Oman edging closer to investment grade rating

September 19, 2024, 3:22 AM

Omanis watch cruise ships in Muscat. Oman's new Social Protection Fund includes benefits for families with children

Taxation plans viewed positively
Social safety net introduced
Revenues drop due to gas prices

Oman has been putting its fiscal house in order over the past three years and, in the eyes of many analysts, has realistic hopes of regaining its investment grade rating.

But the sultanate has significantly upped spending on energy and social subsidies, while a drop in gas prices has lowered revenues in the seven months to July.

Although oil’s contribution to public coffers has increased, Oman’s budget surplus has been dented, according to new figures released by the Ministry of Finance.

Between January and July 2024, Oman put RO286 million ($743.3 million) toward electricity subsidies, up from RO244 million in the same period last year, according to an analysis by Kamco Invest, a regional brokerage.

The government also spent RO326 million on a brand new social safety net, which accounted for zero spending last year.

The new Social Protection Fund was introduced at the start of 2024 and encompasses benefits for the elderly, citizens with disabilities, families with children, widows, the unemployed and other vulnerable groups.

Oman does not have the hydrocarbon reserves of its neighbours in the GCC, so its rising infrastructure and development spending, privatisation push, and likely introduction of the GCC’s first-ever personal income levy become critical.

For the moment, analysts are not especially concerned about the fiscal outlook.

Maya Senussi of Oxford Economics says the downward pressure on revenue is to be expected and generally public finances appear to be withstanding the energy drag.

“There is nothing too worrying in the July figures, except for the ongoing rise in the subsidy bill perhaps,” she says.

“The way forward is to stick to announced taxation plans, including the introduction of income tax on high-income earners, because when you are increasing subsidies, that means your fiscal sustainability is at risk again,” says Sumaya AlJazeeri, assistant vice president at Sico Bank.

In a crunch, today’s significantly lower debt-to-GDP ratio will enable Oman to borrow again more cheaply, analysts say.

“Elevating spending without increasing and diversifying revenues would imply going back to the same vicious cycle of borrowing seen in the past, you’ve just bought yourself time to do it,” AlJazeeri says.

“However, if we do see taxation rolling in, and a possible increase in VAT, then at least we will see improvements in the non-oil revenues, which will be a more positive sign.”

Meanwhile, public revenues fell slightly to RO7.154 billion as of this July, down from RO7.183 billion in July last year, driven by a significant decline in gas prices and changes in the Finance Ministry’s accounting of related revenues.

Net oil revenues, in contrast, rose 9 percent year on year, says Aathira Prasad, director for macroeconomics at Nasser Saidi & Associates.

Oman’s oil exports were barely up year on year by the end of July, but it secured slightly higher prices for them over 2023. Fluctuations in energy-related royalties and dividends paid to the government are among the other factors that may have affected oil and gas revenues in the first seven months of this year.

Prasad says net oil and gas revenues together accounted for 72 percent of revenues at the end of July, underscoring the need for greater diversification.

James Swanston of Capital Economics says that even after these shifts in income and spending dynamics, Oman's budget surplus only went from around 2.5 percent of GDP in 2023 to 1.8 percent of GDP in July, calculated on an annual basis.

“Fiscal consolidation has done a good job of flipping the balance from a large deficit into a surplus,” Swanston says.

Oman’s public debt has already fallen from a high of 61 percent in 2021 to 34 percent in the first half of this year, according to Prasad. The fiscal breakeven oil price has also dropped, from $77 in 2021 to an estimated $58 this year, she says.

OQ, a state energy company, announced earlier this month plans to sell up to a quarter of its exploration and production business through what is slated to become the nation’s largest initial public offering.

As a result, Oman has seen its credit ratings upgraded and analysts remain optimistic that current headwinds are not going to jeopardise the nation’s expected return to investment grade territory.

“We don’t think that a downgrade would be triggered based on a short-term underperformance that was driven by market forces,” says Junaid Ansari, director of investment strategy and research at Kamco Invest.

According to AlJazeeri, Oman’s growing spending on roads, airports, schools, hospitals and other infrastructure, as well on housing and tourism-related development, is also likely to drive growth and revenues, though many projects in the pipeline remain in the early stages and have yet to make their full impact.

“In the past, Oman’s project expenditure scene was status quo, as the focus was on redirecting revenues towards debt payments,” AlJazeeri says.

“But with the debt-to-GDP levels lowered, the focus shifted to spending on strategic projects which will have a return on investment – maybe not immediately, but eventually.”