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)
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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.


Al Sharjah government announces Friday, Saturday and Sunday as official weekend

Al Sharjah government announces Friday, Saturday and Sunday as official weekend
Updated 22 sec ago

Al Sharjah government announces Friday, Saturday and Sunday as official weekend

Al Sharjah government announces Friday, Saturday and Sunday as official weekend

JEDDAH: Al Sharjah’s Executive Council approved on Thursday a three-day weekend following the introduction of a new working system in the UAE.

The changes by the city’s government see a shift to a four day working week, running from Monday to Thursday, with the weekend becoming Friday, Saturday, and Sunday, according to the Emirates News Agency.

The official working hours of government agencies will also be changed to 7:30 a.m. to 3:30 p.m., with the implementation of the new system starting from January 1, 2022.

These decisions come in line with UAE vision to enhance its competitive position in various sectors in a way that supports the business environment and the economic market.

The move came following other emirates' decision to transition to a four-and-a-half day working week, as it effectively moved its weekend to Saturday and Sunday. 


US mortgage lender Fannie Mae issues $100bn in green bonds 

US mortgage lender Fannie Mae issues $100bn in green bonds 
Updated 11 min 34 sec ago

US mortgage lender Fannie Mae issues $100bn in green bonds 

US mortgage lender Fannie Mae issues $100bn in green bonds 

DUBAI: US mortgage loan company Fannie Mae has reached $100 billion in its green bond issuances, which it claims to be a major milestone in “greening the US housing stock.” 

The company began issuing green multifamily mortgage-backed securities over 10 years ago to support both sustainable and affordable housing through its “Green Building Certification” program and “Green Rewards” scheme.

“More than a decade ago, we pioneered green housing mortgage finance to make multifamily housing more energy-efficient, resulting in tangible and meaningful benefits for building owners and residents,” Michele Evansee, an executive vice president at the US-listed firm, said. 

The securities particularly finance homes and communities that meet energy-efficiency and water-saving benchmarks.

Fannie Mae claims their bonds have saved 9.5 billion British thermal units of energy, 8.5 billion gallons of water, and 634,000 tons of carbon dioxide emissions across 872,000 properties. 

“Fannie Mae is working to accelerate the greening of US housing supply and help reduce the carbon footprint of housing,” Laurel Davis, the company’s senior vice president, said.


SABIC chief urges cross-sector collaboration to tackle climate change

SABIC chief urges cross-sector collaboration to tackle climate change
Updated 16 min 16 sec ago

SABIC chief urges cross-sector collaboration to tackle climate change

SABIC chief urges cross-sector collaboration to tackle climate change

JEDDAH: The head of Saudi Basic Industries Corporation — known as SABIC — has urged the petrochemical industry to work with other sectors to help deliver ambitious carbon neutral goals.

Speaking at the Annual Forum of the Gulf Petrochemical and Chemical Association in Dubai, Yousef Al Benyan said now was the time for the industry to “redefine, reshape and reinvent” itself.

Al Benyan said that while players around the world are moving quickly toward clean energy, more effort is needed to match global trends.

"Decarbonization and circularity are not just for one company or even for one industry. They are for the whole of society and the economy. The solution has to be generated through collaboration not only within the chemical industry but also across multiple industries in the value chain,” he said.

Al Benyan also announced the approval of the GPCA board decision to rotate its annual forum among the capitals of Gulf Cooperation Council countries, starting with Riyadh next year.


Lebanon’s Central Bank sets new rate for withdrawals from dollar deposits

Lebanon’s Central Bank sets new rate for withdrawals from dollar deposits
Updated 44 min 52 sec ago

Lebanon’s Central Bank sets new rate for withdrawals from dollar deposits

Lebanon’s Central Bank sets new rate for withdrawals from dollar deposits
  • The rate was previously set at 3,900 pounds
  • The central bank also set a withdrawal ceiling of $3,000 per month equivalent in Lebanese pounds

BEIRUT: Lebanon’s central bank said on Thursday it had set a new rate of 8,000 Lebanese pounds to the US dollar for withdrawals from bank deposits denominated in dollars but which can now only be accessed in the local currency.
The rate was previously set at 3,900 pounds, which implied a “haircut” or loss of more than 80 percent at the current market rate of around 25,000 pounds per dollar. The new rate represents a haircut of around 70 percent.
The central bank also set a withdrawal ceiling of $3,000 per month equivalent in Lebanese pounds for account-holders, who have been unable to freely access their savings since the collapse of the financial sector in 2019.
The central bank had maintained a pegged rate of 1,500 pounds per dollar until summer 2019, when it unofficially allowed the currency to become untethered after accumulating tens of billions of dollars in losses.
The pound has since lost more than 90 percent of its value, throwing the majority of Lebanon’s population into poverty and leading to shortages of basic goods such as medicines in the formerly middle-income country.
The central bank officially maintains a rate of 1,500 but almost all goods trade at the market rate.


Egypt to list army companies on stock exchange soon: sovereign fund CEO

Egypt to list army companies on stock exchange soon: sovereign fund CEO
Updated 54 min 22 sec ago

Egypt to list army companies on stock exchange soon: sovereign fund CEO

Egypt to list army companies on stock exchange soon: sovereign fund CEO

RIYADH: Egypt is planning an initial public offering of two of its army’s companies, the CEO of the country's sovereign fund has said.

Ayman Soliman told Asharq the fund is currently in the final stages of legal restructuring of Safi and Wataniya to make them eligible for listing on the Egyptian stock exchange.

Safi supplies the Egyptian market with bottled mineral water while Wataniya specializes in supplying and distributing petroleum products.

Both companies are subsidiaries of the National Services Products Organization, which is part of Egypt’s armed forces.

Soliman emphasized that the main condition before listing on the bourse is to identify a strategic investor to manage the companies’ operational activities.

The official added that the offering pipeline includes more companies that are to be disclosed after finalizing their legal restructuring.