Oman’s budget deficit to decline further

Business Sunday 29/April/2018 17:59 PM
By: Times News Service
Oman’s budget deficit to decline further

Muscat: Oman's Tanfeedh plans for economic diversification are well underway, as the government seeks to diversify away from its traditional fossil-fuel based sources of income, a senior development head in Oman has said.
Speaking at the 2018 Oman Economic Forum, Ominvest Chairman Sheikh Khalid Muhammad Al Zubair said: “In order to achieve higher and sustainable growth, Oman has embarked on a National Program for Enhancing Economic Diversification. In Arabic, This Program is called Tanfeedh – exemplifying the true spirit of Public-Private Partnership.
Tanfeedh entails investing around $45 billion in key non-hydrocarbon sectors. Following careful study and analysis, key focus sectors have been clearly identified over two phases: manufacturing, logistics and tourism in Phase 1, and fisheries and mining in Phase 2,” he said.
“Under Tanfeedh, the public sector is expected to provide around $7 billion as seed-capital, while the remaining $38 billion is coming from the private sector,” he added.
He also said the twin deficits are shrinking fast in Oman’s budget. “Oman ran large twin deficits in 2015 and 2016. For instance, the budget deficit widened to OMR5.3 billion (22 per cent of gross domestic product (GDP) in 2016, which has come down to OMR3.5 billion (13 per cent of GDP) in 2017 and budgeted to decline further to OMR3.0 billion (10 per cent of GDP) in 2018. The budget deficit is likely to shrink materially over the next 3 years.
“Similarly, the current account deficit stood at 18.8 per cent in 2016. As the value of our oil exports surge again, the Current Account Deficit will likely reduce to just three per cent to four per cent of GDP by the end of 2018.”
Oman’s 2018 budget is based on an average oil price of $50 per barrel — the good news is that so far this year Omani oil has averaged at $65 per barrel — 25 per cent above the 2017 average of $52 per barrel. If oil prices stabilise around current levels, it will have a major positive impact on Oman’s key economic indicators and the future outlook,” he said.
In a recent announcement, Central Bank of Oman (CBO) relaxed capital adequacy and liquidity requirements for the banking sector. The CBO lowered the required Capital Adequacy Ratio (CAR) by one point — from 13.9 per cent to 12.9 per cent. And, without the capital buffers, the new minimum CAR falls from 12 per cent to 11 per cent.
“It is estimated that this relaxation will create room for additional OMR2.6 billion in lending, which is around 11 per cent of the sector’s loans. If the limits are effectively utilised, it will be a major liquidity boost,” he said.
In addition, the CBO has allowed the banks to include net interbank borrowings in their deposit base, thereby, giving the banks more room to expand their Loan Books. The CBO has also allowed the banks to run bigger mismatches in their assets and liabilities. With these relaxations, banks will be able to manage their liquidity with much greater flexibility, he said.
“The good news is — Omani banks are well capitalised, with the Capital Adequacy Ratios of the larger banks well above the CBO’s minimum thresholds. For instance, Bank Muscat’s CAR is 18.6 per cent, NBO’s at 17.3 per cent, Bank Dhofar’s 15.4 per cent and Bank Sohar’s 16.2 per cent.
He also believed that that CBO’s recent measures will serve as an additional catalyst, boost credit growth, enhance liquidity flows and help the private sector to more aggressively borrow and invest to create jobs.
Regarding the most challenging aspect of Oman’s economic picture — the Debt, he said: “To finance its budget deficit, Oman’s government has been borrowing largely from the international markets. Over the last 4 years (ie, 2015 through early 2018), Oman has borrowed around $34 billion.
“Invariably – all of Omani debt issues have been well received and significantly oversubscribed. For instance, in January 2018, Oman raised $6.5 billion in a single scoop from the international markets. The Issue was oversubscribed by 2.3 times and at an attractive yield of 5.8 per cent – given Oman’s sovereign ratings.
“With a strong recovery in oil prices and an acceleration in the government’s initiatives for economic diversification and fiscal reforms, we expect further debt issuance will taper-off and debt as a percentage of GDP will decline to more moderate levels, over the next 3 years.
“We are pleased to observe that Omani Government has met over 80 per cent of its deficit financing through borrowings in USD from the international markets. This has left the local pools of capital largely intact and wide-open for the private sector to borrow comfortably,” he said.
“The prudent decision by the Ministry to Finance to borrow from international markets and the CBO’s recent policy relaxations to the banking sector present a great combination of accommodative policies — which together — are providing major boost to the local funding system and ultimately to the private sector,” he said.