Oman needs external financing, says Bank of America Merrill Lynch report

Muscat: Oman needs external financing to meet its deficit and to check sustained erosion in foreign assets, according to a leading financial institution. The sharp drop in oil prices last year and spending had led to considerable widening of the fiscal deficit in 2016, said Bank of America (BofA) Merrill Lynch’s Emerging Insight report. The consolidated government fiscal balance recorded a deficit of OMR5.2 billion (22.6 per cent of gross domestic product) in 2016, widening from OMR4.2 billion (16.9 per cent of GDP) in 2015. On the revenue side, this was due to a substantial fall in hydrocarbon revenues, only partially offset by an increase in non-oil revenues. “The latter was mostly due to an increase in investment income and miscellaneous revenues, including fees and asset sales, which suggest the increase may not be recurrent,” said the report. BofA Merrill Lynch expects the fiscal deficit to narrow this year on higher oil prices, but hover around 2015 levels. The 2017 budget will target narrowing of the fiscal deficit to OMR3 billion (11.9 per cent of GDP), based on an oil price assumption of $45 per barrel. The government plans to cover the 2017 fiscal gap with an OMR0.5 billion draw down from reserve assets, OMR2.1 billion in external borrowing, and OMR0.4 billion in domestic borrowing. The Ministry of Finance, the report said, appears to have been maintaining overdrafts at the Central Bank of Oman (CBO) of OMR0.7 billion in December 2016, but financing from this avenue is limited as overdrafts at the CBO cannot exceed 10 per cent of annual revenues. Drawing down on all of the government deposits in the banking sector (OMR5.9 billion or 23.3 per cent of GDP) will increase fiscal buffers by a year. BofA Merrill Lynch expects authorities to be reluctant to materially draw down on these deposits to avoid tightening domestic liquidity in the banking sector as government deposits represent 30 per cent of the total deposits. The report also said government debt has risen materially from a low base. Total government debt stood at $19.7 billion (32.6 per cent of GDP) in 2016, up from 4.9 per cent of GDP in 2014. The largest increase has come from external debt, which was pegged at 22 per cent of GDP. External borrowing has supported the central bank’s foreign exchange reserves, including through the issuance of a $4.5 billion international bond, a $4 billion Petroleum Development Oman’s pre-export facility, a $1 billion syndicated loan and $1 billion bilateral short-term loan with China. The external public sector medium-term debt repayment profile suggests an additional $1.5 billion in annual average redemptions over the 2017-2020 period. Large external borrowing and potential support from non-resident entities have prevented a more rapid erosion of gross foreign assets than implied by external imbalances.