Investors forgiving as Oman’s austerity drive hits bumps in the road

Investors forgiving as Oman’s austerity drive hits bumps in the road
Oman may use government spending to dampen some of the social fallout from its efforts to diversify revenue. (Reuters)
Short Url
Updated 02 June 2021

Investors forgiving as Oman’s austerity drive hits bumps in the road

Investors forgiving as Oman’s austerity drive hits bumps in the road
  • Oman’s austerity measures unveiled last year are seen as crucial for maintaining the cash-strapped country’s ability to access international debt markets ahead of debt redemptions worth about $11 billion this year and next

DUBAI: Oman may be rowing back on an austerity plan to fix its shaky finances in the face of protests over unemployment but investors are cutting the Gulf state’s new ruler some slack for now.
Sultan Haitham, who acceded to the throne in January 2020, promised last week on the third day of rare demonstrations in several towns and cities to create 32,000 jobs and subsidise private companies that take on Omanis.
But the move did not trigger any major drop in the price of Oman’s bonds, with investors saying some flexibility in its fiscal adjustment was expected to guarantee social stability in a country also hit by protests over jobs and corruption in 2011.
“The market reaction is reflecting an understanding that significant reform, particularly as it relates to taxation in a region that has limited precedence, will meet obstacles, but has not been materially derailed,” said Sharif Eid, a portfolio manager at Franklin Templeton Investments.
“Short term, measured adjustments are to be expected, particularly as they may impact social factors,” he said.
Oman’s government bonds due in 2047 yielded 6.9 percent at the end of last week, only slightly higher than 6.7 percent before the protests. In March last year, the yield hit nearly 12 percent as the coronavirus outbreak triggered a collapse in crude prices.
Oman’s austerity measures unveiled last year are seen as crucial for maintaining the cash-strapped country’s ability to access international debt markets ahead of debt redemptions worth about $11 billion this year and next.
Oman is among the weakest countries financially in the oil-rich region and more vulnerable to swings in the price of hydrocarbons, a sector that accounted for about a third of its gross domestic product (GDP) in 2019.
Since the oil price crash in 2014, its debt to GDP ratio has leapt from about 15 percent in 2015 to 80 percent last year, while Oman’s plans to diversify revenue away from oil and to reduce spending on its bloated public sector have lagged.
Oman’s finance ministry and central bank did not respond to requests for comment about the country’s ability to prop up its economy in the face of financial constraints.
The medium-term fiscal plan announced in October, which included the introduction of a value-added tax (VAT) in April, has reassured investors, helping Oman to raise billions of dollars in bonds and loans this year.
“Oman provided comfortable levels of information since late last year that supported the market and are further supported by oil prices at $70 per barrel, which significantly reduced their funding gap,” said Zeina Rizk, executive director, fixed-income asset management, at Arqaam Capital.
“Also, Oman raised most of its budget funding needs this year, which is also supportive,” she said.
Oman plans to reduce its deficit from more than 4 billion rials ($10.4 billion) in 2020, or 15.8 percent of GDP, to 537 million rials in 2024, which would be equivalent to 1.7 percent of GDP.
Debt to GDP is expected to remain at about 80 percent by 2024, but in the absence of the medium-term fiscal plan it would have shot up to 128 percent, the ministry of finance has said.
Oman is also aiming to increase non-oil revenue to 35 percent of the overall total in the coming years from 28 percent last year.
The fiscal plan does allow for some time to launch particularly sensitive steps such as a personal income tax on high earners, which Oman said it was considering for 2022 in what would be a first for the Gulf region.
Still, while the unrest that erupted last week appears to have abated after a heavy security response, it is a sign that Oman’s efforts to contain state deficits and debts may slow down to accommodate job demands.
Oman’s unemployment rate spiked to a record 5 percent last year and youth unemployment is over 10 percent, according to World Bank data.
“The road to fiscal consolidation was unlikely to be smooth and the concessions made by the authorities will slow the rate of adjustment,” said Scott Livermore, Middle East chief economist at research group Oxford Economics.
Tariq Haq, senior employment policy specialist for Arab states at the International Labour Organization, said Oman needed to develop a medium- to long-term employment policy.
“The provision of government jobs as an emergency response is not a sustainable substitute for a more comprehensive reform of the labor market, which needs to accompany structural reform of the Omani economy more broadly,” he said.
In addition to introducing VAT and gradually raising water and electricity tariffs this year, Oman cut its civilian and military spending in 2020 and has budgeted for further declines this year.
However, an expectation that such ambitious reforms would have to be balanced against socio-economic pressures has been largely factored in by investors and credit ratings agencies.
Fitch said last month its outlook for Oman — which is rated sub-investment grade by all major agencies — was negative owing to “risks to sustained enactment of fiscal consolidation plans given the challenging economic and social context.”
Oman may use government spending to dampen some of the social fallout from its efforts to diversify revenue but the direction of reforms will not change, said Livermore.
“The Omani authorities have little choice but to remain committed to medium-term fiscal adjustment, although there may be some fine-tuning on how this is achieved.”
Still, some investors said how Oman reacts to any resurgence of social unrest and other economic challenges would need to be monitored closely.
“Investors evaluated the medium-term consolidation plan in Oman with relative relief as it provided some short-term relief for the fiscal figures,” said Sergey Dergachev, a fund manager at Union Investment.
“But Oman also faces other risks, including a challenging tourism sector outlook and inflationary pressures, all in parallel to the employment situation, which needs to be watched,” he said. ($1 = 0.3849 Omani rials)


