Oil in Oman. Labour tensions and political paralysis.

Sabato, 19 Dicembre, 2015

by Michele Delera

Omani crude is currently trading at below $40 per barrel. Drilling activity in the country has hardly been affected. Crude and condensates production hit record levels recently, with 1mm b/d produced for the first time in the country’s history in July. But spending in the hydrocarbon sector is increasingly under pressure. At least 1,000 Omani workers – around 5% of Omani nationals employed in oil and gas companies – have been laid off since the start of the year. More redundancies are expected in the months ahead[1]. With over 45 percent of Oman’s population being less than 20 and the memory of the 2011-12 protests still fresh, this is a sensitive issue. Recent developments mean that the unemployment rate – at 20% as of now – as well as underemployment, which reportedly affects 70% of the population, are likely to increase.

Negotiations with the sector’s trade unions – allowed to exist since 2006 – are proving tricky. The government has hastily promised that oil and gas companies will be asked to fire expatriate workers first, and to give preference to Omanis when hiring. Compensations are likely to follow. Meanwhile the government is also pledging to maintain high levels of public investment, in an effort to enhance the country’s refining capacity, boost output and increase diversification. State-owned oil company OOCEP has unveiled plans to invest up to $4 billion by 2020. But mass immigration during the oil boom and one among the fastest population growth rates across the region (see Figure 1, below) make the prospects of growth and employment creation quite challenging. It is unclear whether labour markets will be able to absorb all, or even part of the new entrants.


Figure 1 – Population growth (annual %), Oman and wider MENA region. Source: World Bank.

 

Public finances are another, more pressing concern. Hydrocarbon exports account for approximately 45% of the country’s GDP, and contributed to 86% of government revenues last year. Last week, the Omani finance ministry released data showing that for the first nine months of 2015, the government has run a budget deficit of US$ 7.6 billion – approximately 9% of Oman’s GDP (see Figure 2, below). This already exceeds the finance ministry’s original expectations – which assumed an average crude price of $75 per barrel – by over a billion. At current prices, a deficit of over $10 billion looks increasingly likely[2]. One wonders how is the government going to honour its commitments over the next few years.

 

Figure 2 – Omani public finances overview (% of GDP), 2011-16. Source: IMF.

 

Oman is hardly alone in grappling with the oil price drop. Slowing global demand and rising crude production are putting all governments in the Gulf under increasing fiscal pressure. Yet while the UAE has made some progress towards reducing energy subsidies in August and Saudi Arabia is reportedly considering the same option, other countries are struggling to adjust. In Kuwait, for instance, the government reversed its plan to bring diesel prices closer to their market value following criticism from members of the legislature as well as opposition groups[3]. So far the Omani government has cut on defence spending, but with political turmoil at home and conflict in the region, it is unclear whether that will remain a priority. It has also raised natural-gas tariffs, but only for industrial users. Gas subsidies for individual consumers, alongside fuel and electricity subsidies – estimated by the IMF to cost around 6% of GDP annually - will be left untouched for the time being.

Different responses across the region seem to have relatively little to do with differentials in fiscal space. Some GCC countries – Qatar, the UAE and Kuwait – have large fiscal buffers at their disposal. They should be able to maintain their deficits further into the next 20 years, according to IMF estimatesThey may choose to delay important reforms. This, Oman might not be able to do. The country may have less than five years ahead. Its sovereign wealth fund, the State General Reserve Fund (SGRF), has assets of around $13 billion – equal to 16% of the country’s GDP. This is significantly less than its neighbours. To make matters worse, the country has a generally worse credit outlook than other countries in the region (see Table 1 below). Hence the decision to start tapping the Islamic debt market, with the country’s first issue of a sukuk (a sovereign, Shari’a-compliant bond) worth around $500 million. But this will cover less than 5% of deficit-financing for the current financial year.

 

 

S&P

Moody’s

Fitch

Oman

BBB-

A1

-

Qatar

AA

Aa3

AA

Saudi Arabia

A+

Aa3

AA

Abu Dhabi

AA

Aa2

AA

Kuwait

AA

Aa2

AA

Bahrein

BBB-

Baa3

BBB-

Russia

BB+

Ba1

BBB-

Nigeria

B+

Ba3

BB-

Table 1 – Sovereign credit ratings for selected GCC and non-GCC oil-exporting countries. Source: Trading Economics.

 

Oman’s highly centralised decision-making process – the country’s ruler, Qaboos bin Said Al Said, concurrently holds most key cabinet positions – may once have been considered an important element in the country’s stability. An ageing man, Qaboos does not have any direct successors and he has, so far, failed to nominate one. Should the issue of succession not be resolved quickly, that stability will risk turning into paralysis. Labour tensions are on the rise at a time when Oman is, by some margin, the most financially vulnerable country in the Gulf. The Sultanate should have a stronger incentive to adjust than most governments in the region, especially if it wants to keep up current levels of spending in the social sector and on infrastructure. Yet support for reform has been, at best, lukewarm.

Strengthening economic relations with Iran may help bring investment in, but it is also likely to affect the country’s relationships with other GCC members – most notably Saudi Arabia. If confirmed, the recently announced VAT reform – to be coordinated across all GCC countries – will constitute a more promising step towards long-term sustainability. Otherwise, it is unclear whether the government’s moves will be sufficient to increase the economy’s resilience. Repercussions may be severe. Islamists could gain some ground, especially in the more marginalised Northern provinces where both Salafis and Brotherhood-affiliated groups constitute one of the few effective forms of political organisation. Having already successfully channelled social unrest back in 2011-12, they might be able to do it again. This time, however, they would be facing a weakened regime.

 

[1] Middle East Economic Survey, 30 October 2015.
[2] Middle East Economic Survey, 4 December 2015.
[3] Middle East Economic Survey30 October 2015.


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