All indicators show that the Omani economy is on the rise, as the Sultanate recorded a surplus of $2.04 billion in the first half of this year, compared to a deficit of $2.88 billion in the same period last year.
This surplus represents an important economic recovery for Oman, which appears to end 2022 with its first surplus since 2013.
On Monday, Fitch Ratings upgraded Oman’s credit rating to BB from BB-, with a stable outlook.
This improved rating, according to Fitch, “reflects significant improvements in Oman’s fiscal metrics, reduced external financing pressures and ongoing efforts to reform public finances. Higher oil revenues will support budget surpluses in 2022 and 2023 and a sharp decline in government debt-to-GDP to less than BB Average. While we expect oil prices to trend lower in the medium term and noticing some easing of fiscal reform in 2022, we believe that commitment to fiscal consolidation through the country’s medium-term fiscal plan will be sufficient to limit the renewed deterioration in public and external financing metrics”.
Data from “MEES”, a weekly oil and gas analytics specialist in the Middle East, indicates that Oman’s production of crude oil and condensate reached record levels during the first six months of the year. The average production reached a record 1.05 million barrels per day, exceeding the previous record of 1.00 million barrels per day reached by the Sultanate in the first half of 2016. The figure for the first half of 2022 represents an increase of 10 percent over the 955,000 average barrels per day compared to the same period last year.
Fitch forecasts budget surpluses of 5.5 percent and 3.4 percent of GDP in 2022 and 2023, respectively, the first surpluses in Oman since 2013, with oil revenue growth easily outpacing additional spending. This is assuming that Brent crude prices average $105 per barrel in 2022 and $85 per barrel in 2023 and that crude oil and condensate production will grow by 8.8 percent in 2022 and 3.5 percent in 2023, reaching a record 1.1 million barrels per day. Favorable prices will also boost budget revenues from gas.
In contrast, the agency expects a small budget deficit for 2024, as lower oil prices (assumed to average $65 per barrel) and modest GDP growth, offsetting gains from ongoing fiscal reforms that will boost non-oil revenues and reduce overall spending. Non-hydrocarbon tax revenues are expected to increase following the already introduced value-added tax in April 2021, the personal income tax planned for 2023, and the potential for stronger corporate tax returns.
Progress and challenges in financial reforms
Fitch expects spending to be higher by 6 percent than what is estimated in the 2022 budget due to fuel subsidies that help mitigate the domestic impact of high energy prices, and the slowdown in reforming other forms of subsidies,
and the increase in capital expenditures. Noting that the time frame for phasing out electricity subsidies has been extended from five years to 10 years.
Fitch forecasts indicate a decline in the government debt-to-GDP ratio to 46.7 percent in 2022 and 44.9 percent in 2023, from about 70 percent in 2020, on the back of improved budget performance and oil-backed nominal GDP growth of 24 percent in 2022.
The government used a portion of the windfall oil proceeds to buy back $700 million of bonds maturing during 2025-2032, prepay the remainder of the pre-export financing facility obtained in 2017 ($1.3 billion), and repay an outstanding loan of $3.6 billion from China.
Net external borrowing in 2022 will be negative at around 4 percent of GDP.
Oman on its way to overriding its plans
This new classification indicates that Oman is on track to skip the plans it laid out for its 2022 budget. For example, actual revenues for the first half are approximately 64 percent of the full-year budget estimates of $27.48 billion.
Knowing that the Sultanate had calculated its budget when preparing it on the basis of a conservative price of oil, which was $50, and expected a deficit of $4 billion. According to the International Monetary Fund, Oman needs an oil price of $73 per barrel to balance its finances for 2022.
With Omani crude oil prices exceeding $100 per barrel in recent months and LNG prices at record levels, it was no surprise that the Sultanate’s huge revenues in the first half were driven by the oil and gas sector, which provided 74 percent of H1 revenues.
Exports are crucial to the Omani economy, with about 86 percent of Oman’s oil production being exported. According to data obtained from more than one party, oil exports reached a record level close to 897,000 barrels per day in the first half of 2022, an increase of 125,000 barrels per day over the same period last year, with the easing of “OPEC +” restrictions on production.
While official figures are not yet available, MEES calculates that Oman’s crude oil export revenue nearly doubled year-on-year to $14.7 billion in the first half of 2022.
Growth and inflation
All these positive developments are pushing the Sultanate to achieve good growth expected of 4.4 percent in 2022 from 3 percent in 2021, according to “Fitch”.
As for inflation, it is expected to remain at around 3.5 percent on average this year, supported by government price controls, before declining to less than 2 percent in 2023. The Sultanate had announced that the annual inflation reached 2.85 percent until June year-on-year.