**Written and disseminated to select contacts on March 12, 2020**
WHAT YOU SHOULD KNOW:
- The accession of Sultan Haitham bin Tariq al-Said in Jan injected new vigour into a much needed but potentially unpopular reform process, following a period of relative inactivity in the final years of Sultan Qaboos’ life.
- A top-down political and economic reform agenda, based broadly around Vision 2040, will be implemented, with a view to spurring foreign investment in multiple sectors, although oil and gas – which still accounts for nearly 75% of government revenues – will remain important.
- Cabinet changes are widely expected under Sultan Haitham, with those ministries holding key reform priorities likely to be targeted first. These include the finance ministry, the ministry of commerce and industry, and potentially the ministry of manpower, tasked with the Omanisation policy. Mohammed al-Rumhy, still considered the key decision-maker in energy, is expected to remain as oil and gas minister for the time being. Politically, he’s a balanced figure and has steered clear of tribal politics.
- Administration reform, including consolidation of certain government departments, reduced bureaucracy, and better management of funding and policies can be expected, both to raise efficiency and reduce expenses. There is increased likelihood that members of the ruling al-Said family will gain more prominent political roles under Sultan Haitham, who will be keen to devolve some of the ruler’s powers to a trusted circle of close advisers and relatives. This could mark a key divergence from Sultan Qaboos, under whom decision-making was much more centralised. The new ruler will need to balance family and business interests carefully to ensure reform priorities remain on track.
WHAT WILL HAPPEN NEXT:
- Tackling the debt burden and reducing the budget deficit are top priorities. It’s estimated that Oman’s debt-to-GDP ratio is in excess of 60% (the figure varies depending on data). In the short term, more debt issuance is highly likely, to meet repayment and refinancing commitments, help plug a widening budget deficit and support economic growth initiatives. However, opting to tap global debt markets risks a significant increase in the cost of borrowing. Oman is rated junk by all major rating agencies, and is seen as most vulnerable to sustained downward pressure on oil prices and global demand, and fallout from the Covid-19 outbreak. New economy-related hires are expected to be announced in upcoming decrees, which will be telling for the direction Haitham wants to take on this central topic.
- Asset sales are extremely likely, and there is potential for foreign investors to buy into domestic assets which are attractively priced. However, it is likely that most of the revenues raised in the short term will go towards refinancing, or paying public sector salaries, and not towards economic growth or job creation. Hence, there is a need for more large-scale investment projects and other sources of income.
- In 2019 the National Programme for Fiscal Balance was formed, and a range of public finance management reforms are in the pipeline.
CONTEXT:
The crash in global oil prices comes at a time when Oman, the largest Arab oil producer outside OPEC, is in a period of political transition following the death in January of Sultan Qaboos al-Said who passed away after ruling the state for 50 years. His successor, Sultan Haitham, is widely respected as a reformist figure, having helped shape state economic policy under Qaboos. He was also a key figure in devising the Vision 2040 development programme, intended to move the country towards a non-oil dependent economy.
Although limited in scope so far, Haitham’s decrees to date have focused on a few new appointments, as advisers for example, as well as pronouncements about the importance of reducing debt and attracting foreign investment. He most recently appointed Shihab bin Tariq, his younger brother, as deputy prime minister for defence affairs. New laws such as the Foreign Capital Investment Law, or the PPP law, will not only need to be implemented but actively enforced. These initiatives are intended to make the business environment more attractive to investors.
With only 10 years of oil reserves and 1/3 GDP relying on this sector, Oman’s leadership has rushed ahead with economic diversification plans aimed at reducing oil’s share of GDP to 8.4% and public expenditure/GDP to 25% (from 45%) by 2040. The Gulf state, relying on its advantageous geographic location and a large and young indigenous workforce, plans to develop its comparative advantages in logistics, through the creation of four strategic ports, tourism, mining and fisheries.
However, Vision 2040’s goals are considered overly ambitious. The plan is based on annual GDP growth of 5%, the eventual adoption of EU-type fiscal rules and the doubling of FDI as a share of GDP. The success of the diversification and reform strategy will depend not only on balancing the interests of the family and the elite business community domestically, but also on global factors which remain the beyond the control of the new sultan.
Rachna Uppal |Senior Analyst Business & Finance Gulf | r.uppal@castlereagh.net
