Oman's prospects for additional revenue are "dim", according to Moody's Ratings Agency.
About 86% of the government's revenues come from oil and liquefied natural gas -- a number that has increased over the years, instead of declining. Oil and gas revenues have jumped from 82.4% of total revenues at the start of 2010 to as much as 91% in the past few quarters (see table).
With other sources of revenues limited, Oman is more vulnerable than most other Gulf states to oil prices, according to the ratings agency.
The firm expects the country's fiscal balance to decline to 4.3% of GDP in 2011-2013F, compared with 14% of GDP in 2005-2008.
"These risks lie with the fiscal breakeven oil price, i.e. the price of oil that is necessary to balance budgeted government expenditure and government revenues," said Moody's analysts Mathias Angonin and Steffen Dyck, in a note to clients.
DEPRECIATING OIL REVENUES
While the country's crude production has remained steady at 920,000 bpd since 2007, fiscal breakeven oil price has risen from USD 62 per barrel to USD 104 during that period.
"The increasing pressure is also reflected in increases in Oman's fiscal breakeven oil price outpacing global oil price rises: between 2010 and 2012 the oil price needed to balance Oman's general government accounts rose by USD 37, whereas actual oil prices increased by USD 32 only. As a result, Oman's fiscal breakeven oil price rose by almost USD 80 between 2003 and 2012."
The Omani government took extensive and immediate social and economic measures at the first sign of revolt. But those decisions are likely to weigh heavily on the government over the long term.
The government recruited 36,000 Omanis in the public sector last year, increased subsidies and raised the salaries of Omanis working in the private sector - twice.
As such, government expenditure as a ratio of overall gross domestic product rose from 34% between 2005 and 2008 to 46% last year.
"In addition, the increase in current expenditure poses an economic risk as it could crowd out capital expenditures in the event of a sharp oil price correction. In the past, capital expenditure had been used as an adjustment tool to maintain fiscal surpluses at times of falling oil prices," said the Moody's analysts.
Oman's unemployment rate of 15% is the highest in the region, according to Global Investment House, and was a key reason for the protests in 2011, which saw an immediate reaction from the government and promise of aid and financing of around USD 10 billion from neighboring Gulf countries.
OMANIZATION AND DIVERSIFICATION
The International Monetary Fund (IMF) echoes that sentiment, arguing that recent policy measures have "reduced the policy space to respond to shocks."
"A renewed global recession could lead to a large and prolonged decline in oil prices. One standard deviation decline in oil prices (USD 28) relative to the baseline will result in large deficits in the fiscal and current account balances from 2013 onwards, implying bigger fiscal risks in the near term," the IMF said in a report on the country.
In a bid to diversify the economy, Oman is building 31 ports and harbors to reaffirm its strategic location as a regional maritime hub. Construction of four ports is under way and another six ports are in design and tender stages, according to a senior government official.
"Oman is taking advantage of its Indian Ocean centrality by building and enlarging a network of ports -- Salalah, Duqm, Muscat and Sohar. Salalah, in the southwestern province of Dhofar -- close to the border with Yemen -- has the advantage of ultra-transshipment centrality between India and Africa and between the [Arabian] Gulf and the Red Sea," said Robert Kaplan, chief geopolitical analyst at Stratfor, a geopolitical analysis firm.
The diversification of economy will be crucial as the sultanate may only have about 16 years of reserves left, at the current rate of production, according to the BP Statistical Review.
While Oman's non-oil sector has grown at an impressive 5.2%, revenues sources remain limited, especially in the absence of value added tax or income tax receipts.
LOCAL EMPLOYMENT
Oman's Vision 2020 economic program has to gain a faster momentum if the sultanate is to resolve its long-term challenges.
Oman's indigenous population stood at 3.3 million in 2011, and is expected to reach 8.3 million by 2050. But the advent of foreign workers to meet economic needs has left many unemployed Omanis disappointed.
The government's eighth five-year plan see spending on education and health rise by 55% and 88%, respectively, and create approximately 45,000 jobs per year.
"To boost local employment and reduce dependence on expatriates, Oman is also reviewing its policies for foreign workers," notes Global. "Government departments are proposing rules for the issuance of new foreign worker permits as well as imposing quotas for expatriates while assessing which industries need to employ more Omanis vis-à-vis foreign talent."
However, in the immediate future, oil resources will remain central to economic growth, and that could place Omani fiscal resources under pressure, should crude prices wobble for a long period.
The dependence on oil revenues gives the sultanate "shrinking fiscal headroom" over the long term, says Moody's, arguing that while high oil prices have offset rising expenditure, it has increasing vulnerability of public finances.
"This trend is further underpinned by the high proportion of revenues that are generated by the oil sector, Oman's comparatively low levels of oil reserves on a regional basis and the low likelihood of cuts to structural spending."
© alifarabia.com 2013