World Bank warns of inflation in low-income countries as energy prices rise

World Bank warns of inflation in low-income countries as energy prices rise
Updated 27 sec ago

World Bank warns of inflation in low-income countries as energy prices rise

World Bank warns of inflation in low-income countries as energy prices rise

MOSCOW: Rising energy prices pose significant risks of inflation in many emerging markets and developing countries, World Bank warned on Monday.

In its semi-annual report “Commodity Markets Outlook,” the bank said the ongoing energy crunch is likely to weigh on the growth of energy-importing countries in 2022.

Energy prices are expected to increase more than 2 percent in 2022 after jumping more than 80 percent in 2021, supported by continued robust demand and gradual production gains. 

The bank has raised its forecast for average oil prices to $74/bbl in 2022 from $70/bbl in 2021 projected previously in April. Natural gas and coal prices are expected to decline only slightly in 2022 to $4/mmbtu and $3.9/mmbtu from $4.1/mmbtu in 2021, as demand growth eases and production and exports increase, driven by the US.

Prices of non-energy commodities like metals and wheat are also projected to remain at elevated levels. After rising more than 48 percent this year, metal prices are projected to decline 5 percent in 2022. Prices for US hard red wheat are projected to decrease to $250 per metric ton and $245 per metric ton in 2022 and 2023 respectively from $255/mt in 2021.  

The rally in energy prices has sharply increased agricultural input costs. This includes fertilizers, which have risen more than 55 percent since January this year, with several fertilizer manufacturers halting or reducing production capacity. Elevated food prices combined with the recent spike in energy costs is pushing food price inflation up in several low-income countries such as Ethiopia, Zambia, and Zimbabwe as well as higher-income economies including Argentina and Turkey, the report pointed out.

The report provided its 2022 price forecast for energy and non-energy commodity groups revised from its previous estimate published in April this year. The most notable revisions include fertilizers (+11.8 percentage points), precious metals (+4.1 ppts), metals and minerals (+3.4 ppts), grains (-9.2 ppts), beverages (-2.7 ppts).


Egypt’s government projects to go 30% green by 2024

Egypt’s government projects to go 30% green by 2024
Updated 51 min 28 sec ago

Egypt’s government projects to go 30% green by 2024

Egypt’s government projects to go 30% green by 2024

RIYADH: Egypt aims to make 30 percent of all the government projects green by 2024 and then raise the level to 100 percent by 2030, said Yasmine Fouad, the country’s environment minister. 

Speaking at the Middle East Green Initiative Summit in Riyadh, she said Egypt spent 447 billion Egyptian pounds on 691 green projects in different sectors during the current fiscal. 

Egypt also became the first country to issue green government bonds in September 2020.

“We issued $750 million in five-year green bonds in order to focus on the climate change projects in transport and sanitation sectors,” the minister said.

Fouad said the Egyptian government is taking measures to change the overall investment environment by not just only supporting the private sector but also focussing on the banking sector to encourage it to adopt sustainable financing principles.


