From the print edition
Poised for revival
The 2018 Budget has tried to maintain balance by cutting public expenditure without impacting funding of key development projects. The 2018 budget framework supports the general objectives of the Ninth Five-Year Development Plan, most importantly in achieving economic growth targets, promoting private sector involvement, completing ongoing development projects and creating jobs for the citizens. Oommen John P reports
Rebounding oil prices over the past few months and increased focus on economic diversification seem to be paying off as Oman’s Budget 2018 in hindsight reflects the country’s improving economic sentiments.
HE Darwish bin Ismail al Balushi, Minister Responsible for Financial Affairs, who issued a press statement on the budget, has said the Budget 2018 has tried to maintain balance by cutting public expenditure without compromising on funding of key development projects. The focus of the government is not only to improve the investment climate and promote public-private partnerships to stimulate economic growth and sustain employment but also ensuring swift implementation of the National Programme for Enhancing Economic Diversification (Tanfeedh) initiatives.
The 2018 Budget broadly aligns with the Ninth Five-Year Development plan. The targets set out are linked with an aim to increase Oman’s growth rates through stimulation of the private sector and creation of more jobs for citizens of the country. An executive programme has already been adopted to implement the decision taken by the Council of Ministers as per the Royal Directives to provide 25,000 jobs for Omani job seekers. The programme will run until the first half of 2018. Until the end of December 2017, around 4800 jobs have been provided in the private sector, while employment in the public sector will only be need-based. The government is currently working towards revamping certain critically important laws, including the public-private partnership (PPP) law and the foreign capital investment law. The aim is to facilitate private sector investment and increase the ease of doing business.
The government, he says has set aside RO1.2bn to ensure prompt completion of ongoing development projects and also to make timely payments. Investment projects carried out by state-owned-enterprises (SOEs) during 2018 are estimated to cost RO3bn. This will give a further boost to economic activity, accelerate economic growth and create more jobs. Despite the financial and economic challenges posed by the decline in oil prices, affecting investment activities and capital markets in the region, the privatisation scheme is being continued. This is essential to promote and expand participation of private sector in the economic activities. According to the scheme, six SOEs are being planned for privatisation during 2018.
The total projected spending will amount to RO12.5bn, an increase of 6.8 per cent against the previous year. Revenues are estimated at RO9.5bn, leaving a budget deficit of RO3 bn, a level of 10 per cent of GDP. GDP is budgeted to grow at a rate of 3 per cent. This year’s budget is based on an oil price of $50/bbl, which is lower than the $55/bbl assumed in the ninth five year plan and suggests prudent financial management. The actual deficit for FY17 (RO3.5bn) has exceeded the budgeted deficit (RO3bn) by 17 per cent mainly due to higher than forecast expenditures compared to the actual revenues. This has resulted in higher than estimated borrowings in 2017 and is reflected in an 81 per cent increase in interest payments. The reduction in the deficit permits an increase in allocation to subsidies in the current fiscal year, which includes fuel subsidy for the needy. Value-added tax (VAT) in Oman, which appears to be delayed until 2019, may have a positive impact by further driving down the declining budgeted fiscal deficit. When VAT is enacted in Oman, as per the International Monetary Fund estimates, it could account for 1.5 to 2 per cent of GDP (or 2.5 to 3.5 per cent of non-oil revenues). The oil and gas production expenditures are estimated at RO2.1bn, up by 15 per cent compared with 2017 budget estimates. This includes the cost of oil and gas production, and expenses required to maintain future oil and gas production, as well as enhance oil reserves.
Mustafa Salman, chairman and CEO, United Securities, says the budget is a balanced one with a realistic vision and tries to include private sector more than ever. “We expect the government might achieve targeted growth of 3 per cent in 2018 as a result of diversification efforts which were in place since 2015.” The results of these efforts are likely to be seen in 2018. With increased activities in Duqm, tourism sector and logistics sectors, economic growth should gather pace in 2018. The revenue of RO9.5 bn is 9 per cent higher than what was budgeted in 2017, and 3 per cent higher than 2017 actuals. If oil prices stay at current levels for a significant portion of the year, we will see further increase in 2018 revenue growth, he says.
