Oman May Sell Assets, Borrow Abroad If Oil Prices Drop

Oman may have to start selling foreign assets or borrow on international markets in coming years if government spending rises during a period of lower oil prices and economic growth, a report in a magazine published by its central bank said.

“The sultanate has to tolerate one of the options in the coming years if there is any prediction of decrease in GDP (gross domestic product) growth rates with an increase in spending,” said the article in Al Markazi, a banking and economic publication.

“The first option is to begin to liquidate assets abroad to support domestic spending. The second would be to start a programme of external borrowing next year at the earliest.”

The author of the article was not named, and a note attached to the magazine said the opinions expressed in it were not necessarily those of the central bank. But an official in the central bank’s media department, contacted by Reuters, said the article was in line with the bank’s thinking.

Oman, which relies on oil and gas for 87 per cent of its budget revenue, faces increasing pressure on its finances because of rises in state spending on social welfare and infrastructure investment. The finance minister said last year that the country might resume borrowing in international markets for the first time since 1997.

In October, the International Monetary Fund predicted that Oman would slip into a fiscal deficit of 0.2 per cent of GDP in 2015, widening to as much as 7.1 per cent in 2018.

That was before the government revealed plans for additional spending on public wages, which could raise the oil price which Oman needs to balance its budget to $112 per barrel from an estimated $105 this year.

Brent crude oil is currently at $108; a Reuters poll last month showed the market thinks the price will ease to $104.90 this year and $100 in 2015.

“(The) break-even price reaching up to $112 will make building financial reserves difficult if not a downright impossible task,” the magazine article said, quoting the finance minister.

It also noted that oil prices could fall substantially if Iran reaches a comprehensive agreement with world powers on its nuclear programme this year, allowing economic sanctions to be lifted and full supplies of its oil to global markets to resume.

“Any decline to about $90 probably because of the return of Iranian supplies to the international market – in case Tehran entered into a definitive agreement with world powers on its nuclear programme – would affect the expectations and the odds set by the sultanate,” the magazine said.

Oman has started to rein in state spending growth, but this may not be enough to avoid budget deficits in future. State spending this year is projected at OMR13.5 billion ($35.1 billion), up just five per cent from the original plan in the 2013 budget, which envisaged a 29 per cent leap from 2012.

The country has a relatively modest store of oil earnings compared to neighbours such as Saudi Arabia. The magazine said the size of one of Oman’s sovereign wealth funds was $8.2 billion, but did not name it or give other details.

Analysts have estimated the country’s two most prominent sovereign wealth funds hold a total of about $16 billion worth of assets. The central bank’s foreign reserves stood at $15.8 billion in December.