Thursday, 18th June 2020

Overhaul of Oman’s economic structure accelerates, so does crisis

Sultan Haitham Bin Tariq Al-Said’s decision to merge the State General Reserve Fund (SGRF) and the Oman Investment Fund (OIF) – announced via a royal decree on 4 June – brings to an end a debate that has rumbled on since 2017. The new Oman Investment Authority (OIA) will combine the $14.3bn of assets held by the SGRF and $3.4bn from the OIF. To be independent of the Ministry of Finance (MoF), the new entity will report directly to the Council of Ministers. Abdulsalam Al-Murshidi has been promoted to ministerial rank to head the new organisation, which reflects well on his tenure as chief executive of the SGRF.

The decree establishing the new authority said that, in addition to the two sovereign wealth funds’ assets, the OIA will assume ownership of all government-owned companies, with the exception of Petroleum Development Oman (PDO), “government contributions in international establishments” and some other companies to be specified at a later date. These qualifications add uncertainty as to the final shape of OIA’s portfolio.

Of particular interest will be the status of international companies that were previously subordinate to the Oman Oil Refineries and Petroleum Industries Company (Orpic) and Oman Oil Company (OOC); since late 2019 these entities have been held within the state-owned OQ group, subordinated to the MoF. Some of these companies, for example Dubai-based oil brokerage firm OQ Trading, have been very successful, while others such as German-headquartered OQ Chemicals (formerly Oxea) have had a more chequered history. A senior OQ executive told GSN that no changes had been announced internally as yet, but he expected OQ to be subordinated to OIA. This source felt the OI would be better suited than the MoF to exercise strategic asset management over OQ.

The primary aim behind the OIA’s creation is to improve the efficiency and effectiveness of the management of state-owned assets, reducing the previous supervisory overlap between the two sovereign wealth funds, cutting costs and combining complimentary lines of business. With few state-owned companies publishing financial results, there have been suspicions that some major investment initiatives had been failures, that errors and fraud had occurred at OOC and elsewhere (GSN 965/13) and that the sovereign wealth necessary to sustain Oman in a post-oil future was being squandered on poorly thought-through projects – all hidden by the lack of transparency. To redress such criticisms, recent press commentary has suggested the OIA will follow the best practice model of the Abu Dhabi Investment Authority.

The overall effectiveness of sovereign wealth management is a long-term issue that is finally being addressed. But the OIA is faced with more immediate problems as the twin crises of the coronavirus pandemic and oil price crash have pushed Oman’s financial situation to the brink. GSN’s predictions that Oman is likely to face a budget deficit this year of OR15bn ($39bn) remain valid (GSN 1,101/5). If met by borrowing, this shortfall would double the national debt in a year. The MoF has already instituted two 5% cuts to government spending this year; it has imposed compulsory retirements in the civil service and slashed the salaries of new civil servants by more than 20%

The MoF has already two sold tranches of debt on the local market, for OR200m and OR150m respectively, which have tested the limits of the local market’s absorbtion capacity. It has also burned through the OR500m reserve put in place for the full financial year. Approaches have already been made to Kuwait and Qatar for loans, but even these two best prospects for assistance are under fiscal strain and Oman is not the first to knock on the door and ask for largesse.

Compounding the fiscal difficulties, a looming shortage of foreign currency could be so substantial as to threaten the rial’s peg to the US dollar. Central Bank of Oman (CBO) already has to contend with junk credit ratings from Moody’s Investors Service, Standard & Poor’s and Fitch Ratings. Better news comes with the rise in oil prices on the Dubai Mercantile Exchange, where Oman crude for delivery in August was trading above $41 /bbl as GSN went to press. This is above the $30/bbl cost of production, but still way below even the pre-crisis calculation of $86.80/bbl needed for fiscal break-even.

In these circumstances, the government has limited options available to raise further loans or to cut current expenditure already swollen by the additional costs of dealing with coronavirus. Most of the debt options have already been tried, although there may still be room to seek commercial loans in the international market. The next recourse will be to sell the family silver, including assets now being drawn together within the OIA. In December, oil minister Mohammed Al-Rumhi announced the government intended to float a 20%-25% stake in OOC by end-2020 (GSN 1094/10).

The OIA’s difficulty in generating cash for the government is that most options for realising value – for example, selling units privately or floating shares on the stock market – take time to implement. Moreover, in a distressed market, valuations are likely to be much reduced. The pressure on OIA to deliver will be intense.
There is however a potential bright side to the crisis. Sultan Qaboos University associate professor of economics Dr Hatem Al-Shanfari told a recent audience that only the catharsis of a crisis could shake the sultanate out of its attachment to the status quo – forcing the economy to realign away from oil and gas towards private enterprise. The more hostile envirtonment could force a reduction in the 64% of government expenditure paid out as salaries, by making private sector jobs more attractive. These economic reforms are an essential precursor to solving the fiscal situation. And with a new sultan in place, who is clearly determined to tackle deep-seated issues (and is more financially-minded than his predecessor), the environment is set for a radical but managed overhaul of Oman’s economic structure – potentially fulfilling the aphorism that one should never allow a good crisis to go to waste.

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