Challenges facing Oman’s economy after turbulent year

The coronavirus disease (COVID-19) pandemic has roiled Oman’s economy, with real gross domestic product (GDP) poised to shrink 5 percent this year, according to S&P Global Ratings. (Shutterstock/File Photo)
The coronavirus disease (COVID-19) pandemic has roiled Oman’s economy, with real gross domestic product (GDP) poised to shrink 5 percent this year, according to S&P Global Ratings. (Shutterstock/File Photo)
Short Url
Updated 29 December 2020

Challenges facing Oman’s economy after turbulent year

The coronavirus disease (COVID-19) pandemic has roiled Oman’s economy, with real gross domestic product (GDP) poised to shrink 5 percent this year, according to S&P Global Ratings. (Shutterstock/File Photo)
  • As sultanate reopens borders, how can its economy recover from impact of pandemic?

BARCELONA: Lower crude revenues have left Oman’s finances in a precarious position and while spending cuts and additional taxes will help narrow its soaring budget deficit, the sultanate could require support from its Gulf neighbors unless oil prices rebound.

The coronavirus disease (COVID-19) pandemic has roiled Oman’s economy, with real gross domestic product (GDP) poised to shrink 5 percent this year, according to S&P Global Ratings. Gross government debt will soar to 84 percent of GDP in 2020 from 60 percent in 2019, S&P estimates, predicting oil prices will average $50 next year and $55 in 2023.

“Oman needs the Brent price to rebound to above $60 per barrel to reach a comfortable fiscal zone,” said Fabio Scacciavillani, a partner at Dubai investment bank Emintad and former chief strategy officer at Oman Investment Fund.

“Until the oil price exceeds $80, Oman won’t be completely out of the woods — it’s really as simple as that. In essence, until the oil price reaches Oman’s fiscal breakeven level, its debts are poised to swell further.”

Hydrocarbons provide 35 percent of GDP, 60 percent of current-account receipts and 75 percent of fiscal receipts. Oman’s oil production in November averaged 720,789 barrels per day (bpd), just above its quota as part of the OPEC+ cuts that crude exporters agreed in April in response to dwindling demand and tumbling prices.

Such price and production levels have weakened Oman’s already fragile finances, with government income down by one-fifth in the first seven months of 2020. The sultanate has borrowed internationally and spent some of its foreign reserves in order to fund a budget shortfall that has worsened over the past half-decade; Oman’s combined fiscal deficit from 2014 to 2019 was 20 billion rials ($52 billion) as government debt soared from 1.5 billion rials to 17.6 billion rials over the same period.

Oman’s fiscal deficit will double to 18 percent of GDP in 2020, from 9 percent in 2019, according to S&P and Fitch Ratings.

“That’s a very difficult starting position and even substantial reforms and spending cuts will only bring the budget deficit down to 11.3 percent in 2022,” said Jan Friederich, senior director, sovereigns, at Fitch Ratings.

This year, the major credit ratings agencies — S&P, Moody’s, and Fitch — each downgraded Oman by two notches. Oman’s 2020 to 2024 fiscal plan, published in November, warned that further downgrades were likely over the following six to 12 months unless the country did more to narrow the gap between its income and expenditure. Oman has $10.7 billion of external debt maturing in 2021 to 2022.

“Most likely markets will demand higher interest rates thereby impacting on the debt servicing costs,” said Scacciavillani.

In the Gulf, the single-most important indicator for sovereign creditworthiness was sovereign net foreign assets, said Friederich.

“Oman’s position has turned negative because it has substantial debts and no longer has the large asset positions it did several years ago,” he added.

The country’s interest payments jumped from 35 million rials in 2014 to 1 billion rials this year, according to the fiscal plan which acknowledged that debt servicing costs had hit “unsustainable” levels.

The current account deficit was pressuring Oman’s foreign reserves and the rial’s dollar peg and maintaining the peg could depend on support from Oman’s Gulf neighbors, said Friederich.

