Previous Quarterly Editions
Expropriation Risk: 38 39 40 41 ▲ Political Violence Risk: 35 35 36 36 ► Terrorism Risk: 5 5 5 5 ► Exchange Transfer and Trade Sanction Risk: 55 55 55 55 ► Sovereign Default Risk: 57 47 47 47 ►
TREND ►
In his first year in power, Sultan Haitham has faced the twin crises of COVID-19 and the collapse in oil prices, battering Oman’s economy and straining its healthcare system. Given Oman’s over-reliance on oil (and volatile oil prices), the sultan has taken politically difficult steps to put Oman’s finances on a more sustainable footing.
Under a Medium-Term Fiscal Programme (MTFP), published in November 2020, Oman has introduced value-added tax (VAT) at 5%, eliminated utility subsidies and even mooted an income tax on high earners. Such reforms demonstrate the urgency of Oman’s fiscal challenge but also the sultan’s willingness to test the limits of the social contract in effecting necessary change -- this contrasts with the glacial pace of change under his predecessor, Sultan Qaboos.
With the elimination of electricity subsidies for household users and the introduction of VAT, the reforms are beginning to hit Omanis’ pocketbooks. To streamline and shrink the public sector bureaucracy, the government also proceeded with hiring freezes. This all appeared to come to a head in late May, when scattered protests in the cities of Sohar and Salalah broke out as workless Omanis demanded access to public sector jobs. In response, the Sultan ordered the government to fast-track plans to create thousands of jobs in the public sector and to subsidise employment in the private sector. This will inflate the public sector wage bill.
In early August, the government took a similar approach to soaring summer electricity bills by easing utility tariffs for citizens. While the backtracking on reforms does not necessarily doom Oman’s reform efforts, it does indicate that the momentum of reforms will continue to be disrupted by political sensitivities.
On the foreign policy front, Sultan Haitham’s apparent pivot to Saudi Arabia also reflects the urgency of Oman’s fiscal challenges. In early July, Haitham made his first overseas visit as sultan to the Saudi Red Sea city of Neom, where he met with the Saudi king and crown prince. The visit was the first in ten years by an Omani sultan to Saudi Arabia, signalling a recalibration of Omani foreign policy that gives greater weight and respect to Saudi Arabia’s influence in the region. Given Oman’s traditional preference for keeping Saudi Arabia at arm’s length (fearing for its own foreign policy neutrality), the sultan’s efforts to cultivate closer ties with Riyadh stem primarily from Oman’s need for a potential source of financial aid.
Though higher oil prices have reduced Oman’s short-term need for external support, its debt obligations and the prospects of an oil-market downturn ensure that such assistance may be needed in the future. Regionally, the attack in late July on an oil shipping tanker managed by an Israeli-owned company off the coast of Oman suggests that the sultanate will be vulnerable to a potential escalation in tensions between Iran and Israel. With hard-liner leaders recently rising to the presidency and premiership of Iran and Israel, respectively, the risk of Iran-Israel tensions spilling over into the Persian Gulf has escalated.
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.
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 the government’s media control and for reduced foreign workers numbers, to 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 (as demonstrated by the unemployment protests in May). 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.
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 -- which is a hypothetical -- could open the way for radical groups to target government and Western assets.
Oman has adequate buffers to finance goods imports and maintain the currency’s peg to the US dollar. Reserves currently hover around USD18bn, up from USD15bn at end-2020, equivalent to about 6.5 months of imports. The stability of the reserves is sensitive to oil prices and is therefore rising with the current strength of oil-market conditions. Higher oil prices 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.
In mid-August, the United States sanctioned an Omani businessman and four companies linked to him for his alleged involvement in an oil-smuggling network that supports the Quds Force of Iran’s Islamic Revolutionary Guard Corps. The sanctions came as talks to revive the 2015 Iran nuclear agreement have faltered.
In 2020, Oman’s credit rating was downgraded deeper into junk territory by Standard and Poor’s, Moody’s and Fitch, given the oil price collapse and COVID-19’s economic effects. Higher oil prices will alleviate fiscal pressures and default risks. Investors will also welcome the MTFP. Oman has raised USD7.2bn in bonds and loans in the first half of 2021, demonstrating its improved market access -- but also underlining its large financing needs. In the longer term, rising global interest rates would risk an emerging-markets sell-off, which would squeeze Oman’s market access.
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