Oman struggles to close budget gap
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.