“For the lower-rated (Gulf) sovereigns — Bahrain and increasingly Oman — the stability of the peg comes down to the belief of markets that other members of the GCC would stand behind them,” added Friederich.

Fitch believes Oman will receive sufficient support to maintain its access to capital markets, although its economy is around twice the size of Bahrain’s, so “continuously bailing out Oman will start to become a fairly costly exercise for other GCC members,” he said.

Sultan Haitham bin Tariq al-Said, who became ruler in January, has enacted wide-ranging reforms since assuming power. These have included so-called fiscal consolidation measures to cut the government deficit and reduce its debts, merging Oman’s two main sovereign wealth funds, and bringing all government-related entities, aside from the state oil company, under the control of the newly launched Oman Investment Authority (OIA).

Oman aims to increase government revenue to 12.1 billion rials in 2024 from 8.6 billion rials this year. This would reduce the fiscal deficit to 1.7 percent of GDP in 2024, the government has predicted.

Muscat also plans to reduce its 1 billion annual subsidy bill so that only “vulnerable” and “deserving” people receive such support, with electricity and water tariffs set to increase further. The fiscal plan noted that further spending cuts would have a “temporary socioeconomic impact,” but predicted the measures would bolster economic activity, foreign and domestic investment in Oman, and create jobs.

The government has streamlined its processes, slashing the number of days it takes to open a business and obtain labor visas for foreign workers. Housing fees have been cut to 3 percent from 5 percent and the laws around foreigners owning property have been relaxed. Oman also now allows citizens from more than 100 nations to enter the country visa-free.

“Reliance on oil and gas for income and insufficient past savings limit the extent to which Oman can stimulate the recovery,” said Scott Livermore, chief economist and managing director at Oxford Economics Middle East.

In order for foreign capital and private companies to invest in Oman, the labor market must become more flexible, while the education system must better equip young Omanis with skills to compete globally, Scacciavillani said.

“These are politically hard choices: The policy recipes to jumpstart the private sector and diversify aggressively the economy have always been well known, (but) while oil prices were high enough to pay for Omanis’ wellbeing these measures never became a priority,” he added.

To diversify state income, Oman will introduce a 5 percent value added tax (VAT) next April 2020, although 90 basic products will be exempt along with healthcare and education. As well as raising product and services prices, VAT also imposes a sizeable administration and accounting burden, especially on small businesses, Scacciavillani said.

“VAT is a way for Oman’s government to diversify and increase its revenues, so for bondholders it’s a positive development as it will enable the state to raise taxes flexibly and quickly if the need arises — for example, VAT might increase to 10 percent temporarily if the oil price doesn’t rebound substantially,” he added.

The government also plans to introduce income tax for higher earners, which would be the first time it had been levied in the GCC.

“An income tax creates a subtle political problem. In the Gulf, foreign workers do not receive public services such as education or healthcare, but if you introduce an income tax can you continue to exclude them from these services?” said Scacciavillani.


Saudi CITC pushes for more tech listings on Tadawul

Saudi CITC pushes for more tech listings on Tadawul
Updated 02 August 2021

Saudi CITC pushes for more tech listings on Tadawul

Saudi CITC pushes for more tech listings on Tadawul
  • The CITC is aiming to enhance the investment environment in the telecoms and IT sectors

RIYADH: Saudi Arabia’s Communications and Information Technology Commission (CITC) signed an initial agreement with the Saudi Stock Exchange pushing for more listing of technology operators in the Kingdom on the Saudi stock market.

The CITC is aiming to enhance the investment environment in the telecommunications and information technology sector, the postal sector and delivery applications, SPA reported.

Financial market listings provide greater investment opportunities and helps companies to expand and enter new markets, and develop products, CITC said.

It also contributes to strengthening corporate governance with a regulatory framework of high quality and institutional value.

This agreement comes in line with the Vision 2030 objectives aimed at making the Kingdom a leading global logistics platform and a connecting hub for the three continents.


