Inheriting an economy severely pummeled by the dual impact of collapsing international oil prices and the coronavirus pandemic, His Majesty Sultan Haitham bin Tarik’s first order of business, at the outset of his reign in January 2020, was to institute a series of landmark reforms and programmes aimed at, among other goals, achieving fiscal sustainability in the face of ballooning public debt and budgetary deficits.
Plummeting oil prices, which account for 75 per cent of budget revenues, had sent the country’s debts soaring to about 70 per cent of GDP, up from 15 per cent in 2015. Adding to the nation’s woes were the adverse credit ratings from international rating agencies, which made borrowings from debt markets not only difficult but expensive as well.
It is in the midst of these challenging economic times that the government of His Majesty Sultan Haitham bin Tariq adopted some bold decisions to get the economy under control. In addition to a series of expenditure cuts, belt-tightening measures and overhaul of government structures, the government also rolled out the Medium Term Fiscal Plan (MTFP) as a pillar of its economic reform programme. The five-year programme sets out targets for non-oil revenue growth, rollback of subsidies, introduction of new taxes and a strident employment generation programme for Omani job-seekers.
Dramatic turnaround
In two short years, those momentous reform initiatives paid rich dividends. By the end of 2021, the Omani government under His Majesty Sultan Haitham had notched significant improvements across a number of financial, economic and monetary indices. GDP at current prices had climbed to reach a value of RO 24.2 billion as of October-end 2021, registering a growth of 13.8 per cent compared to 2020. At the same time, the fiscal deficit, estimated RO 4.8 billion at the start of 2021, tumbled to RO 1.2 billion by the end of the year, constituting a 75 per cent decline. As a share of GDP, the deficit was slashed from 15.5 per cent in 2020 to 3.8 per cent at the end of 2021.
The results were remarkable on multiple fronts. Public spending was brought under control, despite financial challenges, which required allocating extra credit to manage the situation. This included addressing the spread of coronavirus and raising the reception/admission capacity of higher education establishments to 31,000 seats, in addition to the allocation of RO 418 million for the payment of overdue balance of previous years, RO1.2 billion for the settlement of the financial dues of private sector companies till the end of 2021 and employment costs and the allocation of RO 200 million to meet the cost of repairing damages resulting from the tropical cyclone Shaheen.
Significantly, commodity exports posted an increase of 42.2 per cent till September 2021, compared to the corresponding period last year of 2020, while commodity imports rose by 54.3 per cent till September this year, compared to the corresponding period in 2020. The Central Bank of Oman’s reserves in foreign currency grew by 31 per cent to $18 billion till the end of December 2021, compared to about $14 billion by the end of December 2020.
Also easing the fiscal burden on the government this year was the creation of Energy Development Oman (EDO) with the mandate to independently raise the financing requirements of Block 6 licensed to Petroleum Development Oman (PDO), the country’s largest producer of hydrocarbons.
As of September 2021, Energy Development Oman (EDO) became fully operational and thus all government obligations related to the oil and gas production expenditure has been transferred to EDO. In August, EDO announced that it had successfully secured a $2.5 billion debut financing transaction involving the participation of a number of local, regional and international banks.
Buoyant outlook
Further endorsement of the government’s strategies to turn around the national economy have come from the Big Three of international rating agencies, which are now broadly in agreement about the buoyant outlook of the Omani economy in 2022 and beyond.
New York-headquartered Fitch revised the Sultanate of Oman’s outlook to stable from negative while affirming the sovereign's Long-Term Foreign- and Local- Currency Issuer Default Ratings (IDR) at 'BB-'.
It came just two months after S&P Global Ratings revised its outlook on the Omani economy to positive from stable. Also based in New York, the rating agency affirmed its ‘B+/B’ long-term and short-term foreign and local currency sovereign credit ratings. The transfer and convertibility assessment was set at 'BB-'.
Moody's Investors Service followed suit in October with a revision in the outlook on the Government of Oman's issuer rating to stable from negative and affirmed its long-term issuer and senior unsecured ratings at Ba3. Moody's also affirmed the Government of Oman's (P)Ba3 senior unsecured medium term note programme rating.
The trio of the world’s most influential rating agencies cited significant improvement of key fiscal metrics, most notably the dramatic shrinkage of the budget deficit for 2021 aided by buoyant oil prices and a steady uptick in non-oil revenue.
Also spurring the rapid evolution of the Sultanate of Oman’s credit rating – from junk status just status barely two years to stable/positive today – are the government’s fiscal reforms enshrined in its landmark Medium Term Fiscal Plan (MTFP) unveiled in late 2020.
Among the key metrics that underscore this turnaround in the Omani economy is the budget deficit which narrowed to 3.4 per cent of GDP in 2021, down from 16.1 per cent of GDP in 2020. Oil and gas revenues also climbed by a third, driven largely by a 28 per cent rise in Oman's average fiscal oil price.
Fitch also forecast a strong rise in real GDP growth to 3.1 per cent in 2022 before steadying at 2.3 per cent in 2023, driven by stronger hydrocarbon growth next year. However, non-oil growth is expected to moderate at just over 2 per cent on average.
Earlier, S&P Global Ratings cited the “solid path” charted by the Omani government to reduce historically high fiscal deficits, and backed by a “strong political will” to implement reform measures. It noted that the Medium Term Fiscal Plan (2021 – 2025) is expected to produce a net positive outcome.
Significantly, the improved outlooks by all three major ratings agencies bode well for the Omani government’s ability to access international debt markets at competitive interest rates and terms and issuance options of choice as well.
Fiscal prudence
Earlier this month, the Omani government unveiled a fiscally prudent Annual State General Budget for 2022 with a deficit that is the lowest since 2014 – proof that the economic reform programme initiated by His Majesty the Sultan is delivering concrete results. Revenues for 2022 are estimated at RO 10.580 billion based an assumed price of $50 a barrel (versus $45/barrel for 2021). The contribution of Oil & Gas is estimated at RO 7.24 billion, constituting 68 per cent of total revenues, while non-oil revenues will account for the remaining 32 per cent (RO 3.34 billion).
Total public spending is set at RO 12.13 billion, which is two per cent higher than the corresponding figure for 2021. This will include an allocation of RO 1.3 billion towards the cost of servicing the country’s public debt.
The deficit of RO 1.5 billion, representing 15 per cent of total expenditure [about 5 per cent of Gross Domestic Product (GDP)], is well within the range projected in the Medium Term Fiscal Plan (MTFP). Part of the deficit will be financed from external and internal borrowings, while the rest of the deficit, estimated to be RO 400 million, will be funded through withdrawals from the State’s reserves.
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