Oman economic mood darkens

25 August 2015

Continued falls in oil price increase deficit worries

  • New falls in oil price and the increasing budget deficit is worsening economic sentiment in Oman
  • Some public spending cuts expected, but no official announcements have been made

Economic sentiment in Oman is deteriorating as oil prices have continued to fall, exacerbating budget deficits and prompting fears of spending cuts.

Oman has a breakeven oil price of $94 a barrel, but set its budget around $75 a barrel. As prices have averaged below $60 for the year, the deficit had already reached RO1.9bn by the end of June. The most recent falls in the price of Brent crude to below $45 suggest that Oman’s budget deficit will overshoot the RO2.5bn target by far.

London-based Fitch Ratings has downgraded the ratings of five major Omani banks, including Bank Muscat and the National Bank of Oman. It cited the reduced ability of the government to support domestic banks. HSBC Bank Oman escaped a downgrade on the basis of support from its parent company UK-based HSBC.

While Fitch does not publically rate Oman, it expressed concern over “a major deterioration of Oman’s fiscal position,” and whether the government was capable of carrying out reforms to decrease spending.

“The main risk factors driving sovereign support are a failure to contain its budget deficit, leading to rapid erosion of fiscal and external buffers,” read Fitch’s ratings note. “This could arise due to a lack of fiscal adjustment, lower-than-expected oil prices over the medium term, or a contested succession process that disrupts government policy-making and political stability.”

The Washington-based IMF predicts that Oman will deplete its financial reserves by 2020, if it keeps government debt to 25 per cent of GDP, based on current spending levels. The other options are higher debt levels or reducing public expenditure, which reached 50.3 per cent of GDP in 2014, according to IMF figures.

Fears of government spending cuts have increased within Oman, but the government’s plans remain unclear.

“No clear, specific actions have been announced,” says the Muscat consultant. “There has been nothing official from the government about anything like a hiring freeze, as that would have political ramifications – they are still the biggest employer.

Cost reduction drives in government entities, especially the Petroleum Development Oman, is putting pressure on consultants and oil services companies. Rumours are circulating about redundancies and relocations in the oil and gas sector.

The government is also likely to prioritise its project spending. Less strategic projects could be rescheduled, or even quietly put on hold.

But this will not affect vital projects, in the power and water or transport sectors, or privately-financed schemes.

“Most industrial projects are third-party funded and seen as critical for diversification, so they won’t be affected,” says the Muscat consultant. “But if growth in Asia slows it might change the feasibility of some projects which are looking to produce for export, and how banks look at them.”

For now, Omanis and expats are looking for clarity from the government on how they will address the growing deficit.

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