Saudi mortgage lending surges 27 percent in first half of 2021 — SAMA

Saudi mortgage lending surges 27 percent in first half of 2021 — SAMA
Updated 02 August 2021

Saudi mortgage lending surges 27 percent in first half of 2021 — SAMA

Saudi mortgage lending surges 27 percent in first half of 2021 — SAMA
  • Saudi banks and financial institutions lent SR79 billion for residential mortgages H1 2021

RIYADH: Residential mortgage financing in Saudi Arabia jumped by more than a quarter in the first half of the year even as new lending slowed in the second quarter, central bank data showed.

Saudi banks and financial institutions lent SR79 billion for residential mortgages in the first six months of 2021, up from SR62.1 billion in the same period last year, SAMA said in its monthly bulletin. The number of transactions increased 14.2 percent to 153,054 in the period.

The value of mortgages provided in the second quarter slid to SR31.1 billion riyals from SR49 billion in the first quarter as the supply of new properties fell amid changes to the building code.

“The number of contracts increased in the first half, but temporarily decreased in the past three months, but due to the reorganization of property evaluation by the Real Estate Fund, and the application of the new Saudi building code with the temporary ambiguity until it is well understood, and the lack of supply of ready housing units,” Mohamed AlKhars, a member of the housing program advisory board and the chairman of Innovest Property Co. told Arab News.

“I expect the volume of financing and the number of contracts to gradually increase in the fourth quarter of 2021,” he said.

Financing for villas accounted for 80 percent of residential real estate loans in the first half of the year, with 15.9 percent for apartments and the remainder for land, the SAMA data showed.

“Villas are still more desired by citizens and more available in the market, and apartment supply is still low now, as the developers are still focusing on building villas due to low interest in apartments which might continue for a while,” AlKhars said.

The mortgage market has seen stratospheric growth since SAMA began collecting the data in 2016 when a total of 22,259 real estate loans were issued. In 2019, that number jumped to 179,220 from 50,496 the previous year, before reaching 295,590 in 2020.


Brent crude falls below $75 amid Chinese economy concerns, OPEC output

Brent crude falls below $75 amid Chinese economy concerns, OPEC output
Updated 02 August 2021

Brent crude falls below $75 amid Chinese economy concerns, OPEC output

Brent crude falls below $75 amid Chinese economy concerns, OPEC output
  • Chinese factory activity posts slowest growth since before pandemic
  • OPEC output reached 15-month high in July - Reuters survey

LONDON: Oil prices dropped, sending Brent crude back below $75 a barrel after a report showed Chinese factory activity declined as the world’s second largest oil consumer battles a resurgence in coronavirus infections.

Brent crude dropped 2 percent to $74.81 a barrel at 2:15 p.m. in London, after ending July at the highest level in more than two weeks.

The international oil benchmark climbed 2.5 percent last week after a rollercoaster month that saw it swoon from a two-year high of $77.16 on July 5 to $68.62 on July 19 before recovering to end the month at $76.33.

Concerns over the effect a resurgence in coronavirus cases might have on demand for crude were allayed on Wednesday when a report showed a bigger-than-expected drawdown of crude stockpiles the previous week.

US West Texas Intermediate (WTI) crude futures dropped 0.8 percent today to $73.24.

Chinese factory activity slowed in July to its lowest level since the start of the pandemic, data showed Saturday, as manufacturing was impacted by slowing demand, weak exports and extreme weather.

The Purchasing Managers’ Index (PMI), a key gauge of manufacturing activity in the world’s second-largest economy, dropped to 50.4 in July from June’s 50.9, the National Bureau of Statistics said. A reading above 50 indicates growth.

“China has been leading economic recovery in Asia and if the pullback deepens, concerns will grow that the global outlook will see a significant decline,” Edward Moya, a senior analyst at OANDA, told Reuters.

Oil prices were also damped by a Reuters survey that showed oil output from the Organization of the Petroleum Exporting Countries (OPEC) rose in July to its highest level since April 2020.

