Index Trend Previous Quarterly Editions
Expropriation Risk: 40 Political Violence Risk: 36 Terrorism Risk: 5 Exchange Transfer and Trade Sanction Risk: 55 Sovereign Default Risk: 47
Risk Temperature
44 (Medium-Low) +1
TREND ►
In 2020, Oman’s decades-long ruler Sultan Qaboos died. He had named his cousin, Haitham bin Tariq Al Said, as preferred successor. The royal consensus around the choice avoided a succession battle, which would have been destabilising in a time of financial turmoil for the sultanate and rising Middle East tensions around Iran’s regional stance and relationship to the West.
Sworn in during January 2020, Haitham has pursued much-needed fiscal and economic reforms that had stalled under Qaboos. However, the oil price drop and COVID-19-related economic crisis have hit Oman. Despite being the largest oil producer outside OPEC, Oman’s oil reserves are smaller and more geologically challenging than its Gulf neighbours, meaning that as oil prices have fallen Oman has become increasingly reliant on debt to finance a ballooning fiscal deficit; the government debt-to-GDP swelled from 16% in 2015 to nearly 80% in 2020, reflecting mounting financing needs amid continuing heavy reliance on hydrocarbons for budgetary receipts (oil and gas exports have generated between 68% to 85% of yearly government revenues over the last 30 years).
Haitham has pledged to maintain Omani foreign policy, including friendly ties with all countries. Oman’s foreign policy neutrality allows it to be a mediator, including for the 2015 Iran nuclear deal. However, this role has been threatened in recent years, including under pressure from Saudi Arabia and the United Arab Emirates (UAE) to partake in boycotting Qatar, which Oman avoided.
In avoiding the boycott (which ended in January 2021) Qatar re-routed many of its critical imports through the Omani port of Sohar. Though Qatar may post-boycott choose to rebalance its trading relationships, routing less trade through Oman, the boycott and Oman’s neutrality furthered Oman’s ambitions to benefit from its strategic location as a transport logistics hub. Oman also stands to benefit from the end of the boycott since a more cohesive Gulf Cooperation Council (GCC) is more disposed to view a liquidity crisis in Oman as posing the risk of contagion, increasing the likelihood of a Gulf bailout if Oman’s finances worsen materially.
Nonetheless, Oman’s cordial relations with Iran (at odds with Saudi-UAE antipathy to Iran), and lingering security-related Oman-UAE tensions, mean that Oman needs to manage intra-GCC relations deftly, especially if Oman needs a bailout. This raises the prospect that any package will be tied to concessions on Omani foreign policy independence. More broadly, a volatile regional geopolitical climate, driven by uncertainty over the outlook for US-Iran ties and Saudi-Iranian rivalry, threatens spill overs that would undermine the stability of Oman and the Gulf’s critical waterways.
Domestically, Haitham has presided over sweeping state restructuring including decision making. In August 2020, he replaced senior cabinet officials, appointed a new central bank board chairman and consolidated 28 ministries into 18. Additionally, he renounced his titles as finance and foreign affairs minister, empowering his new appointments and signalling departure from Qaboos’s centralising tendencies. However, Haitham remains prime minister, defence minister and armed forces chief.
In November 2020, the government published a Medium-Term Fiscal Programme (MTFP), aiming to balance finances by 2025. Through hiring freezes in non-critical sectors and linking salaries to performance, the government aims to stem the drain on public finances from public-sector wages (nearly 40% of expenditure in 2021). Yet with 43% of Omanis employed in public entities, this will be politically sensitive. Other consolidation measures include the potential for an income tax on high earners by 2022, while a 5% value-added tax (VAT) arrived in April 2021.
These reforms’ impact will be watched closely: the government may be forced to U-turn if the inflationary aspect of new taxes and COVID-19-related financial difficulties cause public resentment or other economic problems; indeed, as the new VAT took effect, Oman raised the number of food commodities exempted from 93 to 488 and hiked subsidies. Nonetheless, the reform drive has given confidence to lenders and investors about Oman and its finances. The International Monetary Fund now expects Oman to run a budget deficit of 5.4% of GDP in 2021, less than one-third of its shortfall in 2020.
Oman has also been able to secure USD5.5bn in bonds and loans in the first quarter of 2021, more than the USD3.5bn raised in all of 2020. Enhanced market access will help the country navigate budget distress and reduce the chance of needing Gulf support. Even so, amid all of this, Oman still needs to contain COVID-19, incidence of which is stalling national plans for economic diversification via tourism. New lockdowns were imposed in March 2021, which will hit hospitality and retail. Vaccine rollout began in late 2020 but supply delays have been encountered, suggesting restrictions could continue for some time.
Expropriation Risk 40 (Medium-Low) TREND ▲
Oman is improving its business environment for domestic and foreign investors but has struggled to attract foreign money outside the petroleum sector. However, last year’s Foreign Capital Investment Law, which allows 100% foreign ownership of companies, may attract non-oil foreign investments. Even so, the entrenched economic interests of politically well-connected merchant families means that market access will be challenging.
The government is prioritising asset sales to help finance its structural fiscal deficit, such as selling a 49% share in Oman Electricity Transmission Company to China’s State Grid in December 2019. More asset sales are expected, the moves towards privatisation (including public-private partnerships) and encouraging foreign investment suggest that expropriation risks will be very low in coming years.
Political Violence Risk 62 (Medium-Low) TREND ▲
In past years, Oman has seen bouts of popular anger on the streets, fuelled mainly by rising unemployment and perceptions of official corruption. There have also been popular calls for jobs, higher salaries, reduction in government media control and for reduced numbers of foreign workersto help Omanis find private sector jobs. Qaboos raised the minimum wage and expanded the social safety net, among other responsive measures.
Under Haitham, societal pushback is likely against the public sector austerity and tax measures, and their wider economic effects. Pushback is also likely against the phasing out of electricity and energy subsidies. Given current oil market conditions, Haitham has fewer resources than did Qaboos to respond to any protests with government largesse; he would instead likely halt fiscal reforms and appease Omanis with public-sector hiring.
Terrorism Risk 5 (Extremely Low) TREND ►
Oman has no terrorism; policing and security provisions are effective. This is unlikely to change in coming years, although signing a peace treaty with Israel (currently a hypothetical, with no reports of a deal being in the making) could open the way for radical groups to target government and Western assets.
Exchange Transfer and Trade Sanctions Risk 55 (Significant) TREND ► ►
Oman has adequate buffers to finance goods imports and maintain the currency’s peg to the US dollar. Reserves were USD15bn at end-2020, equivalent to about 6.5 months of imports. However, the reserves’ stability is sensitive to oil prices, which have dropped recently especially due to COVID-19’s economic effects. An oil rebound would help bolster reserves, but Oman will also need strong foreign investment inflows to pre-empt foreign exchange pressures that would arise from a lower-for-longer oil price situation.
Sovereign Default Risk 47 (Medium) TREND ►
In 2020, given the oil price collapse and COVID-19, Oman’s credit rating was downgraded deeper into junk territory by Standard and Poor’s, Moody’s and Fitch. Higher oil prices will alleviate fiscal pressures and default risks. Investors will also welcome the MTFP. In the longer term, rising global interest rates would risk an emerging-markets sell-off, which would squeeze Oman’s market access.
