S&P expects Oman's GDP growth to reach 5%

Updated 23 June 2013
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S&P expects Oman's GDP growth to reach 5%

Standard & Poor's Ratings Services yesterday affirmed its "A/A-1" long- and short-term foreign and local currency sovereign credit ratings on the Sultanate of Oman. The outlook is stable. The transfer and convertibility (T&C) assessment remains "AA-".
The ratings are supported by Oman's strong net external and general government asset positions and prudent investment policies. They are constrained by our view of its heavy dependence on hydrocarbons and its challenging demographic profile; nearly 60 percent of the population is under 25 (mid-2011 official estimate).
It is also subject to geopolitical risk, similar to other sovereigns in the Gulf Cooperation Council (GCC). This is somewhat mitigated by the country's strong alliances with international powers, as well as its ability to maintain a neutral and independent stance in the region.
Policy setting and direction largely hinges on the sultan himself. "In our view, this places the effectiveness and predictability of policymaking at risk." Political institutions are at a nascent stage of development relative to nonregional peers rated in the "A" category. While the sultan has taken some measures to expand political participation, the system remains highly centralized, with limited accountability of institutions. Moreover, uncertainty over succession also poses political risks, in our view.
Oman's economy is performing well. "We expect real GDP growth to reach 5 percent this year, underpinned by an increase in oil production to an average of 0.94 million barrels per day (bpd) from 0.92 million bpd in 2012. We also believe growth in the nonoil economy will remain robust on high investment and public and private consumption. We estimate real per capita GDP at $ 21,600 in 2012."
Oman's annual average real GDP per capita growth of about 1 percent during 2006-2016 is low compared with peers. We attribute this low trend largely to Oman's fast population growth — 4.5 percent on average during 2005-2011. We note, however, that reported population figures might not be accurate. They have also fluctuated greatly in recent years, which could distort GDP per capita data. Oman attracts a large number of foreign workers who accounted for 86.5 percent of private sector employment (2011 official estimate); expatriates also accounted for 39 percent of the total population (mid-2011 estimate).
The government continued to build on its fiscal buffer last year. "Fiscal stimulus notwithstanding, the government posted a fiscal surplus that we estimate at 3.3 percent of GDP. Preliminary fiscal data indicate that government spending reached 43 percent of GDP last year, from 40 percent in 2011. We expect a larger surplus this year (4.2 percent of GDP) as the impact of one-off measures from 2011-2012 tapers off. We also base this estimate on Oman's 2013 oil export price remaining unchanged from last year at $ 110 per barrel." A risk to the government's fiscal performance is its reliance on volatile hydrocarbon revenue: 88 percent of total revenues in 2012. However, the government's large stock of liquid assets — at more than 25 percent of GDP — mitigates this risk.
"In our view, the government is becoming increasingly reliant on oil prices remaining high. Its initiative to expand public sector employment to generate jobs for Omanis, as well as its increased spending on benefits and social welfare and its large investment program, has increased this dependency. If oil prices were to drop, we believe that some of this spending would be difficult to curb. We note, however, that if government revenues fell short of spending needs over 2014-2015 it could draw down on previous surpluses. We view as likely the government continuing to issue bonds in domestic currency to help develop the domestic debt capital market. We expect the general government debt to expand by about 1 percent of GDP annually during 2013-2015."
The large oil windfall in recent years has helped further strengthen Oman's external position. "We estimate that the current account surplus reached 12.8 percent of GDP in 2012, and we believe this will continue this year at 11.3 percent. Oman is in a strong net creditor position; we estimate its narrow net external assets will average 89 percent of current account receipts (CARs) in 2013-2015." Similarly, the country's external liquidity position is ample with gross external financing needs at about 81 percent of CARs and usable reserves during 2013-2015.
Notwithstanding its external flexibility, monetary policy is limited in Oman by the peg of the Omani rial to the US dollar. Furthermore, the transmission of monetary policy is constrained by an underdeveloped local capital market.
The stable outlook balances Oman's strong fiscal and external position — which provides a more-than-ample buffer to withstand external shocks — against risks from structural and institutional weaknesses, which could derail policymaking; a difficult demographic profile that could challenge economic policy; and limited monetary policy flexibility.
"We could consider lowering the ratings if the pace of economic growth, diversification, and structural reform is not sufficient to increase per capita real GDP growth to a pace comparable to peers. Downward pressure on the ratings could also build from a protracted weakening in fiscal performance, for example as a result of continued increases in spending on the public-sector wage bill, which could lead to an increase in government debt and a fast drawdown of government assets.
"We could consider an upgrade if the underpinnings of economic growth strengthen, raising per capita income levels and addressing social challenges, including unemployment."