An exchange of words over an attack on an Israeli-managed oil products tanker off the coast of Oman on Thursday appeared to provide little support to the crude market.

Iran will respond promptly to any threat against its security, a foreign ministry spokesman said on Monday, after the US, Israel and the UK blamed Tehran for the attack..


The robot apocalypse is hard to find in America’s small and mid-sized factories

The robot apocalypse is hard to find in America’s small and mid-sized factories
Updated 02 August 2021

The robot apocalypse is hard to find in America’s small and mid-sized factories

The robot apocalypse is hard to find in America’s small and mid-sized factories
  • Only one of 34 companies visited by MIT researchers had spent heavily on robotics
  • Bulk of machines were from before the 1990s

CLEVELAND: When researchers from the Massachusetts Institute of Technology visited Rich Gent’s machine shop here to see how automation was spreading to America’s small and medium-sized factories, they expected to find robots.
They did not.
“In big factories — when you’re making the same thing over and over, day after day, robots make total sense,” said Gent, who with his brother runs Gent Machine Co, a 55-employee company founded by his great-grandfather, “but not for us.”
Even as some analysts warn that robots are about to displace millions of blue-collar jobs in the US industrial heartland, the reality at smaller operations like Gent is far different.
Among the 34 companies with 500 employees or fewer in Ohio, Massachusetts and Arizona that the MIT researchers visited in their project, only one had bought robots in large numbers in the last five years — and that was an Ohio company that had been acquired by a Japanese multinational which pumped in money for the new automation.
In all the other Ohio plants they studied, they found only a single robot purchased in the last five years. In Massachusetts they found a company that had bought two, while in Arizona they found three companies that had added a handful.
Anna Waldman-Brown, a PhD student who worked on the report with MIT Professor Suzanne Berger, said she was “surprised” by the lack of the machines.
“We had a roboticist on our research team, because we expected to find robots,” she said. Instead, at one company, she said managers showed them a computer they had recently installed in a corner of the factory — which allowed workers to note their daily production figures on a spreadsheet, rather than jot down that information in paper notebooks.
“The bulk of the machines we saw were from before the 1990s,” she said, adding that many had installed new computer controllers to upgrade the older machines — a common practice in these tight-fisted operations. Most had also bought other types of advanced machinery — such as computer-guided cutting machines and inspection systems. But not robots.
Robots are just one type of factory automation, which encompasses a wide range of machines used to move and manufacture goods — including conveyor belts and labeling machines.
Nick Pinkston, CEO of Volition, a San Francisco company that makes software used by robotics engineers to automate factories, said smaller firms lack the cash to take risks on new robots. “They think of capital payback periods of as little as three months, or six — and it all depends on the contract” with the consumer who is ordering parts to be made by the machine.
This is bad news for the US economy. Automation is a key to boosting productivity, which keeps US operations competitive. Since 2005, US labor productivity has grown at an average annual rate of only 1.3 percent — below the post-World War 2 trend of well over 2 percent — and the average has dipped even more since 2010.
Researchers have found that larger firms are more productive on average and pay higher wages than their smaller counterparts, a divergence attributed at least in part to the ability of industry giants to invest heavily in cutting-edge technologies.
Yet small and medium-sized manufacturers remain a backbone of US industry, often churning out parts needed to keep assembly lines rolling at big manufacturers. If they fall behind on technology, it could weigh on the entire sector. These small and medium-sized manufacturers are also a key source of relatively good jobs — accounting for 43 percent of all manufacturing workers.