Striking a similar chord, Lo’ai B. Bataineh, CEO, U-Capital, says the Sultanate has come out with an expansionary and very healthy budget compared with the past few years, giving the economy much needed stimulus and a push towards sustainable growth. It certainly meets the expectations as the sustainable recovery in oil price would energise the Sultanate to meet the needs of all segments of the society. Additionally, maintaining the same amount of deficit despite increase in expenditure would serve the purpose of increasing the economic activity and also appeasing the credit rating agencies.
Sandeep Mishra – advisor to S&T board and CEO of S&T mining investment, says overall the budget is prudent and will bring the economy back on track. Of course, the rebounding of oil price has helped in bringing down the deficit to 10 per cent of GDP. The economic sentiment has certainly went up. Further, the economic growth of 3 per cent estimated by the government is encouraging and is in line with what was predicted by IMF recently. The budget deficit has been curtailed to a great extent- 10 per cent is still on the higher side. For a country like Oman, 5 per cent to 7 per cent should be the manageable range. Oman’s deficit is predominantly financed by borrowings. The cost of debt servicing is to be watched and rationalised. On the expenditure front, rationalising current expenditure without curtailing investment expenditure is a welcome step.
Concurring with his views, Meenakshi Sundaram, director-Tax, KPMG Lower Gulf, says prudent fiscal management continues in 2018 as the budgeted deficit is kept on track as planned in the ninth five-year plan. The budget is based on a conservative oil price of $50/bbl, which was the average price in 2017. Despite the continued economic challenges posed by geo-economic factors, the government has projected a GDP growth of 3 per cent for 2018. This indicates that the 2018 budget reflects improving economic sentiment. The government’s continued rationalisation of public spending and focus on increasing non-oil revenues will help contain deficit to an acceptable level. The government’s attempt to keep the budget deficit to 10 per cent of GDP is prudent.
The development expenditure has been reduced by 17 per cent as compared to the Ninth Five Year Plan. However, the development expenditure budgeted for 2018 at RO1.365 bn is almost unchanged from the amount allocated in the 2017 budget. The estimate is made with the firm intention to ensure completion of all ongoing projects without delay, and to be in a position to make timely payments. Projects such as the new international airport, expressways, water networks, hospitals and renewable energy generation will normally continue to benefit from government funding.
The budget is a balanced budget with primary focus on maintaining the current level of economic activities, to sustain the private sector investments and in line with the objectives set out by the ninth five-year development plan, says Kanaga Sundar, assistant vice president – research, Gulf Baader Capital Markets (GBCM). “We believe the budget remains more realistic in terms of the implementation of the priority projects with the focus on fiscal consolidation over the medium term.”
As per the budget, RO1.2bn will be spent on the development projects to support the completion of the ongoing critical projects without any major delays. This would also ensure timely payments to be made to the contractors which should be supportive to the economic growth. Additionally, the state-owned entities are implementing projects worth RO3 bn, which would be supportive to improve economic activities, create jobs and improve business environment.
Sanjay Kawatra, assurance partner, Ernst & Young Oman says “the mood is more optimistic than in recent times, although many statements of optimism are still prefaced by words of caution. Discipline on costs and spending is being maintained despite the more supportive market fundamentals.” The 2018 budget reflects the country’s improving economic sentiments. The Oman economy is projected to achieve continued positive growth during 2018, supported by gradually rebounding oil prices and rising economic diversification efforts on the part of the government. Improved oil prices and prudent controls exercised by the government on expenditure have resulted in curtailing the deficit. The budgeted deficit for 2018 is estimated to be RO3bn as compared to 2016 actual deficit of RO5.3bn, which is a remarkable improvement of 44 per cent over a two-year period. Should oil prices remain close to $70, Oman’s deficit for 2018 could be considerably lower than expected. The budget is balanced and realistic, which includes several measures for stimulating growth and sustaining employment. The focus continues to be on diversification with enhanced contribution from the private sector, in-country value, public-private partnership, national initiative to create 25,000 new jobs, privatisation of certain state owned entities and to continue spending on the social sectors such as education and healthcare.
