Higher oil prices to pare Oman’s budget deficit to 6.1 per cent of GDP in 2021
Salient feature: Fiscal policymaking has been “galvanised” under the government of His Majesty Sultan Haitham bin Tarik, says Fitch.
Published: 09:05 PM,May 19,2021 | EDITED : 12:05 AM,May 20,2021
17-Omani-real-GDP-growth-to-strengthen-to-3.3pc-in-2022---Fitch
CONRAD PRABHU
@conradprabhu
Relatively buoyant oil prices, which have since bounced back to pre-pandemic levels, will help shrink Oman’s budget deficit to 6.1 per cent of GDP in 2021, down from a hefty 18.3 per cent of GDP in 2020, international ratings agency Fitch stated on Tuesday.
Omani crude is currently trading at prices that prevailed before the oil price shock triggered by the pandemic early last year.
The marker price of Oman Crude Oil Futures Contract (DME Oman) settled at $66.21 per barrel (for delivery in July 2021) in trading on the Dubai Mercantile Exchange (DME) on Wednesday after scaling a post-pandemic peak of $68.43 a barrel a day earlier.
In its assessment for the Sultanate, Fitch cited a number of factors and developments that bode well for an improvement, albeit modest, in the outlook for Oman’s fiscals. They include an anticipated uptick in crude production in line with Oman’s commitments to the OPEC+ accord, the role of wholly government-owned Energy Development Oman (EDO) in shouldering the capex requirements of Petroleum Development Oman (PDO), the recent introduction of value-added tax (VAT), and the positive impact of fiscal reforms in general.
Fitch stated: “The budget deficit will narrow to 6.1 per cent of GDP in 2021, from 18.3 per cent of GDP in 2020, owing to higher oil prices and production (5 per cent of GDP impact), the formation of EDO (4 per cent of GDP net impact for a full year, although newly released 1Q data indicates that hydrocarbon capex had not yet shifted off-budget), fiscal reforms, including VAT which will add 1 per cent of GDP, and 10 per cent growth in nominal GDP.”
Significantly, the budget deficit is projected to further moderate to 5 per cent of GDP in 2022 “as higher oil production offsets a renewed fall in oil prices and reforms bring additional revenue”, the ratings agency noted.
But despite the positive elements in its assessment, Fitch affirmed Oman’s Long-Term Foreign-Currency Issuer Default Rating (IDR) at ‘BB-’ with a negative outlook, citing the challenging economic and fiscal environment.
Nevertheless, the ratings agency credited the government’s Medium-Term Fiscal Plan (MTFP) with boosting prospects for debt reduction, which had spiked to 79 per cent of GDP in 2020, up from 60 per cent in 2019. Belt-tightening measures, coupled with higher average oil production and greater post-pandemic normalisation, will strengthen growth to 3.3 per cent in 2022, it noted.
Fiscal policymaking, Fitch pointed out, has been “galvanised” under the government of His Majesty Sultan Haitham bin Tarik. “Initial implementation in 2020-2021 of the Tawazun Programme, central to which is the MTFP to reach a primary surplus by 2023 and reduce government debt/GDP, has boosted prospects for improving public finances,” it said.
The MTFP strategy, combined with other fiscal reforms, is expected to have positive ramifications for Oman’s fiscals.
“Implementation of the MTFP has started, including reductions in civilian and military spending in 2020 and further budgeted declines in 2021, a mandatory civil service retirement scheme, gradual increases in electricity and water tariffs from January 2021 and implementation of a 5 per cent VAT rate in April. For 2022-2024, measures include Personal Income Tax (this would be a first in the GCC), higher VAT revenue and incremental subsidy reform,” Fitch stated.
Outlined in the MTFP are a number of fiscal measures that will deliver a potential gross impact totalling RO 4.7 billion by 2024 (about 15 per cent of GDP). This includes RO 1.3 billion being generated by EDO in line with its remit to shoulder Oil & Gas capex funding, which was hitherto included in the state budget.
@conradprabhu
Relatively buoyant oil prices, which have since bounced back to pre-pandemic levels, will help shrink Oman’s budget deficit to 6.1 per cent of GDP in 2021, down from a hefty 18.3 per cent of GDP in 2020, international ratings agency Fitch stated on Tuesday.
Omani crude is currently trading at prices that prevailed before the oil price shock triggered by the pandemic early last year.
The marker price of Oman Crude Oil Futures Contract (DME Oman) settled at $66.21 per barrel (for delivery in July 2021) in trading on the Dubai Mercantile Exchange (DME) on Wednesday after scaling a post-pandemic peak of $68.43 a barrel a day earlier.
In its assessment for the Sultanate, Fitch cited a number of factors and developments that bode well for an improvement, albeit modest, in the outlook for Oman’s fiscals. They include an anticipated uptick in crude production in line with Oman’s commitments to the OPEC+ accord, the role of wholly government-owned Energy Development Oman (EDO) in shouldering the capex requirements of Petroleum Development Oman (PDO), the recent introduction of value-added tax (VAT), and the positive impact of fiscal reforms in general.
Fitch stated: “The budget deficit will narrow to 6.1 per cent of GDP in 2021, from 18.3 per cent of GDP in 2020, owing to higher oil prices and production (5 per cent of GDP impact), the formation of EDO (4 per cent of GDP net impact for a full year, although newly released 1Q data indicates that hydrocarbon capex had not yet shifted off-budget), fiscal reforms, including VAT which will add 1 per cent of GDP, and 10 per cent growth in nominal GDP.”
Significantly, the budget deficit is projected to further moderate to 5 per cent of GDP in 2022 “as higher oil production offsets a renewed fall in oil prices and reforms bring additional revenue”, the ratings agency noted.
But despite the positive elements in its assessment, Fitch affirmed Oman’s Long-Term Foreign-Currency Issuer Default Rating (IDR) at ‘BB-’ with a negative outlook, citing the challenging economic and fiscal environment.
Nevertheless, the ratings agency credited the government’s Medium-Term Fiscal Plan (MTFP) with boosting prospects for debt reduction, which had spiked to 79 per cent of GDP in 2020, up from 60 per cent in 2019. Belt-tightening measures, coupled with higher average oil production and greater post-pandemic normalisation, will strengthen growth to 3.3 per cent in 2022, it noted.
Fiscal policymaking, Fitch pointed out, has been “galvanised” under the government of His Majesty Sultan Haitham bin Tarik. “Initial implementation in 2020-2021 of the Tawazun Programme, central to which is the MTFP to reach a primary surplus by 2023 and reduce government debt/GDP, has boosted prospects for improving public finances,” it said.
The MTFP strategy, combined with other fiscal reforms, is expected to have positive ramifications for Oman’s fiscals.
“Implementation of the MTFP has started, including reductions in civilian and military spending in 2020 and further budgeted declines in 2021, a mandatory civil service retirement scheme, gradual increases in electricity and water tariffs from January 2021 and implementation of a 5 per cent VAT rate in April. For 2022-2024, measures include Personal Income Tax (this would be a first in the GCC), higher VAT revenue and incremental subsidy reform,” Fitch stated.
Outlined in the MTFP are a number of fiscal measures that will deliver a potential gross impact totalling RO 4.7 billion by 2024 (about 15 per cent of GDP). This includes RO 1.3 billion being generated by EDO in line with its remit to shoulder Oil & Gas capex funding, which was hitherto included in the state budget.