Oman struggles to close budget gap

Sunday 05/03/2017
A general view of a building of the Petroleum Development Oman (PDO) is seen near Muscat. (Reuters)

Washington - Gulf oil producer Oman proved successful in boosting its crude and condensate output to more than 1 million bar­rels per day (bpd) for the latter half of 2016. Muscat, however, contin­ues to wrestle with financial diffi­culties that have beset the sultanate since the plunge in international oil prices in mid-2014.
Faced with another budget defi­cit this year — the fourth consecu­tive year with a deficit — Oman is considering both traditional and creative measures to raise much-needed cash.
The government has said it would continue fiscal practices, such as borrowing internationally and di­rect placements of debt as well as instituting more austerity measures to rein in spending, it employed in 2016 to contend with budget short­falls. Oman’s budget deficit in 2016 was $13 billion.
Last year, Oman sold $4 billion worth of international bonds, the first such issuances it had conduct­ed in nearly two decades. The Om­ani leadership is planning to garner another $2 billion through dollar or Islamic bond sales this year and has been reaching out to banks to par­ticipate.
Oman lacks the financial cushion enjoyed by many of its Gulf neigh­bours when facing financial dis­tress from sustained low oil prices. This explains why it has turned to borrowing so heavily. That could become problematic as reflected in Standard & Poor’s decision in November to cut its outlook for Oman’s BBB- sovereign credit rat­ing to negative from stable. The independent credit ratings service said that Muscat’s ability to stabi­lise its finances may take longer than expected.
Out of growing concern that ex­tensive and rapid borrowing could further damage its credit rating, the Omani government is studying one creative way to get revenues from its oil sales quicker: Muscat is considering financial structures that would enable its state oil firm, Oman Oil Company (OOC), to re­ceive advance payments of up to two years for crude that it sells to oil traders in return for price dis­counts. Oil firm Rosneft, which is majority-owned by the Russian government, adopted similar pay­ment arrangements.
It is unclear how serious Muscat is in pursuing this avenue, as well as how steep the price discounts would be and how receptive traders would be to such deals.
The Omani government antici­pates the 2017 deficit to be $7.8 billion based on the budget it an­nounced on January 1st, with $30.4 billion allocated for spending and $22.6 billion anticipated in rev­enues. The Finance Ministry said it would make up for this year’s shortfall by raising $5.4 billion from international borrowing, $1 billion from domestic borrowing and pull­ing $1.3 billion from its financial re­serves.
The ministry noted that the Omani government aims to gener­ate higher non-oil revenues this year, which will include income tax changes, taxes on items such as tobacco and alcohol and increases in fees charged for hiring foreign workers. Having cut petrol price subsidies in early 2016, Muscat has more recently introduced higher tariffs on electricity for large gov­ernment, commercial and indus­trial users.
The government also has plans to privatise several state entities with the goal of raising as much as $5 billion over five years. For exam­ple, state-owned Muscat Electricity Distribution Company is expected to sell 50% of its shares in an initial public offering by the end of 2017. The Omani government has for sev­eral years wanted to privatise Oman Air, its unprofitable national carrier.
The Finance Ministry in Septem­ber announced that the govern­ment had begun transferring stakes it owns in listed and private compa­nies to other state-owned corpora­tions and sovereign funds to gain better efficiency in operations and prepare for potential privatisation. The Omani government operates 60 state-owned firms.
Muscat can celebrate having at­tained a milestone when its crude and condensate production hit re­cord levels in November, reaching 1.02 million bpd and marking the sixth consecutive month that the sultanate had produced more than 1 million bpd. However, its output slipped in December and, as part of the coalition of oil producers who agreed to trim nearly 1.8 mil­lion bpd of production from global oil markets beginning in January, Oman has reduced production by 45,000 bpd.
Oman’s 2017 budget is based on an average price for Omani oil of $45 a barrel, which is the same fig­ure the government used to base its 2016 budget, though the aver­age price for 2016 ended up being $37 a barrel. In January, the aver­age price for a barrel of Omani oil fetched $44.50. While that number is encouraging, the International Monetary Fund last year stated that the “break-even” oil price for Oman — allowing it to balance its 2016 and 2017 budgets — is an average of $73 a barrel.