Well oiled
One of the major casualties of the financial meltdown was the oil price which crashed to abysmal depths. Despite the scare, Oman’s economic outlook is still cheerful, writes Visvas Paul D Karra

A Saudi supertanker, Sirius Star, laden with 2 million barrels of oil seized by Somali pirates off the coast of Kenya, on November 15, 2008, made headlines around the world as they demanded around $12mn for its release. The oil in the hijacked tanker, worth about $110mn, was equivalent to a quarter of Saudi Arabia’s daily output. In an altogether unrelated development a month later, OPEC oil ministers agreed their deepest output cut ever on December 16, slashing 2.2 million barrels per day from oil markets to balance supply with rapidly crumbling demand for fuel and stop the oil prices from going south. The move was a bid to build a floor under the oil prices that had dropped more than $100 from a peak of $147 a barrel on July 11, 2008 to $33.36 per barrel on Christmas Eve, the lowest since December 2004.

Wild swings
The two developments reflect the fluctuating fortunes of oil – the most prized commodity in the world today since the time mankind tasted the fruit of the industrial revolution thanks to James Watt and his steam engine. At about the same time the Somalian pirates thought they could make some money with the hijacked oil. On land the price chart of the hydrocarbon was hijacked by the lack of demand for energy due to the global credit crunch. As energy demand slowed globally, countries were left holding huge stockpiles of oil. With countries unable to park more oil, investors were forced to sell off at the futures trading.

According to Dr Sohail Issa Magableh, economic advisor, director general of research and development, Capital Market Authority, the fact that so much oil is lying out there in the water (in ships) means there is large excess supply. “Excess supply combined with low consumer confidence because of the global financial crisis led to a weak demand for oil. This means that the prices of oil will continue to remain below $50 for some more time. The continued weakening demand weighed on the market even as oil worth millions of dollars simply languished in huge oil tankers on the high seas for lack of takers pushing the prices further down,” Dr Magableh says.

News of the impending recession in country-after-country has not comforted the oil-producing countries, as their economies depend upon this black gold to keep the state cash registers ringing. For the first time after several years, gloom had descended on friend and foe alike and there was nothing to cheer about in Christmas and New Year. OPEC, which accounts for about 40 per cent of the world’s oil production, reduced the output but the effects of this cut have been marginal as the price of oil continues to remain under the psychological barrier of $50. So what does oil price under $50 per barrel mean for a country like the Sultanate of Oman?

Past prudence helps
Raghavan K Murthi, CEO, United Finance Company, is optimistic in his views and says, “I would watch for three benchmarks – oil being below $40, below $50 and above $65. To me the three stages will mean ‘drawing from accumulated reserves’, ‘having balanced budgets’, and ‘happy days are here again’ respectively. Luckily past prudence will stand us in our stride and I don’t believe that there will be any need to re-look at any development plan even if oil is below $40 for a couple of years.”

But Dr Magableh states that as the global slowdown continues into 2009 and the oil prices continue to remain low, the ability of oil producing countries to create more jobs will be affected and the demand for foreign workers will also decline thus increasing the unemployment rate. Tourism projects will also be hit as the ability to spend on infrastructure gets impacted negatively.

The Gulf countries and other oil producing nations had by now learnt how to adjust their economies to significant fluctuation in oil prices which they witnessed over several decades. According to experts, Oman, for instance, has been building up its reserves over the last few years when oil prices shot up significantly to touch almost $150 per barrel in 2008. This was achieved by consciously budgeting for oil revenues at levels significantly lower than prevailing market rates and transferring such surplus to the state’s reserves. Oman’s budgets for 2006, 2007 and 2008 were based on oil prices of $32, $40 and $45 respectively – way lower than the prevailing market prices.

The budget deficit could also be higher than in the previous year. This by itself should not cause an undue concern particularly as inflation is now automatically controlled because of the global slow down.

Continue investing
Says Ashok Hariharan, Partner and Head of Tax for Oman and UAE, KPMG, “The price of oil naturally has a great significance for countries like Oman which derive their major income from oil. This is notwithstanding the diversification which Oman has achieved over the last few years in terms of alternative sources of income. The government will, and should, continue to invest in development projects and create a positive climate for the private sector to also continue their planned investments.”

“The price of oil had gone up mainly due to speculators more than anything the actual supply and demand economics. Therefore what you now see is that the demand for oil has been dampened by the global slowdown. But Oman has enough contingency plans if things get worse because the government has enough reserves to tide over this crisis,” says Dr Said Amer Al Riyami, economic expert, at the ministry of commerce and industry. Oman’s fiscal surplus has been 8.4 per cent of the GDP between 2001-2006.

Alternative plans
Meawhile, HE Ahmed bin Abdulnabi Macki, minister of national economy and deputy chairman of the Financial Affairs and Energy Resources Council has declared that the government has drawn up ‘alternative plans’ in case oil prices continue their slide. One of the immediate remedial step has been to revise the 2009 budget estimates by downgrading it to an assumed price of $45 per barrel of oil against the originally decided $55.

In the same breath, Macki said the Omani economy would continue its growth by at least 3 per cent and that the development programmes would go on as usual, but “there will be re-arrangement of priorities.” While claiming the country’s financial and economic condition was “good”, Macki added that the government would implement all approved projects, and there will also be a hedge against any fluctuations resulting from the global financial crisis.

“Some of the alternatives before the government include dipping into the oil reserve fund and postponing certain infrastructure projects while stretching the implementation of the existing projects. The government could also cut down on the subsidies on fuel and electricity in order to tide over the short term decline in flow of investments,” says Dr Riyami.

Murthy observes that Oman has immense unexploited potentials which give options to HE Macki. Mobilising internal savings to fund projects is the number one option. Using stock markets through equity and bonds is another option while inviting global joint venture partners to manage some projects on BOOT basis is feasible. Normal means of borrowing external debts or leaving uncovered deficit are also sustainable choices as Oman’s external debt has gone down from 12.7 per cent in 2000 to 4.4 per cent in 2007, according to a WTO report. This is the time to use deficit financing as a means of supporting growth.

Positive climate
Market analysts also opine that the government will, and should, continue to invest in development projects and create a positive climate for the private sector to continue their planned investments. There will no doubt be a re-look at some of the ambitious projects but the silver lining is the fact that due to the recession in many economies, the prices of not only oil but other commodities have started declining which, hopefully, will reduce the cost of investments.

Oman has always been a prudently managed economy therefore it is very likely that all developmental plans for the next three-to-five years would be looked at again before being put on an implementation course. Macki’s statement that the country would plan for a growth rate of 3 to 5 percent is very positive in the current environment. Further, the current oil prices actually would not impact Oman but would rather impact the economies where the Sultanate has been investing its surplus, as these surpluses may be smaller if at all they are. These testing times also provide an opportunity for governments and the private sector to be more efficient in the way they manage their economies and businesses.

Way ahead
Oman has a strong economic policy defined in its Vision 2020 document and the country is resolutely practicing that. Diversification of sources of revenue, people development, health and education and industrial growth are its strong intents and Oman should continue on that track.

“The brighter side of this alarm bell call is that the nation’s efforts to diversify its revenues beyond oil will get stronger. The support to sectors like tourism, mining, infrastructure like railways/ shipping would get faster and speedier attention. Long term outlook remains unchanged,” Murthy says.

Dr Magableh says that the best way to face the oil and global crisis and find long term protection for a country is by building human capital. This can be done only through sustained efforts and investments in education and health. More vocational training institutes would create a healthy pool of local talent whereas a modern health care industry would lead to more healthy people who can contribute to the diversification process.

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