Tuesday, 02 January 2024 12:17 GMT

Oman- Sultanate's budget for 2016 is carefully crafted and translucent

2016-01-11 01:32:30

(MENAFN- Muscat Daily) Muscat-

Characterised by transparency the 2016 budget is challenging with bold decisions taken by the government reflecting prudent and careful planning.

The budget has been carefully crafted keeping in view the crude prices and geopolitical situation and we expect the government to revisit the budget mid-year keeping in view the oil prices. The budget used both financial and economical procedures.

Revenues (Budgeted Vs Actuals)

The budget this year is in stark contrast to the previous year's; with the government increasing taxes lowering expenses and reducing subsidies. However the government has vowed to continue vital projects which are deemed essential for diversification.

We expect the country's GDP growth to remain under pressure during the first half of 2016; with the economy showing signs improvement during the second half. We believe that inflation is likely to start picking up on the back of the increase in fuel and utility prices.

The exchange rate is expected to remain stable as long as the government manages its balance of payments through successful sourcing of funding.

Revenue: Based on rational expectations

Based on an oil price of US$45 per barrel and average 990000 barrels per day of production the total budgeted revenues at RO8.6bn are 25.8 per cent lower than 2015 budgeted figures and down four per cent from the actuals. Inevitably net oil revenue forms the lion's share at 53 per cent against an average of 69 per cent for the past three budgeted years. Non-oil revenues (mainly taxes fees investment returns and capital repayments) stand at RO2.45bn almost equal to the 2015 budgeted figures but 60 per cent higher than the 10M'15 actual of RO1.53bn.

The 2015 budget broke the historical trend by posting lower actual revenues mainly on account of lower actual oil prices at US$51.5 per barrel compared with the budgeted US$75. This experience has been factored in into the 2016 budget as the government based it on US$45 a barrel subject to change in oil prices in addition to the focus on non-oil revenues.

According to our calculations the breakeven oil price comes out to be US$78 per barrel. China remains the biggest importer of Oman's crude. According to the National Centre for Statistics and Information (NCSI) 78 per cent of the Oman's total oil exports was shipped to China during 11M'15 which might raise concerns as many international agencies are pointing to a slowdown in the global king of commodity consumption. While many forecasts point to 6.9 per cent and 6.5 per cent growth in China's GDP during 2015 and 2016 respectively other estimates have it much lower at 4.8 per cent for 2016. Such a scenario has negative implications for countries that are large commodity exporters to China.

Oman is likely to cope with such a possibility with alternatives such as India (the second largest importer of Oman's oil) expected to register a GDP growth of 7.8 per cent in 2016 benefiting mainly from lower oil prices and the country's ability to reduce interest rates in case of low growth rates as current rates are relatively high at 7.3 per cent (Bloomberg). However reducing reliance on oil and gas revenues while increasing dependence on non-oil segments is a challenge taking into account the length of time required to promote the non-oil sectors.

Expenditure: Low on theory high on realism

Total budgeted expenditure has been set at RO11.9bn for 2016 down from RO14.1bn in the 2015 budget ie -15.6 per cent and -11 per cent compared with 2015 actual figures as per the budget statement. The expenditure is divided into current expenditure (73%) investment expenditure (22.44%) participation and other expenses (4.62%).

Key points to be addressed are:

Current expenditure is close to the budgeted revenues only higher by 1%.

Fall in subsidies is notable down 64% (RO710mn) to RO400mn.

Oil and gas production expenses seen dropping 14% YoY to RO1.79bn; but unchanged from 15% of total public spending.

Development expenditure forms 11.34% of total spending against 11.7% in 2015 budgeted figures.

Historically actual expenses have surpassed budgeted ones for instance over the 2008-14 period. However 2015 was an exception due to the large drop in oil prices. We believe that 2016 actuals will be near budgeted figures assuming effective involvement of the private sector prioritisation of projects stronger non-oil revenues and better average oil prices over the year.

Based on the budgeted revenue-expenditure gap the deficit is RO3.3bn ie 38.4 per cent of total revenues and 13.2 per cent of the 2016 estimated GDP. It will be funded through borrowing of RO1.2bn (+100% YoY) net grants at RO600mn (+200 YoY) and financing from reserves (RO1.5bn +114 YoY).

By special arrangement with OAB - Investment Managment Group

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