A prudently structured 2018 State Budget

Following a year of austerity, Oman issued a somewhat expansionary budget that gives the economy much needed stimulus and a push towards sustainable growth. The budget announcement met our expectation as we believed the sustainable recovery in oil prices would energise the Sultanate in coming out with a budget which meets the anticipation of all the segments of the society.
Sectors which witnessed increased allocation for the year included: subsidy (43 per cent), health (6.7 per cent) and public services (2.7 per cent). We believe maintaining the same amount of deficit despite increase in expenditure, would serve both the purpose of increasing the economic activity and also satisfying the credit rating agencies.
The Oman government expects to earn revenue of RO 9.5bn in 2018, which is 9.2 per cent higher than the budgeted revenue last year, on account of a 11 per cent increase in the oil and gas revenue and 5.0 per cent increase in the non-oil revenue. Oil & Gas accounts for a major share of the earnings at 71.4 per cent followed by revenue from non-oil sources at 28.6 per cent.
Oil Revenue
Budgeted oil revenue for 2018 is RO 4.87bn, which is higher by 9.4 per cent compared to the budgeted amount of RO 4.45bn in 2017. The budgeted amount is higher despite Oman continuing with the output cut (agreed between OPEC and Non-OPEC members which was further extended to 2018).
The growth in the budgeted revenue comes from the higher budgeted oil price which for 2018 stands at USD 50/bbl. compared to USD 45/bbl. in 2017.
We believe, the government was very prudent as it assumed a very conservative oil price compared to what it is trading and is being expected by various economic experts and agencies. According to most of the international institutions and organisations, the oil price is expected to range between USD 55-60 per barrel, in 2018.
Gas Revenue
Gas revenue for the year 2018 has been budgeted higher by 15 per cent to RO 1.91bn compared to RO 1.66bn in 2017. This is the highest ever budgeted gas revenue and major thrust to it has come because of the Khazzan Gas project. The tight gas project began in 2014 and is expected to eventually contribute about 33 per cent of Oman’s gas supply.
BP Oman operates Block 61 with about 60 per cent interest. Oman Oil Company exploration & production holds the remaining interest. Khazzan’s Phase-1 is expected to produce 1bcfd. The combined plateau production from Phases 1 and 2 is expected to be 1.5bcfd. The project will also include construction of a new central processing facility with a designed processing capacity of 1,050 cubic feet of gas, 100km of export pipelines, 600km of flow lines, and other gathering systems.
Non-Oil Revenue
Non-oil revenue budgeted for the year 2018 stands at RO 2.72bn compared to the budgeted 2017 figure of RO 2.59bn, which is higher by 5 per cent. Over the years, the Sultanate has been giving increasing importance to the non-oil sector, so as to cut its reliance on the petrodollars.
The Finance Ministry said the government planned a string of steps this year to boost non-oil revenues, including: amending Income Tax Law, enhancing tax collections efficiency and activating monitoring and follow-up measures, introducing selective tax on certain commodities, amending fees of licenses of bringing foreign workers, amending some fees of civil services, amending rules and regulations pertaining to exemptions of tax and customs duties, amending the regulations of lands allocation and adjusting the fees of municipal services.
Expenditure
The Omani government has budgeted spending of RO 12.5bn in 2018 which is 6.8 per cent higher than the budgeted spending of last year and 2 per cent lower than the actual expenditure of RO 12.7bn in 2017.
According to the (preliminary) actual estimates, overall public spending totaled RO 12.7bn in 2017 compared to RO 11.7bn estimated in the budget, up by 9 per cent. This was attributed to the rise in investment spending over development projects, oil and gas sector projects and electricity sector subsidy; as well as funding a number of budget items to meet necessary and urgent needs. In addition to high cost of public debt service as a result of increased borrowing. Despite the fact that the actual spending is higher than the estimated spending, the actual spending is, however, lower than actual spending recorded in 2016, by RO 208mn.
With a monitored check on spending, government nevertheless is pushing for proposals of Tanfeedh. The country is committed to “providing subsidy required to achieve the anticipated results of recommendations, provided by National Programme for Enhancing Economic Diversification (Tanfeedh), in order to improve investment climate.
The expenditure is divided into current expenditure (71.9 per cent), investment expenditure (22 per cent), participation, and other expenses (6.1 per cent). Budgeted current expenditure is approximately close to the budgeted revenues at 95 per cent compared to 98 per cent last year. Unlike last year, government this time gave full breakdown of the subsidies which have been budgeted to almost double. Overall the amount of subsidy has been raised to RO 725mn compared to RO 395mn in 2017.
Operational support for government companies and subsidy on the electricity sector form the major chunk of the subsidy segment at 93 per cent. Because of the rise in the debt of the country in last couple of years, government in 2018 has budgeted an additional expense of RO 215mn, taking the total of interest on loans to RO 480mn in 2018 compared to RO 265mn in 2017. Because of the commissioning of various gas fields, the current expenditure on gas sector for the first time in history would cross the expenditure on the oil sector. Gas sector expenditure is budgeted at RO 380mn compared to RO 340mn on the oil sector. However, overall expenditure on oil (current and investment) is budgeted higher than the gas. Overall, oil and gas production expense is budgeted 15 per cent higher than 2017 at RO 2.1bn compared to RO 1.82bn in 2017.
Conclusion
The Oman 2018 budgeted has been prudently structured. We expect that GDP and revenue growth would take off much better from the start of the year as the current oil price is way higher than the budgeted one. On the inflation front, the IMF expects Oman to record inflation of 3.2 per cent in 2018 which is almost the same they estimated for 2017. The delay in introducing VAT will aid in containing inflation. The exchange rate is expected to remain stable as long as the Government manages its balance of payments through successful sourcing of funding and adequate levels of foreign reserves.
[Courtesy: U-Capital]