this year, which was marginally lower by 0.74 per cent compared to last year’s tally of RO 8,460.1 million.

Also easing the fiscal burden on the government this year was the creation of Energy Development Oman (EDO) with the mandate to independently raise the financing requirements of Block 6 licensed to Petroleum Development Oman (PDO), the country’s largest producer of hydrocarbons.

As of September 2021, Energy Development Oman (EDO) became fully operational and thus all government obligations related to the oil and gas production expenditure has been transferred to EDO.

In August, EDO announced that it had successfully secured a $2.5 billion debut financing transaction involving the participation of a number of local, regional and international banks.

The positive report comes on the heels of upbeat assessments by a number of credit rating agencies that had revised the Sultanate of Oman’s economic outlook.

Moody’s revised the outlook on the Sultanate of Oman’s credit rating to stable from negative and affirmed its rating at Ba3.

According to Moody’s, the change in outlook reflects the significant easing of government liquidity and external financing pressures, mainly as a result of the ongoing implementation of the Medium-Term Fiscal Plan and significantly higher oil prices since the middle of 2020, which will underpin a steady decline in the direct government debt burden to around 60 per cent of GDP by 2024.

The Medium Term Fiscal Plan targets, among other things, a reduction in the Sultanate of Oman’s public debt from 80 per cent in 2020 to 60 per cent by 2024, a decline in the government’s gross financing need per annum from 22 per cent in 2020 to 10 per cent during 2021 – 23, and a decline in the Sultanate of Oman’s current account deficit from 13 per cent in 2020 to 4 per cent during 2021 – 23.

According to Moody’s, resurgent oil prices are expected to positively impact the Sultanate of Oman’s twin deficits – the fiscal deficit and the public debt – effectively returning them to pre-pandemic levels within the next couple of years. It noted however that it improved outlook is contingent on the scrupulous implementation of fiscal adjustment measures set out in the government’s National Programme for Fiscal Balance (Tawazun). Moody’s estimates that higher oil prices will account for around half of the expected reduction in the fiscal deficit to less than 2 per cent of GDP in 2021 from 18 per cent of GDP in 2020.

Furthermore, based on Moody’s assumption that prices continue to average above $60-65/barrel in 2022-23, fiscal deficits will likely remain small in the medium term, underpinning a large and likely durable reduction in the government’s gross financing needs to less than 10 per cent of GDP per annum during 2021-23 from more than 22 per cent of GDP in 2020, it stated.

In addition to reining in expenditure, the Tawazun programme proposes rollbacks of all subsidies (save for those targeted at economically vulnerable sections of the national population), controlling the public sector wage bill, freezing budgetary capital spending, diversifying and growing non-oil revenue streams, and potentially introducing a personal income tax on high-income earners.

Buoyant oil prices will help whittle down the government’s soaring public debt to around 67 per cent of GDP in 2021, down from a peak of nearly 80 per cent of GDP last year.

This reduction will be driven by the growth of the hydrocarbon sector buoyed by higher oil prices.

By 2024, and assuming oil prices will remain resilient, the Sultanate of Oman’s debt burden could decline back to pre-pandemic levels of around 60 per cent of GDP, said Moody’s.

Complementing high oil prices in driving the reduction of the twin deficits over the medium term is the government’s decision to pass its long-standing budgetary burden in relation to the hydrocarbon sector to the newly established Energy Development Oman (EDO), the ratings agency noted.

That budgetary responsibility amounted to an average of $4.8 billion annually over the past five years, contributing around 6.5 – 7 per cent of GDP to the fiscal deficit every year.

Moody’s also underlined the importance of a transformation of the Omani economy and the government’s revenue base particularly as many leading countries move away from hydrocarbons towards greener energies. Hydrocarbon exports currently account for over 70 per cent of government revenue.

Adding to the optimistic outlook, Dr Said bin Mohammed al Saqri, Minister of Economy, recently noted that the preliminary indicators of the country’s economic performance are “very reassuring and constantly improving”.

Evidence of this improvement can be seen in particular in the labour market, with as many as 32,000 Omanis set to receive employment this year, he said.

Based on initial performance indicators, there was a 10 per cent improvement in the country’s economic performance during the first half of 2021, compared with the corresponding period of last year when the economy underwent a contraction, Dr Al Saqri said.

Various international ratings agencies had also upgraded the country’s sovereign ratings, corroborating evidence of an improvement in the Sultanate of Oman’s economic performance notwithstanding lingering pandemic-induced challenges.

The Ministry of Economy along with the Oman Vision 2040 Follow-Up and Implementation Unit, have been assigned roles to monitor important indicators related to increasing foreign investment, financial sustainability and rationalisation of spending.

In all, there are 430 programmes and initiatives set out in the 10th five-year plan for implementation in this regard by various entities, he said.

At the same time, the Ministry of Transport, Communications and Information Technology is developing a dashboard that links all ministries, enabling the easy monitoring of how various government agencies perform in the implementation of their programmes outlined in the 10th Plan.

The 10th five-year plan, he said, seeks to achieve several overall objectives, including achieving a real average GDP growth rate of around 3.5 per cent and increasing the private sector’s contribution to investment to about 60 per cent.

At the same time, the real growth rate of non-oil activities is projected to rise to 2.3 per cent annually, and an increase in the investment rate to about 20 per cent of GDP.