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Buoyant oil prices bode well for balanced 2019 budget

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MUSCAT, SEPT 29 - Resurgent Omani crude prices could potentially contribute to a balanced budget in 2019 and beyond with reduced scope for new government debt, according to a market expert. Hettish Karmani, Head of Research at U-Capital, a leading Muscat-based independent investment banking platform, said the strong rally in Omani crude prices bode well for a more robust fiscal situation for the Sultanate going into 2019. Oman crude futures surged to $88.96 per barrel on the Dubai Mercantile Exchange last week for the first time since the 2014 global oil price plunge. Oman Crude Oil Futures Contract (OQD), which the Asian crude oil pricing benchmark on the DME, has climbed by over 20 per cent in recent weeks. On Friday, the benchmark price slipped to $84.86 per barrel.


According to Karmani, the implications for Oman’s fiscal outlook will be significant should oil prices remain above the $75 per barrel mark. He explained: “As per the International Monetary Fund (IMF), Oman’s fiscal and external breakeven oil price for 2018 is estimated at $76.3/barrel and $75.1/barrel, respectively. Although oil prices neared $90/barrel (last week), the Oman crude average for the year is around $71/barrel. This means that if the oil prices continue to stay at these levels and reach the $75/barrel average for 2018, then that would be enough for Oman to break even at both fiscal and external levels and the Government of Oman will not have to take further loans next year or draw down from its reserves. This will give strength to the economy and the government might end up spending more than estimated which will be beneficial for the local market.”


Buoyant oil prices have whittled away the sizable debt that the Sultanate has racked up over the past three years in the aftermath of the 2014 oil price crash. Due to the recovery in oil prices, combined with government-driven efforts at fiscal consolidation, the fiscal deficit declined from RO 5.300 billion in 2016 to RO 3.760 billion in 2017.


According to the Central Bank of Oman (CBO), this deficit is projected to further decline to RO 3 billion in 2018. As a share of GDP, the deficit declined from 20.6 per cent in 2016 to 13.5 per cent in 2017 and is budgeted to drop further to 9.4 per cent in 2018.


Despite the strong rally in crude prices, which have remained well above the $55 per barrel mark assumed by the government as the basis for the 2018 budget, prudence will continue to be the guiding philosophy when next year’s budget is drawn up, says Karmani.


“Although the grounds for oil prices remaining buoyant next year are solid, I believe it’s good to be conservative (in our fiscal spending) as Oman has done previously. The government must also explore other options to raise revenue. Recent VAT announcement will also aid the government next year,” he noted.


External debt soared significantly to reach RO 8.898 billion at the end of December 2017, resulting in a depletion of Oman’s net external buffers, according to the CBO. External government debt to gross foreign exchange reserves increased to 70 per cent in 2017, up from 36 per cent in 2016 and 6 per cent in 2015. “Public policy must continue to focus on reducing non-oil current account deficit so that recovery in oil prices could be used to strengthen country’s external buffers,” the apex bank observed in its latest Financial Stability Report 2018.


Conrad Prabhu


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