Expansionary 2020 State Budget to sustain growth

Oman has produced an expansionary budget despite various challenges. We believe the government has made its intentions very clear about 2020 that there will be across the board expansion with no stone unturned to boost sentiment. Not only has budgeted spending been set higher than last year but at the same time additional spending has been earmarked outside the budget in the various sectors. These announcements are very encouraging and reassuring for investors. The government has budgeted higher spending on basic services, increased subsidies and maintained spending on development projects and confirming support for developmental projects. With no mention made of VAT or any other tax in 2020, companies can maintain their cost structure.

Revenue
The Oman government expects to earn revenue of RO 10.7 bn in 2020 which is 6 per cent higher than the budgeted revenue last year, on account of a 13.0 per cent increase in the non-oil and gas revenue. Government has budgeted a 3.4 per cent increase in oil and gas revenue which have been budgeted at an expected oil price of $58/bbl almost similar to last year. Oil and gas revenue is budgeted to touch RO 7.7 bn in 2020 compared to RO 7.44 bn in 2019. In terms of the breakup, oil & gas constitutes majority of the revenue at 72.0 per cent while the remaining will come from non-oil sources.

Measures to increase revenue and FDI flows:
■ Higher gas revenues from Khazzan-Makarem gas field.
■ Higher tax revenues.
■ Privatization of state owned entities.
■ Royal decrees promulgated recently with respect to FDI, notably Foreign Capital Investment Law, Bankruptcy Law and Public-Private Partnership Law, would create new horizons and more potential opportunities for investment. These laws have been promulgated with the aim to enhance public-private investments, and improve business environment and investment climate. This would result in the flow and stability of FDI.

Oil Revenue
Budgeted oil revenue for 2020 is RO 5.50 bn, higher by 0.6 per cent compared to the budgeted amount of RO 5.46 bn in 2019. The budgeted amount is higher despite Oman budgeting almost same oil price as of last year at $58/bbl. for 2020. We believe the slight growth in the oil revenue would be on the back of higher volumes compared to last year. We believe, the government was prudent as it assumed conservative oil price compared to what is being expected by various economic experts and agencies and by other countries within the region. According to most of the international institutions and organizations, oil price is expected to range between $60-65 per barrel, in 2020.

Gas Revenue
Gas revenue for the 2020 has been budgeted higher by 11.1 per cent to RO2.2 bn compared to RO1.98 bn in 2019. This is attributed to an increase in natural gas volume by 5 per cent, and a rise in local gas sales by 3 per cent. The budgeted revenue from gas has been increasing in Oman over the year on the back of increased production from new gas fields. The tight gas production in Oman began in 2014 and is expected to eventually contribute about 33 per cent of Oman’s gas supply. Oman in earlier years also announced that the volume of gas in place at Oman’s Mabrouk gas field could rival the country’s giant Khazzan-Makarem development, according to Petroleum Development Oman (PDO). Increase in gas production is good development for Oman as it will also curtail the gas purchase expenditure of Oman.

Non-Oil Revenue
Non-oil revenue budgeted for the year 2020 has been budgeted at RO 3.0 bn compared to budgeted 2019 number of RO 2.65 bn, higher by 13 per cent. This increase is due to higher tax revenue by 9 per cent and non-tax revenue by 18 per cent as compared with what have been achieved in 2019. This comes in line with Government’s efforts to diversify the sources of income and enhance non-hydrocarbon revenue. The recent establishment of Tax Authority will also aid in improving the efficiency of tax collection. Also we will see privatization of some state owned entities which will give additional revenue to the government as seen last year when
Oman sold 49 per cent stake in Oman Electricity Transmission Company to China’s State Grid Corporation.

Expenditure
Oman government has budgeted spending of RO13.2 bn in 2019 which is 2.3 per cent higher than the budgeted spending of last year. The expenditure is divided into current expenditure (74.5 per cent), investment expenditure (19.7 per cent), participation, and other expenses (5.8 per cent). Budgeted current expenditure is approximately close to the budgeted revenues at 92 per cent compared to 94 per cent last year. Current expenditure has been budgeted at RO 9.83 bn for 2020 compared to RO 9.50 bn in 2019, higher by 3.5 per cent. Within current expenditure, expenditure on defense and national security has been kept same at RO 3,450m. Owing to rising debt of the country in last couple of years, government in 2020 has budgeted an additional expense of RO 230m, taking the total interest on loans to RO 860m to be paid in 2020 compared to RO 630mn in 2019.
Of the total current expenditure, government has allotted 40 per cent to the health, education, housing and social security. The contribution to these sectors has risen from 32 per cent in 2016 and 39 per cent in 2019. Government announced various developmental projects in the field of health and education as well. In health, government announced construction of hospitals in Salalah, Khasab and Suwaiq along with completion of implementing a number of health centres in some wilayats. While in education, government announced construction of a number of schools, and implementation of additional facilities for some existing schools.
Government has also planned multiple projects in the transport sector as well. Some of the major ones include: Completion of implementing air cargo terminals and aircraft maintenance hangars at Muscat International Airport and Salalah Airport, completion of Sharqiyah Expressway Project, completion of various road (dualisation) projects, completion of implementing berths at Salalah and Duqm Port and development of Shinas Port.
Investment expenditure has been budgeted marginally lower at RO 2.6bn for 2020 compared to RO 2.62bn in 2019, lower by a percent on account. Within investment expenditure, same amount has been allotted as last year for the oil and gas sector at RO 1.30bn. Alike last year, government this time did not provide the full breakdown of the subsidies. Overall the subsidies have been budgeted at RO 755mn. Subsidy on the electricity sector form the major chunk of the segment at 65 per cent amounting to RO 500mn compared to RO 485mn last year.

Deficit
The budget deficit for 2020 is estimated at RO2.5 bn. Almost same set of arrangements have been planned in 2020 as in earlier years to fund the deficit. This comes in line with the 6 guidelines set out by the government to maintain sovereign reserve funds, and to rely upon borrowing, notably external borrowing, to finance the deficit. Foreign borrowing of RO 2.0 bn would be arranged along with RO 0.5 bn would be taken from reserves. Raising money in 2020 would be relatively easy and less costly as the rates are falling globally and the rating agency (Fitch) has made the outlook of Oman Stable compared to its Negative earlier. For debt servicing, government has earmarked RO 860m in 2020 compared to RO 630m in 2019, higher by RO 230m (37 per cent).
(Courtesy: U-Capital)