Oman still faces fiscal risks despite spending reduction
Oman's budget outturns for the first seven months of 2017 highlight persistent risks to the sovereign's fiscal consolidation plans as government spending cuts fall short of targets, said Fitch Ratings in a recent commentary.
Recent data show a six per cent decline in total government spending in the first seven months of 2017 compared with a year earlier, with a year-on-year decline of 26 per cent in July alone. The government has budgeted a reduction of nine per cent for the full year. Current spending, including subsidies, fell two per cent, against a planned cut of seven per cent. Capital spending fell by four per cent, against a planned reduction of nine per cent.
Fiscal deterioration was a key driver of Fitch’s revision of the Outlook on Oman's 'BBB' rating to Negative in June.
The relative resilience of current spending is largely due to defence spending. This may be difficult to cut much due to regional security challenges, although completion of equipment purchases in the first half of the year could result in lower spending in 2H. Civil current spending, including subsidies, has fallen 6 per cent, but lower civil investment spending was offset by higher spending on oil and gas exploration, which is key to expanding hydrocarbon revenues.
Overspending on investment and defence in 2016, coupled with a 17 per cent fall in revenues, pushed Oman's budget deficit to 20.2 per cent of GDP—the highest of any Fitch-rated sovereign. The 7M17 numbers show a desire to address this, but volatile monthly expenditure, and the concentration of spending late in the year (characteristic of some cash accounting systems) means the uncertainties surrounding 2017 budget execution remain high. Headline spending in 7M17 includes a very sharp (27 per cent) yoy decline in "expenditures under settlement". These accounted for 12 per cent of the total last year, and will be allocated in December.
Revenues increased 26 per cent yoy in 7M17, reflecting some recovery in oil prices, and revenues will be further supported in 2017-2019 by the recent start of production from the Khazzan gas field. A review of corporate tax exemptions and an increase of tax rates will begin to have an impact in 2018, while new excise taxes could be introduced later this year and VAT in late 2018.
We have maintained our 2017 deficit forecast at 11.9 per cent of GDP, considering the recent outturns. But we have increased our 2018 deficit forecast by 1.3pp to 10.9 per cent, taking into account the lower oil price assumptions in our latest "Global Economic Outlook" (USD52.5/bbl in 2018, and USD55/bbl in 2019). We expect the 2019 fiscal deficit to narrow to 9.8 per cent of GDP.
Continuing deficits mean we forecast debt to rise to 48.2 per cent of GDP in 2019. This would be around four times the 2012-2016 average and higher than the 'BBB' category median. We estimate Oman's fiscal breakeven oil price at USD75-85/bbl even with planned spending cuts and non-oil revenue measures.
Oman has financed its deficits mostly through foreign debt issuance, accompanied by drawdowns from the State General Reserve Fund of Oman (SGRF). SGRF foreign assets were USD18 billion at end-2016, underpinning Oman's sovereign net foreign asset position and supporting its market access and exchange rate peg. In a hypothetical scenario where Oman did not issue debt and maintained fiscal deficits at forecast 2017 levels, SGRF assets would be depleted by the end of 2018. But they could last considerably longer if accompanied by debt issuance, fiscal consolidation, and favourable asset returns. The government is also hoping to privatise some of its domestic infrastructure assets.
The main factor that could lead to a sovereign downgrade would be continued rapid erosion of the fiscal or external positions, for example as a result of a failure to implement fiscal reforms or due to a renewed fall in oil prices. By contrast, a reduction of the budget deficit allowing stabilisation of the government debt/GDP ratio could lead to a revision of the Outlook to Stable.