Oman's continued large twin deficits imply a need for material external financing to prevent sustained erosion in foreign assets and to defend the US dollar peg, a report says.
Further borrowing is likely to pressure external debt, especially if a downgrade to non-investment grade removes a source of technical support as debt levels increase further, said the Bank of America Merrill Lynch’s Emerging Insight report on Oman by its Mena economist Jean-Michel Saliba.
In the absence of material fiscal consolidation, debt dynamics remain adverse and unanchored, despite the low starting level for government debt, it said.
Fiscal Accounts Under Pressure
The sharp drop in oil prices last year and spending slippage have led to a large widening in the fiscal deficit in 2016. The consolidated government fiscal balance recorded a deficit of OR5.2 billion ($13.5bn, 22.6% of GDP) in 2016, widening from OR4.2bn ($10.8bn, 16.9% of GDP) in 2015.
On the revenue side, this was due to a substantial fall in hydrocarbon revenues, only partially offset by an increase in non-oil revenues. The latter was mostly due to an increase in investment income and miscellaneous revenues including fees and asset sales, which suggests the increase may not be recurrent.
BofA Merrill Lynch expect the fiscal deficit to narrow this year on higher oil prices, but hover around 2015 levels.
The 2017 budget targets narrowing of the fiscal deficit (excluding net grants) to OR3 billion, based on an oil price assumption of $45/bbl.
Authorities plan to cover the 2017 fiscal gap with an OR0.5bn ($1.3bn) drawdown from reserve assets, OR2.1bn ($5.5bn) in external borrowing, and OR0.4bn ($1bn) in domestic borrowing, the report said.
Government debt has increased materially, albeit from a low base. Total government debt stood at $19.7bn (32.6% of GDP) in 2016, from 4.9% of GDP in 2014. The largest increase has come from external debt, which stood at 22% of GDP ($13.4bn).
Current Deficit Pressures Peg
The sharp drop in oil prices last year has led to a large widening in the current account deficit in 2016 despite continued import contraction (20% YoY). 3Q16 current account deficit data annualises at $12.8bn (21.4% of GDP), versus a deficit of $10.8bn (16.9% of GDP). Net errors and omissions show a further annual outflow of $1bn, the report said.
External borrowing has supported CBO FX reserves, including through the issuance of a $4.5bn international bond, a $4bn PDO pre-export facility, a $1bn syndicated loan and $1bn bilateral short-term loan with China (expiring in May 2017). The external public sector medium-term debt repayment profile suggests in addition $1.5bn in annual average redemptions over 2017-2020.
Large external borrowing and potential support from non-resident entities have prevented a more rapid erosion of gross foreign assets than implied by external imbalances, it said.
Total gross foreign assets, including CBO, the State General Reserve Fund (SGRF), the Petroleum Reserve Fund (PRF), the Infrastructure Project Finance Account (IPT), and Oman Investment Fund (OIF), have declined to $38.8bn (64.9% of GDP) at end-2016, from a peak of $51.5bn (66% of GDP) in 2013.
Boosted by external debt proceeds and non-resident deposits, CBO foreign assets stood at $20.3bn in 2016 (33.9% of GDP). As such, liquid foreign assets likely represent 2.5 years of external financing needs, providing near-term cushion, the report said.
The report says that it would be in the interest of the GCC to support Oman in maintaining its USD peg to prevent contagion risk.
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