Oman: Risk Assessment
Country Risk Rating
Business Climate Rating
- Strategic location, strong commercial ties
- Ability to attract financial support from neighboring countries
- High living standards, balanced relations with the regional powers
- Oil and gas resources
- Tourist attractions
- Heavy dependence on hydrocarbons (nearly 40% of GDP)
- Wide budget deficit, high and rising public debt
- Large external financing needs
- Ageing oil reserves
Weakness in the non-oil sector will persist due to fiscal consolidation
The Omani economy’s recovery in 2021 is expected to be weak because of still low energy prices, lasting negative impacts of the measures implemented to control COVID-19 (including travel restrictions, partial lockdowns, closing of shopping malls, limiting workplace attendances, etc.) and a tighter fiscal stance. The non-oil sector in particular will continue to struggle. Tourism revenues (3-4% of GDP in 2019) will stay low, as it should take a few years for that of Oman to reach pre-COVID-19 levels. This will also weigh on the construction sector. In the first half of 2020, government spending declined by 16% from a year earlier, with investment expenditures falling by 26% versus 0.6% for current expenditures. This trend is expected to continue in 2021, providing less support for the non-oil sector, consumer spending and investment. Any cut in social subsidies, in order to counter the further weakening of financial dynamics, would hit private consumption. Conversely, the gradual pick up in oil exports (60% of total exports consist of oil, while 10% come from natural gas) will narrow the current account deficit. The start of gas production in the Ghazeer field, which is part of Block 61, four months ahead of schedule in October 2020, will increase Oman’s gas output. Total production capacity from Block 61, comprising both Khazzan and Ghazeer, is expected to rise to 1.5 billion cubic feet of gas per day and over 65,000 barrels a day of associated condensate, according to British Petroleum (BP), which operates Block 61 with a 60% ownership. Chemicals and plastics will continue to lead non-oil exports of the country, in line with the recovery of key export markets such as the United Arab Emirates, Saudi Arabia and the United States.
Fiscal and external accounts in a perilous situation
The sultanate’s fiscal breakeven price for 2021 is estimated at USD 109.5 per barrel according to the IMF, which is among the highest across the Gulf Cooperation Council (GCC) countries. The fiscal deficit will persist due to reduced activity in the non-oil sector and relatively still low energy prices (together, oil and gas represent nearly 70% of total fiscal revenue) despite ongoing cuts in spending. The deficit will be covered by internal and external debt issuance, but lowered credit ratings and a deteriorated fiscal balance will increase the cost of borrowing. Fiscal deficits and external debt maturities are expected to total USD 12-USD 14 billion per year in 2020-2022, according to Fitch Ratings, which also estimates Oman’s government related entities’ external debt at around USD 12 billion as of June 2020. The authorities might also use other sources to finance the deficit, such as the State General Reserve Fund, but the Fund’s assets (around USD 14 billion) are almost equivalent to the estimated USD 10.5 billion deficit in 2021. Financial aid, probably from GCC countries, is likely, but will be conditional on the introduction of more drastic structural fiscal reforms.
Oman’s hydrocarbon exports are expected to pick up gradually, in line with recovering global demand and rising demand from China (attracting nearly 90% of Oman’s oil exports). Non-oil exports such as chemicals, metals and mineral products will recover partially. On the other hand, weakness in domestic demand will reduce imports. This will all contribute to a lower current account deficit in 2021. Despite the slowdown in foreign direct investments and portfolio flows, estimated by the IIF at USD 2.1 billion (31% of net external financing) and USD 1.3 billion (19%) respectively, Oman should avoid a balance of payment crisis and save the peg to the dollar thanks to the reform agenda improving investor confidence, the potential for financial support from its GCC neighbors and the international reserves (covering 5 months of imports).
Reforms will accelerate under the new Sultan Haitham
After Sultan Qaboos bin Said, who ruled the country for nearly half a century, passed away in January 2020, Sultan Haitham bin Tariq Al Said took over. He introduced 28 royal decrees in August in order to reorganize the government, to reduce bureaucracy and to increase the effectiveness of the policymaking process. He reduced the number of ministries from 26 to 19. Sultan Haitham was already overseeing Oman’s Vision 2040 program, which aims to diversify the economy away from oil, indicating that he has a good understanding of the private sector’s needs. With the introduction of reforms and fiscal consolidation, his biggest challenge will be related to the management of the country’s impartial foreign policy while tensions in the region rise. The need for financial help might bring him closer to GCC countries and to normalize the relationship with Israel.