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."


Iran looms large over OPEC summit

Updated 22 September 2018
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Iran looms large over OPEC summit

  • Saudi Arabia only country in Mideast, and perhaps world, with enough capacity to keep market supplied, say experts
  • At Algiers, Opec and leading non-Opec countries are expected to discuss how to allocate supply increases to offset a shortage of Iran supplies

LONDON: The Opec summit in Algiers on Sunday meets amid widespread fears of a supply crunch when a forecast 1.4 million barrels a day of crude is lost from Iran in November when US sanctions kick in.
If, on top of that, more supply shocks hit the market in worse-than-expected disruption from Libya and Iraq, the price of crude could surge, said Andy Critchlow, head of energy news at S&P Global Platts. “At the moment, the market looks finely balanced,” he said.
There isn’t a lot of slack in the system. As Critchlow points out: “Upstream investment in infrastructure and new wells is historically low and it will take a long time to turn that around.”
At Algiers, Opec and leading non-Opec countries are expected to discuss how to allocate supply increases to offset a shortage of Iran supplies. The gathering comes after a tweet by President Trump on Sept. 20 calling on Opec to lower prices. He said on Twitter that “they would not be safe for very long without us, and yet they continue to push for a higher and higher oil price.”
Critchlow reckoned KSA still had spare capacity of about 2 million bpd. And KSA would get oil back as they go into winter as it had needed 800,000m bpd merely to generate electricity for the home market to meet heightened demand for air conditioning in the summer.
But there is uncertainty about what will come out of Algiers. For a start, the Iranians say they will not attend. That could be tricky in terms of an Opec communique at the end of the meeting as statements need unanimous support from member nations. And Iran has indicated it will veto any move that would affect Iran’s position, ie, one where other countries absorb its market share as sanctions bite.
Jason Gammel, energy analyst at London broker Jefferies, said: “The magnitude of the drop in Iranian exports is likely to be higher than any hit in demand as a result of problems linked to emerging market currencies, or trade wars. That’s why we expect oil prices to continue to strengthen. The Saudis and their partners will keep the market well supplied, and I think the issue is that the level of spare capacity in the system will be extremely low. Any threat or interruption will mean price spikes. Possibly by the end of the year demand will exceed supply; for now, the market remains in balance, but threats of supply disruption will bring volatility.”
Under the spotlight in Algiers is a production cuts accord forged by Opec and 11 other countries in 2016 which has been extended to the end of this year. The agreement helped reboot prices and obliterate inventory stockpiles that led to the crash in crude prices nearly three years ago. But how long will the agreement last? Algiers may kick that one into the long grass.
Thomson Reuters analysts Ehsan Ul-Haq and Tom Kenison told Arab News: “OPEC members would like to maintain cohesion within the group around supply ahead of Iran sanctions and declining Venezuela production, However, they are expected be in favor of maintaining stability in prices while doing so. On the other hand, they need to find a consensus around how their market share would be affected by a decision to pump more oil in the market. Any decision around production will likely be offset until the November meeting.”
Critchlow said that it is what KSA and Russia say and do that matters. “They speak for a fifth of the global oil market, producing a combined total of 22m bpd.” Together, they are the swing producers when it comes to crude production and supply.
Another factor about Algiers is that it is a meeting of the Joint Ministerial Monitoring Committee, which is not a policy-making forum. Big policy statements may have to wait for the main Opec summit in Vienna at the end of year. That said, there will be some very high-level delegations in Algiers, including the Saudi oil minister and his Russian counterpart.
A statement about the demand picture could emerge, especially as there are fears about the impact on the global economy from the US-China tariff war.
Looking to the future, Critchlow thought the Opec production cuts accord would carry on into 2019. “Oil priced between $70/bbl and $80/bbl is a sweet spot for Middle East producers. Its’s good for Saudi as it helps stop further drainage of their foreign reserves and moves the budget back toward balance. Do they want (the price) to go higher? I think that would cause a lot of political problems for them.”