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Analysis: Investors forgive as Oman’s austerity campaign hits roadblocks

By on June 2, 2021 0

Oman may be backing off an austerity plan to straighten its fragile finances in the face of unemployment protests, but investors are loosening the new Gulf state ruler a bit for now.

Sultan Haitham, who ascended to the throne in January 2020, pledged last week on the third day of rare protests in several towns and villages to create 32,000 jobs and subsidize private companies preying on Omanis. Read more

But the move did not trigger any major drop in the price of Oman bonds, with investors saying some flexibility in its fiscal adjustment should ensure social stability in a country also hit by protests over jobs and corruption. in 2011.

“The market reaction reflects the understanding that a major reform, especially with regard to taxation in a region that has little precedence, will encounter obstacles, but has not materially derailed,” said Sharif Eid, manager portfolio at Franklin Templeton Investments.

“In the short term, measured adjustments are to be expected, especially since they can have an impact on social factors,” he said.

Oman government bonds due 2047 returned 6.9% at the end of last week, just above 6.7% before the protests. In March of last year, yield hit nearly 12% as the coronavirus outbreak triggered a crash in crude prices.

Oman’s austerity measures unveiled last year are seen as crucial to maintaining the cash-strapped country’s ability to access international debt markets ahead of debt repayments worth around $ 11 billion. dollars this year and next year.

Oman is among the weakest countries financially in the oil-rich region and more vulnerable to fluctuations in hydrocarbon prices, a sector which accounted for about a third of its gross domestic product (GDP) in 2019.

Since the fall in oil prices in 2014, its debt-to-GDP ratio has fallen from around 15% in 2015 to 80% last year, while Oman’s plans to diversify oil revenues and cut spending on oil its bloated public sector has fallen behind.

Oman’s finance ministry and central bank did not respond to requests for comment on the country’s ability to support its economy in the face of financial constraints.

THE BUGUE ROUTE IN FRONT

The medium-term budget plan announced in October, which included the introduction of a value added tax (VAT) in April, reassured investors, helping Oman to raise billions of dollars in bonds and loans this year. . Read more

“Oman has provided comfortable levels of information since the end of last year which has supported the market and is further supported by oil prices at $ 70 per barrel which has significantly reduced their funding gap,” said Zeina Rizk, executive director of fixed income asset management at Arqaam. Capital city.

“In addition, Oman has lifted most of its budget financing needs this year, which is also favorable,” she said.

Oman plans to reduce its deficit from more than 4 billion rials ($ 10.4 billion) in 2020, or 15.8% of GDP, to 537 million rials in 2024, which would be equivalent to 1.7% of GDP .

The debt-to-GDP ratio is expected to remain at around 80% by 2024, but in the absence of the medium-term budget plan it would have reached 128%, the finance ministry said.

Oman also aims to increase non-oil revenues to 35% of the global total in the coming years, up from 28% last year.

The budget plan leaves some time to launch particularly sensitive measures such as a personal income tax on high incomes, which Oman said it was planning for 2022 in what would be a first for the region of the United States. Gulf.

Yet while the unrest that erupted last week appears to have eased after a strong security response, it is a sign that Oman’s efforts to contain the state’s deficits and debt may slow to meet job applications.

Oman’s unemployment rate hit a record 5% last year and youth unemployment exceeds 10%, according to World Bank data.

“The path to fiscal consolidation was unlikely to be smooth and the concessions made by the authorities will slow the pace of adjustment,” said Scott Livermore, chief economist for the Middle East at the Oxford research group. Economics.

Tariq Haq, senior employment policy specialist for Arab States at the International Labor Organization, said Oman needs to develop a medium and long-term employment policy.

“The provision of public jobs as an emergency response is not a lasting substitute for a more comprehensive reform of the labor market, which must more broadly accompany the structural reform of the Omani economy,” he said. -he declares.

FOCUS ON MAPS

In addition to introducing VAT and gradually increasing water and electricity tariffs this year, Oman has cut its civilian and military spending in 2020 and has planned further cuts this year.

However, the expectation that such ambitious reforms should be balanced against socio-economic pressures has been widely taken into account by investors and rating agencies.

Fitch said last month that his outlook for Oman – which is categorized as investment by all major agencies – was negative because of “risks to the sustained implementation of fiscal consolidation plans given the economic backdrop. and social difficult “.

Oman could use government spending to mitigate some of the social fallout from its income diversification efforts, but the focus of reforms will not change, Livermore said.

“The Omani authorities have no choice but to remain committed to the medium-term fiscal adjustment, although there may be adjustments to how this is achieved.”

Nonetheless, some investors said Oman’s reaction to any resurgence of social unrest and other economic challenges should be closely watched.

“Investors have rated the medium-term consolidation plan in Oman with relative relief as it has provided some near-term relief for the budget figures,” said Sergey Dergachev, fund manager at Union Investment.

“But Oman also faces other risks, including a difficult outlook for the tourism sector and inflationary pressures, all alongside the employment situation, which needs to be monitored,” he said.

($ 1 = 0.3849 Omani rials)

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