Oil revenue decline
Oil revenue is expected to decline by 11 per cent as compared with the ninth five-year plan, but projected to grow by 11 per cent as compared to the 2017 budget, says Meenakshi Sundaram. The estimated oil price considered for the five-year plan, initially prepared in 2016, was on the higher side. Thereafter, the 2017 and 2018 budgets have aligned revenue projections to current market reality. Oil and gas revenue for 2018 is expected to increase by 9 per cent compared to the 2017 budget. The estimates take into account reduced production pledged by the government in line with the OPEC production agreement, as well as anticipated production from the Khazzan-Makarem gas field. Given the anticipated increase in oil and gas revenue, there should ideally not be any threat to the growth of the Omani economy during 2018, although the need for economic diversification remains.
Despite oil prices remaining low in last couple of years, the overall GDP growth remained positive and is expected to do even better this year on account of increased production of Khazzan- Makarem Gas project, Tanfeedh and PPP related initiatives, says Lo’ai. The government has been pursuing its diversification strategy since the past several years and avenues have been opened to cover up any untoward shortfall in oil prices. Lastly, oil prices are not expected to fall much in the coming year and is expected to remain in the range of $57-62/bbl in 2018.
Kanaga Sundar says the decline in oil prices had impacted the level of economic activities during 2016 and 2017. The government had ensured relative stability in the economic environment through its prudent policies over the past two years. “We do see challenges to the economy if the oil prices remain lower for a long period. The thrust on non-oil economic diversification remains as a key theme for the government over the medium term along with the focus to enhance private sector investments.”
Impact of subsidies and diversification
Overall the amount of subsidy has been raised to RO725mn compared to RO395mn 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, says Lo’ai. “We believe subsidies will overburden the government a little on one hand but at the same time raise the consumption power of the population, which will give boost to the economy gradually.”
Subsidies are expected to increase by 84 per cent to RO 725 mn, compared to RO395 mn in the 2017 budget, says Meenakshi Sundaram. This is due to the increase in electricity subsidy to meet anticipated growth in consumption. This also includes subsidies for cooking gas, housing and development loans, and operational support to state-owned enterprises (SOE). The government should aim to balance economic needs with social welfare. Earlier, subsidies were available to all the people. Now the government seeks to provide subsidies only to those who need them most. For instance, fuel subsidy is now only available to individuals earning below certain income levels.
Kanaga Sundar says the government has taken measures to lower subsidies across various categories and the focus remains on providing targeted subsidies to the necessary group. The National Subsidy Scheme has been introduced successfully tp provide fuel subsidies for eligible citizens starting from January 2018. This can be extended to other subsidies during the coming years. The budget allocation for subsidies increased mainly due to the increase in electricity subsidy along with subsidies to cooking gas, housing and development loans and operational support to government entities. “We believe that the focus would remain on lowering these subsidies gradually without any negative impact to both economic and social aspects.”
The government has been pursuing its diversification strategy since the past several years and many avenues have been opened, says Lo’ai. Public private participation in various projects, Tanfeedh and changes in the investment law are the core areas where the government is focusing. Tanfeedh is a national initiative, which is part of the 9th Five-Year Development Plan (2016-2020). The targeted sectors are manufacturing, tourism, transport and logistics, mining, and fisheries. The program will focus on raising the contribution of these sectors to the Sultanate’s Gross Domestic Product (GDP), increasing investment in these sectors, and creating more job opportunities.
Sandeep Mishra says in line with the requirement of the day, the government has taken a major stride by setting up Tanfeedh to enhance non-oil revenue and thereby to contain the deficit. There is no reason for the government to go slow on these efforts. To achieve and maintain the price level of oil between $ 65 -70 per barrel, oil production has to be contained and simultaneously non-oil revenue generation efforts have to be aggressively expedited.
Fiscal consolidation
Through prudent fiscal management and rationalisation of public spending, the government was able to contain the fiscal deficit during 2017 to RO 3.5 bn, compared with RO 5.3 bn in 2016, avers Meenakshi Sundaram. Public spending during 2017 was 2 per cent lower than in 2016 and 5 per cent lower than in 2015. The budget estimates a deficit of RO3 bn and reflects a cautious revenue estimation. The 2017 budget was prepared on the basis of an oil price of $45/bbl, whereas the average realised price during 2017 was $ 50/bbl. Similarly, the 2018 budget has considered an oil price of $50/bbl, whereas, until recently, the oil price reached a 3-year high of $ 67/bbl. The government has also highlighted its intention to reduce public spending to a sustainable level of 40-45per cent of the GDP.
