Monday 25 / November / 2024
Muscat: Although the Sultanate’s debt to gross domestic product (GDP) ratio has risento 29 per cent, a higher borrowingrate to managethe budget deficit is needed tosustain economic growth, according to financial experts.
The Ministry of Finance on Sunday said the total outstanding debt of the country stood at an all-time high of OMR7.4 billion, or 29 per cent of the GDP,by the end of 2016.
The Sultanate plans to borrow OMR2.1 billion from the overseas market and another OMR400 million from the domestic market this yearto meet its projected deficit of OMR3 billion.
“This ratio is reasonable when compared to other developing countries,” statedDavis Kallukaran, managing partner of Crowe Horwath Oman. Also, the debt service coverage ratio will be on par with any other developing country, he added.
According to Kallukaran, a deficit in the budget and inflationary trends are essential to sustain the growth of the economy. “It is a wise decision to borrow money to support growth.”
Debt-GDP ratio in GCC
Echoing a similar view, Kanaga Sundar, head of research at Gulf Baader Capital Market, said the average debt-GDP ratio for the Gulf region is estimated at 21 per cent. “Within the GCC (Gulf Cooperation Council), Bahrain has the highest level of debt at close to 70 per cent of its GDP, while Qatar’s ratio is around 50 per cent;for the remaining countries in the region,it is in the range of 15-30 per cent,” noted Sundar.
He also pointed outthat the government does not want to reduce liquidity inthe domestic market as itrelies on external borrowing to fund developmental projects and meet expenses charged to the budget.
However, Sundar acknowledged that the government must plan for debt servicing by limiting non-priority public spending and bringing in more fiscal discipline.
Last year, the Omani government relied on borrowing from external sources to avoid crowding out the private sector and allow it to meet its financing needs. Crowding out is a situation that arises when public sector spending drives down or even eliminates private sector spending.
A higher deficit in the 2015-2016 period led to a rapid growth in debt. “Consequently, the debt service ratio will increase in the coming years,” noted the ministry.
Borrowing in 2016
The Omani government issued international bonds worth $4 billion and received a syndicated loan of $5 billion last year. Further, Islamic bonds or sukuk worth OMR500 million were issued and loans worth $2 billion provided by an export credit agency.
Subsequently, borrowing from domestic and external sources and issuance of Islamic bonds, development bonds and treasury bills accounted for 72 per cent of the total funding. The remaining 28 per cent was covered by drawing funds fromthe reserves.
Despite the enormous challenges for the budget, the government was able to obtain funding by borrowing mainly from external sources.
Kannan Rajagopal, general manager of the Global Omani Investment Company, said the oil price assumption of$45 per barrel is a reasonable consideration. “I expect the oil price to recover this year,and it will rule above the budget price, which will help reduce the estimated deficit.”
In a similar vein, Kallukaran explainedthat the budget revenue had beencalculated on the basis of oil being reasonably priced at $45 per barrel . Oman Crude is currently hovering at a price of$54 per barrel, which indicates 20 per cent growth over the budget price. This will help reduce the deficit.
“The government also did not reduce itscapital expenditure, which shows that employment opportunities will continue.”
The actual fiscal deficit for 2016 amounted to someOMR5.3 billion, increasing by 60 per cent over the estimated budget deficit. Thishigh deficit is driven by the difference between the actual oil price achieved and the expected oil priceand theincrease in government expenditure.
