Oman opts for fiscal deficit in budget

Oman is set to run a fiscal deficit for the first time in five years, after the state announced a 4.5 per cent rise in planned expenditure for 2015 – even as Brent futures fell to $57 per barrel.

Expenditure is set to total 14.1 billion Omani riyals (Dh134.5bn), while falling oil prices mean that total revenue will be cut by 1 per cent to 11.6bn rials. About 79 per cent of Oman’s revenue comes from oil.

Oman will run a deficit of 7.8 per cent of GDP in 2015. That is considerably larger than 2009’s deficit of 0.3 per cent, and represents a marked deterioration in the state’s finances since 2013, when Oman ran a budget surplus of 8.1 per cent of GDP.

Oman has been considering a range of measures to boost revenues, including cuts to energy subsidies and 2 per cent tax on expat remittances, as low oil prices weaken the country’s fiscal position. However, Oman decided against including the remittances tax in its 2015 budget, with government officials arguing that it could harm investment, according to The Times of Oman.

No plan to cut energy subsidies has been announced, despite statements from Omani central bank governor Hamood Al Zadjali in October, in which he indicated that this was under consideration.

Oman followed Saudi Arabia in sticking to spending plans in spite of oil’s decline. Saudi Arabia said last week it would continue its programme of infrastructure investment, while forecasting a budget deficit equivalent to 20 per cent of revenues in 2015.

Abu Dhabi and Dubai are yet to announce budgets for the forthcoming fiscal year, but ministers have said that falling oil prices would not force the government to cut spending.

In June, ratings agency Standard and Poor’s ranked Oman and Bahrain as the Gulf states most vulnerable to a fall in oil prices.

Oman has a fiscal break-even price of $89 per barrel, according to S&P. Forwards contracts for the price of Brent, which indicate market expectations of the commodity’s future price, suggest that oil will rise to around $70 per barrel by 2017.

Oman’s hydrocarbons are likely to last a further 21 years – considerably shorter than Saudi Arabia’s 66 years of reserves, or the UAE’s 81 years, according to data from the 2014 BP Statistical Review of World Energy.

Oman will be forced to issue new sukuk in a bid to finance future spending, Moody’s Investor Service said last month.

The country had outstanding sovereign debt equivalent to 8 per cent of GDP last year, according to the IMF, which predicts net indebtedness will grow to 10 per cent of GDP by 2017 – before the impact of falling oil prices is taken into account.

In December, S&P cut its outlook for Oman’s credit rating from stable to negative. The country has a credit rating of A – below Saudi Arabia’s AA– rating, and the UAE’s AA rating.

Oman’s reserves will partly insulate the country from oil price shocks. Oman’s largest sovereign wealth funds, the State General Reserve Fund and the Oman Investment Fund, hold reserves of about $19bn, according to the Sovereign Wealth Fund Institute – equivalent to 21 per cent of Oman’s GDP.

Its reserves are considerably lower than those of its wealthy Gulf neighbours, however. Saudi Arabia holds reserves equivalent to 100 per cent of its GDP, while the UAE has reserves equivalent to about three times the country’s annual output.

“The drop in oil prices will hurt performance in the near term, even if the Gulf’s buffers are powerful enough to ensure there’s no crisis,” Simon Williams, HSBC’s chief economist for Eastern Europe and MENA, told Bloomberg News.

“The region has had 10 years of abundance, but that decade of plenty is done,” said Mr Williams.