Lo’ai says the government has been able to contain deficit through multiple means, not limited to: (a) increased private sector participation through different initiatives (b) introduction of new taxes and tariffs (c) curtailment of unwanted government projects during the past few years(d) amending fees of various government services (e) introducing selective tax on certain commodities (f) reducing reliance on imports and giving thrust to in-country value produce and many more to come such as removing subsidy on items such as water and electricity.
Kanaga Sundar says the government has taken several measures to control deficit by focusing on plans to increase non-oil revenue stream and also by means of controlling the current spending. The focus remains on fiscal consolidation over the coming years and to lower the budget breakeven prices assuming that the oil prices to trade between $60-70 per barrel over the medium term.
:On the other hand, with the relative recovery in the oil prices along with the measures taken by the government in terms of fiscal consolidation and subsidy rationalisation, we estimate lower level of deficit during 2018 as compared to the budget estimates”, he added.
Public private partnership
The government is revamping its foreign capital investment laws so as to encourage not only local but international private companies to participate in the development of the country and benefit from the geographic location and sound investment practices of the Sultanate, says Lo’ai. Foreign Capital Investment Law, an important statute that provides assurance to foreign investors that their capital in the Sultanate is safe and secure, is being revamped to bring it into line with modern trends and developments. The proposed investment law provides dispute resolution and includes international arbitration amongst many other things which are necessary to encourage investment. Hence, we believe, government is on the right path and the only need of the hour is its quick implementation, he adds.
Mustafa says the government’s plan to continue with privatisation of public sector companies in 2018 is expected to provide boost to the MSM trading activity. “We might see more IPOs and good participation if high quality companies are privatised this year,” he says.
“We are seeing an increase in private sector participation in investment projects. The same has reached 60 per cent as compared to 52 per cent in 2014. This is an indication of the positive response to the government’s policies from the private sector. With a changing investment environment, we are likely to see more private sector participation.”
Sanjay Kawatra says early in the year, the government had sold a $6.5bn bond to cover full portion of its estimated deficit for the year which it intended to be financed by debt. The debt issuance was significantly oversubscribed and attracted orders of $15bn, which demonstrates investors’ confidence in Oman’s fundamentals rather than its weak ratings. The government aims to further improve the investment climate along with the ease of doing business in Oman. A good progress has been achieved in implementation of these reforms, however a push will be warranted to further accelerate the process.
Kanaga Sundar says the emphasis on public-private-partnership (PPP) has increased over the past three years to accelerate the project implementations and to increase private sector investments. The government has taken several measures to improve the overall business environment and to remove the impediments with related to doing business in Oman. The government is in the process of introducing Foreign Investment Law, Public- Private- Partnership law and Bankruptcy law, and we believe these would create a proper legal and institutional framework which would improve the overall investment climate during the coming years, he adds.
Oman with the geopolitical stability, state-of-the-art infrastructural facilities and investment-friendly environment, is well placed to attract further investment by facilitating PPP initiatives and foreign capital/bankruptcy laws, says Sandeep Mishra.
Investment is the main driver for economic growth. In developing the economy, public investment is the major investment stream. The government has to maintain this lead, but with a special emphasis on PPP initiatives and strategy to enhance non-oil revenue. All the five sectors identified by Tanfeedh should be pursued aggressively, with defined time-bound targets. The private sector should be engaged in implementing and managing projects, facilities and activities in both oil and non-oil /gas sectors.
Meenakshi Sundaram says the government should consider accelerating the reform process including issuing the new PPP, foreign capital investment and bankruptcy laws to foster private sector participation. The 2018 budget does suggest a critical role for private sector businesses to be more involved in government initiatives. It is critical to improve investment conditions so as to raise investment from the private sector and promote public private partnerships. Easing the way of doing business in Oman would also improve the country’s chances of raising levels of foreign direct investment (FDI).
Challenges ahead
Some of the challenges currently faced by the government that include and not limited to are: (a) how to contain the increasing debt burden (b) increasing inflation and mainly the goods and services (c) job creation (d) increasing foreign direct investment and (e) striking a balance between increasing oil revenue and the increasing social expenditure and also to improve the FX reserves, says Lo’ai.