LIMITATIONS OF ROBOTS
One barrier for smaller companies is finding the skilled workers needed to run robots. “There’s a lot of amazing software that’s making robots easier to program and repurpose — but not nearly enough people to do that work,” said Ryan Kelly, who heads a group that promotes new technology to manufacturers inside the Association for Manufacturing Technology.
To be sure, robots are spreading to more corners of the industrial economy, just not as quickly as the MIT researchers and many others expected. Last year, for the first time, most of the robots ordered by companies in North America were not destined for automotive factories — a shift partly attributed to the development of cheaper and more flexible machines. Those are the type of machines especially needed in smaller operations.
And it seems certain robots will take over more jobs as they become more capable and affordable. One example: their rapid spread in e-commerce warehouses in recent years.
Carmakers and other big companies still buy most robots, said Jeff Burnstein, president of the Association for Advancing Automation, a trade group in Ann Arbor, Michigan. “But there’s a lot more in small and medium-size companies than ever before.”
Michael Tamasi, owner of AccuRounds in Avon, Massachusetts, is a small manufacturer who recently bought a robot attached to a computer-controlled cutting machine.
“We’re getting another machine delivered in September — and hope to attach a robot arm to that one to load and unload it,” he said. But there are some tasks where the technology remains too rigid or simply not capable of getting the job done.
For instance, Tamasi recently looked at buying a robot to polish metal parts. But the complexity of the shape made it impossible. “And it was kind of slow,” he said. “When you think of robots, you think better, faster, cheaper — but this was kind of the opposite.” And he still needed a worker to load and unload the machine.
For a company like Cleveland’s Gent, which makes parts for things like refrigerators, auto airbags and hydraulic pumps, the main barrier to getting robots is the cost and uncertainty over whether the investment will pay off, which in turn hinges on the plans and attitudes of customers.
And big customers can be fickle. Eight years ago, Gent landed a contract to supply fasteners used to put together battery packs for Tesla Inc. — and the electric-car maker soon became its largest customer. But Gent never got assurances from Tesla that the business would continue for long enough to justify buying the robots it could have used to make the fasteners.
“If we’d known Tesla would go on that long, we definitely would have automated our assembly process,” said Gent, who said they looked at automating the line twice over the years.
But he does not regret his caution. Earlier this year, Tesla notified Gent that it was pulling the business. “We’re not bitter,” said Gent. “It’s just how it works.”
Gent does spend heavily on new equipment, relative to its small size — about $500,000 a year from 2011 to 2019. One purchase was a $1.6 million computer-controlled cutting machine that cut the cycle time to make the Tesla parts down from 38 seconds to 7 seconds — a major gain in productivity that flowed straight to Gent’s bottom line.
“We found another part to make on the machine,” said Gent.


HSBC profit more than doubles as economies rebound, loan-loss fears ebb

HSBC profit more than doubles as economies rebound, loan-loss fears ebb
Updated 02 August 2021

HSBC profit more than doubles as economies rebound, loan-loss fears ebb

HSBC profit more than doubles as economies rebound, loan-loss fears ebb
  • HSBC reinstated dividend and released $700 million set aside for bad loans
  • Pretax profit was $10.8 billion versus $4.32 billion a year earlier

HONG KONG/LONDON: HSBC Holdings on Monday reported forecast-beating first-half pretax profit that more than doubled from a weak performance last year when it made huge provisions for pandemic-related bad loans.
Encouraged by an economic rebound in Hong Kong and Britain, its two biggest markets, HSBC reinstated dividend payments and released $700 million that had been set aside to cover potential bad loans. That compares with $6.9 billion in loan-loss provisions made in the same period a year ago.
Pretax profit for Europe’s biggest bank by assets came in at $10.8 billion versus $4.32 billion in the same period a year earlier and was higher than the $9.45 billion average of 15 analysts’ estimates compiled by the bank.
Revenue, however, fell 4 percent due to the low interest rate environment.
HSBC said given the brighter outlook globally as economies recover better than expected from the pandemic, it expects credit losses to be below its medium-term forecast of 0.3 percent-0.4 percent of its loans.
The bank also said that for the year, it could even make a net release of funds from earlier provisions rather than add to them, but it was hard to say definitely due to the unknown impact of government support programs, vaccine rollouts and new strains of the virus.
It plans to pay an interim dividend of seven cents a share after the Bank of England scrapped payout curbs last month.
Reflecting its better than expected loan performance, HSBC will move to within its target payout range of 40-55 percent of reported earnings per share within 2021, it added.