How Oman has moved from protests to surplus in a year

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• Budget surplus of 5.5 percent forecast for 2022
• Oil revenue rose by more than 70% at end of first quarter
• IMF says economy is strengthening and inflation contained so far

Last June Oman was facing protests over job layoffs and poor economic conditions as the sultanate suffered from the double shock of the coronavirus pandemic and a slump in oil prices.

Just 14 months later Fitch Ratings has upgraded Oman’s long-term foreign-currency issuer default rating to ‘BB’ from ‘BB-‘, with a stable outlook.

Fitch said the upgrade reflects a lessening of external financing pressures and ongoing efforts to reform public finances.

It added that higher oil revenue will underpin budget surpluses in 2022 and 2023 and a sharp fall in government debt/GDP to below the ‘BB’ median. 

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Oman’s budget recorded a surplus of OR357 million ($929.7 million) by the end of the first quarter, boosted by a more than 70 percent rise in oil revenue as output and prices surged, finance ministry data showed last week.

That compared with a deficit of OR751 million in the same period a year earlier.

Gulf oil producers have benefited from the sharp rise in oil prices, which surged past $100 a barrel after Russia’s invasion of Ukraine in late February exacerbated concerns about disruptions to global energy supply.

“While we expect oil prices to trend down over the medium term and there has been some dilution of fiscal reform in 2022, we believe that commitment to fiscal consolidation via the state’s medium term fiscal plan (MTFP) will be sufficient to limit renewed deterioration in public and external-finance metrics,” Fitch said in a research note.

However, Fitch warned that potential social pressure resulting from the low employment rate of young Omanis remains a risk to public finances and political stability.

The economy and fiscal revenue will remain heavily linked to the hydrocarbon sector, despite ongoing structural reforms to boost diversification, it added.

Fitch forecasts budget surpluses of 5.5 percent and 3.4 percent of GDP in 2022 and 2023 respectively. These are the country’s first surpluses since 2013, as oil revenue growth easily outweighs additional spending. 

The figures assume average Brent crude prices of $105/barrel in 2022 and $85/barrel in 2023.

They also rest on the assumption that crude and condensate output will grow by 8.8 percent in 2022 and 3.5 percent in 2023, reaching a record high of 1.1million barrels/day.

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Fitch is forecasting a small budget deficit by 2024 as lower oil prices (assumed to average $65/barrel) and modest GDP growth offset gains from ongoing fiscal reforms, which will boost non-oil revenue and lower overall spending. 

It added that non-hydrocarbon tax revenue will increase, following the introduction of VAT in April 2021, personal income tax planned for 2023 and the likelihood of stronger corporate tax revenue.

Spending will be six percent higher than budgeted in 2022, owing to fuel subsidies to cushion the domestic impact of high energy prices, slower reform of other subsidies and higher capex, Fitch noted.

“We expect the medium-term fiscal plan, even on our assumption that it falls short of full timely implementation, to lower the fiscal break-even oil price to around $66/b in 2024, and to narrow the non-oil primary deficit as a percentage of non-oil GDP to 23 percent in 2024 from 31 percent in 2019,” it said.

The note added that Oman would “nonetheless remain heavily dependent on hydrocarbon revenue and vulnerable to commodity-price shocks”.

Real GDP growth

According to Fitch, this year’s real GDP growth will accelerate to 4.4 percent, up from three percent in 2021. This will be driven largely by the oil sector as Oman increases crude oil production alongside the OPEC+ taper. 

Non-oil GDP growth should also strengthen to around three percent, given loosening pandemic-related restrictions, renewed population growth and a mild loosening of fiscal policy. 

Analysts forecast growth to then slow to 2.8 percent in 2023 and to around two percent in 2024-2025 as gains in hydrocarbon production level off, oil prices fall and the government pursues its MTFP.

They also forecast inflation to rise in 2022, but remain contained at 3.5 percent on average, helped by government price controls, before moderating to under two percent in 2023-2024.

Government debt/GDP is forecast to fall to 46.7 percent in 2022 and 44.9 percent in 2023, from around 70 percent in 2020. This is on the back of better budget performance and oil-fuelled nominal GDP growth of 24 percent in 2022. 

Government debt/GDP is expected to then start rising again to 50 percent by 2025 as the budget swings back into deficit. 

Oman’s government has also fulfilled its external financing requirement for 2022 and has reduced the size of maturities in 2023 to $1.7 billion, making its funding position “considerably more comfortable relative to recent years”, said Fitch, although medium-term funding requirements remain sizeable.

In June, the International Monetary Fund (IMF) hailed Oman’s “substantial vaccination efforts” and targeted fiscal, monetary and financial measures that had provided relief to households, firms and banks.

“The economy is strengthening, and inflation has been contained so far,” it said.

“Higher oil prices and fiscal consolidation have improved fiscal and external positions. The banking system has weathered the recent shocks relatively well, supported by substantial capital and liquidity buffers and the Central Bank of Oman’s continued efforts in strengthening regulatory and supervisory frameworks.”