Given the oil price volatility, it is not certain whether it will remain at the current level of $65-$70/bbl, says Meenakshi Sundaram. Therefore, the key challenge for the government is to diversify revenue streams as rapidly as possible. This is also critical for the employment generation, another of the state’s priorities. Achieving diversification of revenue in a short span of time will be challenging and will require adequate planning and timely execution. By encouraging greater involvement of the private sector and local SMEs, the government is ensuring swift implementation of identified development projects, and thus implementing its diversification strategy.
With the sharp fall in oil revenues during the last three years, the government has followed a gradual policy of adjusting its expenses without bringing any major social and economic implications, which is noteworthy, says Kanaga Sundar. The key challenge would be to revive the non-oil revenue stream and also to bring further down the budget breakeven oil price to a sustainable level before 2020.
Mustafa says this is a budget with clear plans to tackle the government’s finances and expenditures. If oil prices remain at these levels for an extended period of time, we think the government will have more confidence for enhanced spending, which would trigger further increase in economic activities towards the latter half of the year. The government has followed a policy of not disturbing the domestic liquidity or stressing the local institutions for its budget funding needs in 2016 and 2017, and looks like following the similar strategy in 2018 as well.
The economic slowdown is impacting the overall job creation, says Meenakshi Sundaram. While employment opportunities can be generated through additional infrastructure and Tanfeedh projects, the fiscal deficit would limit the government’s ability to spend. The government is therefore expecting the private sector to play an important role in undertaking new projects and contribute to local job creation. For this purpose, the government has committed to issuing new public private partnership, foreign capital and bankruptcy laws.
The government has also budgeted a higher proportion to social welfare in the 2018 budget. This includes education which is vital to improving the skills of Omani nationals. The private sector’s contribution towards employment generation would be more productive if the skill gap between the existing and expected capability is bridged. The success of the training initiatives being undertaken by the government to enhance the capabilities of Omani workforce will therefore be crucial. Persistent efforts focused towards capacity building would ultimately yield results.
Mustafa says the skill enhancement of local talent is getting more attention from the government and the establishment of National Training Fund is a positive step in the right direction. The 62 million allocation for training and development of local talent is a welcome move, and trained local workforce should help businesses achieve higher Omanisation levels.
The way forward
The Sultanate’s increased thrust on economic diversification and developing the travel and tourism sector has begun to show its positive effects on the economy. A number of private and government projects across various sectors including hospitality is a testament to the growing investor confidence in the Sultanate’s economy.
The government is expected to focus on maintaining fiscal and economic stability over the long term, says Kanaga Sundar. Despite oil prices moving gradually, the government would work towards containing fiscal deficit lower than 10 per cent of GDP, to lower current spending and also to limit the increase in borrowings, which would remain beneficial to the economic progress over the long term.
However, Meenakshi Sundaram says simply depending on oil prices to rebound will certainly not be enough. The government needs to accelerate the reforms process, encourage private sector participation, rationalise public spending and continue investing in key infrastructure projects. These measures would help to achieve the government’s target of 3 per cent GDP growth.
Lo’ai says the government should not rely much on the finite sources of oil as they are prone to increasing volatility in the wake of geopolitical tensions around the region. The government should continue its diversification drive and any increased petro dollars should be wisely utilised and put to best use for future. Also they have to work side by side with the private sector with more initiatives and try to speed up the PPP programmes and regulations.
With an increase in crude oil price, the economy started gaining strength since the beginning of last year, reversing a slackness witnessed during the previous two years. Oman’s economy achieved a robust 10.1 per cent growth rate at RO20.33bn for the first nine months of 2017, mainly driven by a remarkable growth in crude oil prices in the international market and surge in non-oil activities. The average price of Oman Crude surged ahead by 27.8 per cent to $51.3 per barrel during January-December period of 2017, against $40.1 a barrel for the same period of 2016, according to a report released by National Centre for Statistics and Information (NCSI).
Economic diversification and tourism will be the main growth engines for the country’s economic development as it will help in achieving the target of 3 per cent GDP growth and place the economy back on the growth mode.
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