2015 breakeven oil price $94

2014 breakeven oil price $108

After months of medical treatment abroad, the much-celebrated return of Sultan Qaboos to Oman has calmed the fears of observers concerned about the country’s preparedness for succession. It has also provided a boost to the economy.

This is evident in the steady stream of news on big projects. Prequalification has begun on the next phase of the national rail scheme and on the power and desalination plant for Duqm refinery.

“The Sultan’s return prompted a bit of renewed confidence in the continuity and consistency of government,” says a Muscat-based consultant. “They are cracking on with a lot of tenders.”

Rising debt

But with oil prices hovering around $60 a barrel, this rate of spending is unsustainable. Due to high levels of social and infrastructure spending since 2011, Oman had a breakeven oil price of $108 in 2014, according to the Washington-based IMF.

The IMF released a statement on 5 May calling on Oman to undertake fiscal reforms and avoid massive increases in government debt levels. However, the suggested reforms, including subsidy cuts and limiting the public sector wage bill, are politically sensitive.

Muscat approved a record budget of RO14.1bn ($36.7bn) for 2015. It plans a deficit of 8 per cent of GDP and will draw down on sovereign reserves and issue RO600m of debt to cover it. However, outside observers find this projection optimistic.

The IMF warned the overall fiscal deficit would reach 14.8 per cent of GDP in 2015 and would remain in double digits over the medium term if Oman continues with its spending plans.

Despite having the highest extraction costs in the region, Muscat intends to increase crude oil production by 4 per cent to 980,000 barrels a day in 2015 to make up for budget shortfalls. It is investing heavily in extraction, but raising production is a short-term strategy.

This highlights the urgent need to invest in economic diversification strategies to reduce its dependence on oil revenues, which provided 79 per cent of government income in 2014.

The IMF forecasts that the non-oil growth rate will drop from 6.5 per cent in 2014 to 5 per cent in 2015, in line with the government’s spending plans. It will continue to fall to 4.5 per cent from 2017 until 2020, based on the assumption of continuing low oil prices.

Real GDP growth overall will increase from 2.9 per cent in 2014 to 4.5 per cent in 2015, but remains below government projections of 5 per cent, according to the IMF.

A total of RO3bn, or 21 per cent of total spending, is earmarked for investment in infrastructure and diversification in 2015. A number of important projects are intended to shift Oman’s economy away from hydrocarbons. These include industrialisation schemes such as the 222-square-kilometre Duqm port and freezone and Sohar freezone, featuring the recently tendered $3.6bn Liwa Plastics project.

Another element of Oman’s strategy is its plans to become a logistics hub. The $15.6bn national rail programme is a key part of these ambitions, as are the numerous road projects.

Tourism boost

The third pillar of diversification is tourism, and the Oman Tourism Development Authority (Omran) is encouraging local private sector and foreign investment in massive tourist developments. These include the Omagine real estate and tourism scheme, which is financed by local and US investors, as well as Athens-based CCC, and the Ras al-Hadd eco-tourism project being developed by Qatari Diar.

The tendering of these vital projects has not noticeably slowed since oil prices fell, and the government is widely expected to carry out projects already planned. Some schemes have been delayed, however, including the Duqm petrochemicals plant, which will not begin until the planned Duqm Refinery is completed.

“In certain sectors, such as oil and gas, belts are being tightened, but in others development continues,” says the consultant. “We are not worried about 2016 as there are plenty of road projects going on, as well as the railway.”

The Oman Power & Water Procurement Company (OPWP) is undertaking a huge building drive to increase electricity capacity, in order to keep up with demand growth of 9 per cent a year for electricity and 6 per cent for water in the main systems, numbers that rise in other regions.

Oman’s independent power and water project (IPWP) model has been tried and tested, with companies such as Saudi Arabia’s Acwa Power agreeing to extend plants under new power-purchase agreements. The tendering of large schemes such as the Ibri and Sohar independent power projects and the Sohar and Barka independent water projects, set for this year, should be smooth.

However, the privatisation of electricity distribution will present a greater challenge, mainly due to subsidised tariffs and the resistance to increasing consumer prices.

The OPWP is appointing experts to study spot market and privatisation plans, and over the past five years the government has tried to set up viable electricity companies to sell off. However, little progress is expected in the next 12 months.

With subsidies making up 13 per cent of the 2015 budget, or RO1.8bn, unless oil prices rise dramatically, Muscat will have to take action on its subsidy bill.

The next few years in Oman will be challenging. Regional instability is now knocking on Oman’s door after Saudi Arabia launched a war against Houthi militias in bordering Yemen.

The government will have to find a way to balance budgetary constraints with much-needed investment in diversification strategies and stabilising social spending, while encouraging Omanis into private sector employment.

Efforts so far have been disappointing, with state spending rising to 57.8 per cent of GDP in 2015, according to the IMF, and only a third of Omanis in private sector employment.