Oman: Downgrade from 5/7 to 6/7 for medium- to long-term political risk
Covid-19 and low oil prices likely to push current account and public deficit to very high levels again
The covid-19 pandemic in combination with the low oil price come at an ill time for Oman, an oil and gas exporter. The spread of covid-19 infections seems relatively contained in Oman at this stage but the impact of the worldwide covid-19 pandemic on oil prices is hitting Oman excessively. Indeed, the combination of lower demand for oil and gas due to the covid-19 pandemic, a brief oil price war between Russia and Saudi Arabia and the renewed OPEC+ production cuts have reduced Oman’s hydrocarbon revenues. Hence, the twin deficit (current account and fiscal deficit) is set to deteriorate after improvements in recent years (see graph 1). The twin deficit might even return to its peak level of 2016. When looking closer, the fiscal deficit is expected to reach a wide 17% of GDP in 2020, despite the government announcing the largest reduction in fiscal spending ever. The main reason is the huge dependence of the government on oil and gas, as around 80% of Oman’s public revenues come from hydrocarbon receipts. The current account deficit is expected to widen this year as well, despite likely import compression. Again, this evolution can be attributed to the reliance of the country on hydrocarbons as almost 65% of current account receipts come from hydrocarbon revenues. Therefore, in the absence of a recovery in oil and gas prices sharper than currently expected, persistent twin deficits might become the new economic reality for Oman in the medium to long term. This would mean a sharp course reversal compared with previous decades.
Funding the twin deficit might prove tricky
Financing the twin deficits might prove tricky in the coming years. External and public debt were already at high levels before the covid-19 crisis, which leaves the country very badly placed to deal with the low oil prices. It is unclear whether Oman will be able to borrow large amounts on the financial markets in the current difficult global environment. In this context, Oman’s sovereign wealth fund is likely being used as happened in the past years. Nonetheless, if Oman relied on its SWF to finance its deficits in the future, the latter could be quickly exhausted. Using the foreign exchange reserves is another possibility. However, as the country has a peg with the USD, it should be cautious to use its foreign exchange reserves as that can put pressure on the peg. That being said, gross foreign exchange reserves have remained stable at around 5 months of import coverage in April 2020. Lastly, financial support from other Gulf states could be an option for Oman. Nevertheless, this could come at the cost of the country losing its long-standing neutrality in foreign policy.
Recession and rising unemployment might trigger unrest
The covid-19 pandemic in combination with the low oil prices are expected to push the economy in a recession of almost 4% this year according to the World Bank. Historically, Oman has been one of the region’s most stable states but the country will struggle to maintain public goodwill due to the contracting real GDP and rising unemployment. Moreover, there is barely any room for support measures. Lastly, absolute monarch Sultan Haitham bin Tariq Al only recently succeeded his cousin Sultan Qaboos bin Said Al Said after his death in December 2019. The new Sultan, handpicked by his predecessor, might prove to be less popular and might have more difficulties to calm down potential unrest.
Fourth downgrade of MLT political risk since 2015
Oman’s economy has been floundering for years. Indeed, six years after the oil price collapsed in 2014, Oman has still not adapted to the relatively low oil prices. The Achilles heel of Oman’s economy remains the significant twin deficit, which has been driving MLT political downgrades since 2015. The main problem is that the twin deficits have been financed through excessive external borrowing. The covid-19 pandemic in combination with the low oil prices is likely to worsen the twin deficit again while external debt already stood at a high level. In this context, Credendo downgraded the MLT political risk from category 5/7 to category 6/7.
Analyst: Jolyn Debuysscher – J.Debuysscher@credendo.com