Russian oil industry now self-reliant enough to weather US ‘bill from hell’

Updated 18 August 2018
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Russian oil industry now self-reliant enough to weather US ‘bill from hell’

  • Western sanctions imposed in 2014 over Russia’s annexation of Crimea have already made it extremely hard for many state oil firms such as Rosneft to borrow abroad
  • Russian gas exporting monopoly Gazprom has maintained its output since 2014 and actually increased exports to Europe to an all-time high in 2017

MOSCOW: Stiff new US sanctions against Russia would only have a limited impact on its oil industry because it has drastically reduced its reliance on Western funding and foreign partnerships and is lessening its dependence on imported technology.
Western sanctions imposed in 2014 over Russia’s annexation of Crimea have already made it extremely hard for many state oil firms such as Rosneft to borrow abroad or use Western technology to develop shale, offshore and Arctic deposits.
While those measures have slowed down a number of challenging oil projects, they have done little to halt the Russian industry’s growth with production near a record high of 11.2 million barrels per day in July — and set to climb further.
Since 2014, the Russian oil industry has effectively halted borrowing from Western institutions, instead relying on its own cash flow and lending from state-owned banks while developing technology to replace services once supplied by Western firms.
Analysts say this is partly why Russian oil stocks have been relatively unscathed since US senators introduced legislation to impose new sanctions on Russia over its interference in US elections and its activities in Syria and Ukraine.
The measures introduced on Aug. 2, dubbed by the senators as the “bill from hell,” include potential curbs on the operations of state-owned Russian banks, restrictions on holding Russian sovereign debt as well as measures against Western involvement in Russian oil and gas projects.
While the rouble has fallen more than 10 percent and Russian banking stocks have slumped 20 percent since the legislation was introduced, shares in Russian oil firms have climbed 2 percent, leaving them 27 percent higher so far in 2018.
“The main driver of the Russian oil industry’s profitability is the oil price denominated in roubles and it is currently posting new records as the rouble is getting weaker. Hence the sanction noise often even has a positive impact on Russian oil stocks,” said Dmitry Marinchenko at Fitch Ratings.

 

The prospects for the latest US sanctions bill are not immediately clear. It would have to pass both the Senate and House of Representatives and then be signed into law by President Donald Trump.
To be sure, Washington could really hurt the Russian oil industry if it introduced Iran-like measures forbidding oil purchases from the country. But given Russia produces more than 11 percent of global crude, such a measure would lead to a major spike in oil prices and hit the US itself hard as it is the world’s largest oil consumer.
Russian gas exporting monopoly Gazprom, for example, has maintained its output since 2014 and actually increased exports to Europe to an all-time high in 2017, securing a 34 percent share of EU markets amid rising demand.
But of all Russian oil and gas companies, it is the only one to have borrowed significant sums from the West — about $5 billion in 2017 and $3 billion in 2018 so far — using Eurobonds and syndicated loans.
What’s more, those amounts are only equivalent to a small proportion of Gazprom’s annual capital spending of $22 billion. The rest of the Russian oil industry invests a similar amount each year as well, mostly without Western funding.
That represents a major departure from the years prior to the sanctions when the lion’s share of Russian oil industry’s borrowing came from Western banks or export-backed facilities with trading houses and major oil companies.
In 2013, for example, a year before the first Western sanctions, Rosneft alone borrowed more than $35 billion from Western institutions to buy smaller rival TNK-BP and to fund its capital spending.
There has been a similar shift in joint ventures between Russian and Western companies.
A decade ago, dozens of projects were planned but the number has shrunk to just a few ventures, which are important but not critical to help Russia maintain its output growth.
US oil giant Exxon Mobil and Italy’s Eni, for example, have dropped plans to help Russia develop offshore fields and US company ConocoPhillips sold out from Russia’s biggest private oil firm Lukoil.
The key remaining ventures involving Western companies are three projects between BP and Rosneft in East and West Siberia and a gas venture between Rosneft and Exxon Mobil on Sakhalin island.
Also on the gas front, Royal Dutch Shell and France’s Total have been considering new liquefied natural gas projects with Gazprom and Novatek, as well as a new pipeline to Europe under the Baltic Sea.
But to put the projects in perspective, the combined cost of all of them is about $50 billion — less than a 10th of the Russian oil industry’s investment program for the next decade.
And if Western institutions are wary of lending to Russia, other countries such as China have been prepared to step in. Novatek and Total, for example, launched the $27 billion Yamal LNG plant this year with Beijing’s financial support.
WEAKEST LINK
The weakest link in the Russian oil industry in the face of sanctions has traditionally been high-end Western technology such as complex drilling, hydraulic fracturing or IT, said Denis Borisov, director of EY’s oil and gas center in Moscow.
Russia’s drilling and oil servicing market is worth about $20 billion a year and the share of the market held by Western service companies has remained fairly steady over the last few years and at about a fifth.
“But the process of replacing foreign equipment with local production has gathered pace,” said Borisov.
Rosneft, which produces 40 percent of Russian oil, has recently tested its own simulated hydraulic fracturing technology — the extraction technique that spurred the boom in US shale oil production.
The technology first came to Russia mainly via major Western oil services firms such as Schlumberger and Halliburton .
Companies such as Schlumberger are still doing a lot of complex drilling work in the Caspian Sea and West Siberia for Lukoil, as well as working on the world’s longest extended reach well for Exxon and Rosneft off the Sakhalin island.
But Fitch’s Marinchenko said the reliance of Russian oil firms on Western technology has declined since 2014 thanks to imports from China and local production of drilling equipment.
Since 2014, Rosneft’s own drilling subsidiary has doubled its market share to 25 percent, meaning the company has become almost self sufficient.
“It is clear that new wide-scale sanctions on technology will not become the start of an end for the Russian oil industry, especially if Europe doesn’t join them,” said Marinchenko. “But it will complicate the development of hard to extract or depleted deposits.”

FACTOID

Ratings agencies, consultants see limited impact from bill / Russian oil firms have reduced borrowing from West / Spending funded by own cash flow, state banks and China / Technology seen as weakest link as dependence significant