Oman must cut subsidies and trim a burgeoning public wage bill to avoid draining financial reserves, said the IMF’s country head.
The IMF mission concluded a visit to Oman on Tuesday as part of the country’s Article IV consultation, a regular economic review. The fund will press for major fiscal reforms in the sultanate, the mission chief Ananthakrishnan Prasad said.
“The oil price decline has made undertaking of reforms more urgent for Oman,” Mr Prasad said. “Without any reforms at this stage the country will either have to use its buffers or increase debt, and there could be spillovers from the fiscal sector to the rest of the economy.”
Oman, which is not a member of Opec, has been hit hard by the fall in oil prices. After years of surpluses, the country recorded a budget deficit of 600 million rials (Dh5.72 billion) last year, according to the finance ministry. It estimated that the deficit would widen to 8 per cent of GDP this year, assuming an oil price of US$75 a barrel.
Brent crude was trading at $61.04 a barrel yesterday afternoon.
In its survey of what the drop in oil prices means for Middle Eastern countries, HSBC Holdings predicted that Oman’s shortfall could reach 16 per cent of GDP if it carried on spending at trend levels. Oman’s fiscal stance will “tighten significantly if low oil prices persist, drawing down overall growth”, HSBC economists said.
Oman realises “very well that even if the prices go up, they are going to run a deficit, and the deficit is going to stay,” Mr Prasad said. “So they have to do something.”
The IMF will release forecasts next week for Oman’s budget deficit and economic growth, he said. Because the country’s oil production is near capacity – at 980,000 barrels per day – non-oil growth will be key, Mr Prasad said. The IMF estimates Oman’s non-oil growth last year at 6.5 per cent and projects it will narrow to 5 per cent this year and next.
He said Oman needs to limit growth to public-sector wages and reform the system of subsidies for fuels, electricity and water. The government also needs to further diversify the economy and increase non-oil revenue through direct and indirect taxation, he added.
Reforms should be phased in to avoid destabilising the economy or causing social discontent, Mr Prasad said.
During the Arab Spring, when unrest swept the Middle East, Oman responded to local protests by raising wages and creating tens of thousands of new jobs. Government spending increased almost 35 per cent in 2011.
Sultan Qaboos, the country’s 74-year-old ruler, travelled to Germany in July to receive medical treatment and has yet to return, raising questions among Omanis about the succession. He has no children and has not named an heir.
Meanwhile, the state-controlled oil producer Petroleum Development Oman (PDO) raised its crude output in the first two months of the year to more than the planned annual average of 570,000 bpd, a top official said.
While neighbouring members of Opec have called on producers from outside the group to cut or freeze production to support oil prices, Oman is moving ahead with plans to pump more.
PDO’s production in January and last month exceeded the planned average for the year as a whole, the managing director Raoul Restucci said on Tuesday.
He said the planned average was 570,000 bpd but declined to give the actual production.
Oman is a small independent producer, but its crude forms part of the benchmark price for millions of barrels per day of exports from Middle East producers to Asia.
Oman is also an important exporter to Asian markets. In 2013, Oman exported an estimated 833,400 bpd of crude oil and condensate, of which nearly 60 per cent went to China, according to the US Energy Information Administration.
In January, the Omani oil minister Mohammad bin Hamad Al Rumhy said the country’s crude oil production was expected to rise by about 20,000 bpd this year.
Oman has spent heavily on technology to enhance output from its old, depleted fields. Mr Restucci said some enhanced oil recovery projects will slow, as they require higher prices to be profitable, but the vast majority would continue, as they are “very very profitable”. He did not elaborate.
As oil prices decline or continue to stay at current levels, energy companies will spend about $450bn on mergers and acquisitions this year on the back of lower valuations, according to the consultant AT Kearney.
The value of M&A transactions in the oil and gas industry will probably rise by $10bn from last year, when deals totalled $440bn, said Richard Forrest, AT Kearney’s lead partner for energy. The increase will accelerate in the second half of this year, he said.
“2015 is a pivotal year where a sustained low oil price will trigger the start of a new wave of M&A activities,” he said.
Producers and explorers including Royal Dutch Shell and Chevron have announced spending cuts of almost $50bn since November 1. Gulf Keystone Petroleum, which is exploring for energy in Iraq’s Kurdish region, said last month it was talking with parties it did not identify about a possible merger or sale.
In the chemical industry, which uses oil and natural gas as feedstock, activist investors rather than commodity prices will be the main driver of consolidation, Mr Forrest said.
The value of mergers in the chemicals business rose 13 per cent to $82bn last year, spurred partly by investors who advocated asset sales to boost shareholder returns, he said. Dow Chemical in November offered board seats to Third Point after the hedge fund agreed to stop calling for Dow to sell its petrochemical business.
“In chemicals, activity will continue, and the industry is not waiting for a value adjustment from the oil price,” he said.
Chemical companies are set to sell non-core assets this year, he said, citing a survey of about 50 industry executives.
Middle Eastern energy-producing states could take advantage of such sales to add assets and buy new capabilities, Mr Forrest said. Saudi Arabian Oil, or Saudi Aramco, the world’s largest crude exporter, seeks to become the world’s biggest chemicals maker, its chief executive Khalid Al Falih said in March 2013. The drop in oil prices will not derail that project, he said in Dubai in November.
Saudi Aramco was discussing the potential purchase of a minority stake in the German chemical company Lanxess’s synthetic-rubber unit, two sources said last month.
Many investors are raising money in anticipation that oil prices have further to fall.
“The opportunity is very large, long and wide,” with $200bn of high-yield bonds and $50bn of leveraged loans in the energy sector, said Dwight Scott, the head of GSO Capital’s Houston office. Oil prices “have stabilised, but could still come down a leg”, he said.
As oil plunged about 50 per cent during the second half of last year, the average price on junk-rated energy company debt dropped more than 22 cents to 83.4 cents on the dollar, according to Bank of America Merrill Lynch index data. The prices have since bounced back to 91.1 cents.
Much of the decline was driven by concern that the lower oil prices would squeeze companies’ ability to borrow from credit lines tied directly to the value of their assets.
Mudrick Capital, whose founder Jason Mudrick cited the oil-price decline as “the most exciting” opportunity since the 2008 financial crisis, is now raising a fund to invest in distressed bonds and loans of energy companies, according to Bloomberg News.
As oil prices stabilised this year, individual investors also have been piling back into junk bonds. They added a net $11bn to US high-yield bond funds this year through February 25, according to the data provider Lipper.
Trouble may still be looming for borrowers that have yet to find rescue financing.