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Fiscal surplus likely to touch 5pc of GDP

MUSCAT -- Standard & Poor's Ratings Services revised its outlook on the Sultanate of Oman to stable from negative. At the same time, S&P has affirmed its 'A/A-1' long- and short-term sovereign ratings on the Sultanate. Oman's transfer and convertibility (T&C) assessment remains 'AA-.'
Explaining the rationale behind its revision, the ratings agency said: "The outlook revision reflects our view that political reforms and economic measures are helping address popular demands and restoring stability to the domestic environment. The ratings are supported by Oman's substantial net external and general government asset positions and prudent investment policies, and constrained by, in our view, a heavy dependence on hydrocarbons, political risk, and a challenging demographic profile -- 60 per cent of the Omani population is under the age of 25 (source: 2010 census data). Oman, similar to other sovereigns in the Gulf Cooperation Council, is subject to geopolitical risk. This is somewhat mitigated by the country's strong alliances with international powers, as well as its ability to maintain a neutral and independent stance in the region."
S&P also cited initiatives by the Omani government to increase wages and benefits of the Omani people, and its commitment to the formation of up to 75,000 jobs. "We expect a significant share of these to be generated in the public sphere. According to our base-case scenario, we anticipate that social spending will rise during 2012-2015, but that the government's resources will be sufficient to manage this increase without incurring a weakening in its fiscal buffers," the ratings agency said.
Currently, Omanis account for only 14 per cent of employment in the private sector; most private-sector employees are foreign nationals. Providing young people with employment opportunities outside the public sector would require far more of the jobs in the private sector to be filled by Omanis. Oman has witnessed some reforms in the political sphere over the past year. The Majlis Ash'shura was granted legislative and regulatory role which is improving political participation to some extent, and introducing some checks and balances into the system, it said.
S&P credited His Majesty the Sultan for championing these changes. "His vision has helped the country accomplish impressive development credentials," it stated. Another factor weighing in the Sultanate's favour was the strong growth of the economy, by an estimated 5.5 per cent in 2011. The growth was primarily based on strong public and private consumption. The hydrocarbon sector was also an important contributor to growth last year -- -oil production rose to 885,000 barrels per day (bpd) from 865,000 bpd in 2010. Moreover, Oman's average oil export price rose to $103 per barrel from $77 per barrel in 2010, bolstering government foreign currency revenues significantly. We expect economic growth to remain at around 5 per cent in 2012, boosted by high government spending coupled with high private consumption and investment," S&P said.
The strong oil windfall in 2011 helped bolster the government's financial buffer. The fiscal surplus reached 7 per cent in 2011 (including oil revenues allotted to the various investment and savings funds and the government's investment income). The 50 per cent increase in the government's revenues from hydrocarbon was more than sufficient to offset a 44 per cent increase in current spending. This increase included higher outlays for wages and social and employment benefits in line with the measures taken last year.
"Despite the increase in the public sector wage bill and the full year effect from the increases in social and unemployment benefits instituted last year, we expect the fiscal surplus this year to reach around 5% of GDP, contingent on Oman's oil export price averaging around $100 per barrel for the year as a whole. We have excluded from our base-case scenario any resources from the Gulf Cooperation Council Development Fund since the fund does not appear to be capitalised yet. We estimate the general government's net asset position at around 67% of GDP in 2012. On the external balance, we expect the current account surplus to reach 10% of GDP in 2012, compared with 14% in 2011," S&P said.
It further added: "In our baseline scenario, the government's hydrocarbon-dominated revenue base is more than sufficient to cover the higher social spending outlays that we have factored in during 2012-2015.
Nonetheless, we remain concerned that a sharp and sustained deterioration in the country's terms of trade -- for example, through a sharp decline in the oil export price -- could weaken public finances tangibly, forcing the government to tap its external assets to meet public spending needs."
In concluding, S&P stated: "The stable outlook reflects our view that the domestic political environment has generally stabilised. The government's fiscal performance is expected to remain favourable over the forecast period allowing it sufficient room to address the higher social spending expected over the ratings horizon. We could lower the ratings if political pressures intensify or if we see a sustained weakening in fiscal performance, as might occur following a sharp decline in the oil price. Alternatively, we could raise the ratings if the underpinnings of economic growth strengthen, raising per capita income levels and improving."

© Oman Daily Observer 2012

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