Saudi Arabia's Net Zero goals are important developments since Paris agreement: John Kerry

Saudi Arabia's Net Zero goals are important developments since Paris agreement: John Kerry
Getty Images
Updated 25 October 2021

Saudi Arabia's Net Zero goals are important developments since Paris agreement: John Kerry

Saudi Arabia's Net Zero goals are important developments since Paris agreement: John Kerry
  • He said no government in the world has the money to fight climate actions alone

RIYADH: Saudi Arabia’s nationally determined contributions and net zero carbon goals are important developments since the Paris agreement John Kerry, U.S. Special Presidential Envoy for Climate, told delegates at the Middle East Green Initiative.

The Paris Agreement is a legally binding international treaty on climate change signed at COP 21 in Paris, on 12 December 2015.

He said as a result of US diplomatic efforts, many countries are now taking bolder climate actions.

Science is playing a bigger role today in shaping climate actions, he said.

“This is the biggest market opportunity the world has known with 4 to 5 billion users. I see trillion dollars to be invested" in the energy transition market opportunities, he added.

He said no government in the world has the money to fight climate actions alone, and countries need the private sector to support these efforts.

He highlighted that the global financial industry is helping tens of trillion of dollars to be moved into the energy transition market.

He warned that countries must work to reduce emissions in the next 10 years.

“Action to combat climate change must be accelerated,” he said.


More investment needed to make green companies the next Facebook or Google, says BlackRock CEO

More investment needed to make green companies the next Facebook or Google, says BlackRock CEO
Updated 25 October 2021

More investment needed to make green companies the next Facebook or Google, says BlackRock CEO

More investment needed to make green companies the next Facebook or Google, says BlackRock CEO

RIYADH: Environmentally-focused start-ups will make up the next thousand ‘unicorn’ businesses, billionaire businessman Larry Fink has told the Middle East Green Initiative Summit.

The head of US asset management giant BlackRock told delegates at the forum in Riyadh it will be firms producing environmentally-friendly goods and systems that will become the next billion dollar companies  — the threshold for being dubbed a ‘unicorn’.

Fink said governments, financial service companies and multinational institutions need to work together to achieve a net-zero world, as he talked up the role of private sector investment in hitting this target.

Speaking at the event, which is attended by leading figures including the US Climate Change envoy John Kerry, Fink said clean technologies and fuel are more expensive than conventional energy sources due to a “Green Premium".

“To bring down this Green Premium we need to be serious about attracting private capital for technology and technology revolution,” he added.


UK PM Johnson follows Saudi Crown Prince's lead urging 'further faster' action on climate change

UK PM Johnson follows Saudi Crown Prince's lead urging 'further faster' action on climate change
Getty Images
Updated 25 October 2021

UK PM Johnson follows Saudi Crown Prince's lead urging 'further faster' action on climate change

UK PM Johnson follows Saudi Crown Prince's lead urging 'further faster' action on climate change
  • Prime Minister Johnson also praised Saudi Arabia’s commitment to plant 10 billion trees

UK Prime Minister Boris Johnson has reiterated the sentiments of the Crown Prince Mohammed bin Salman bin Abdulaziz at the original announcement of Saudi Green Initiative, saying the world must go “further and faster” to combat climate change by the middle of the century.

In a statement to the inaugural Middle East Green Initiative Summit in Riyadh, Prime Minister Johnson said: “This is a region rich in history - the birthplace of the alphabet, algebra, coffee, the will and much of our civilization. But for many, the region has become most synonymous with fossil fuels. There is now a chance for a new chapter in the history of your region.”

“We must go further and faster if we are to limit the increasing global temperature, and take the necessary action to protect people and nature from the effects of climate change.”

Prime Minister Johnson also praised Saudi Arabia’s commitment to plant 10 billion trees, and the wider regional commitment to plant 50 billion trees highlighted earlier by HRH the Crown Prince Mohammed bin Salman bin Abdulaziz.

Prime Minister Johnson said: “This inaugural conference tackles the latter two head-on - cash and trees. 10 billion trees to be precise in Saudi Arabia, and 50 billion total across the region. That, my friends, is a lot of trees, and I hope you will match that outstanding level of ambition across all areas where action is needed.”

Earlier, the Crown Prince announced a series of regional programs for climate action to an audience of dozens of heads of state at the event. On Saturday, the Crown Prince also revealed that Saudi Arabia is aiming to achieve net zero emissions by 2060 through the Carbon Circular Economy approach.

The Middle East Green Initiative called for intensifying coordination and joint action to preserve and develop the importance of the environment and vegetation cover in Africa, in addition to establishing the Green Initiative Foundation as an independent non-profit entity to support the summit and raise the level of coordination.