Oman looks for aid in a fraught GCC where strings are attached

Oman has unofficially reached out to neighbouring Gulf countries for financial assistance in an effort to shore up its ailing economy, Bloomberg reported on Thursday.

According to two unnamed officials in the region, discussions have taken place at the leadership and foreign ministry level between Gulf officials, but are preliminary and without any formal decision.

Gulf countries are unanimous in recognising that Oman is in dire straits and do not want to see it become distressed further, a US official also told Bloomberg.

Already among the most vulnerable economies of the six-nations in the Gulf Cooperation Council (GCC), the Sultanate has been beset by low oil prices and lockdown measures implemented to curb the spread of Covid-19.

Oman, the largest Gulf oil exporter that is not a member of OPEC, is one of the most vulnerable oil producers in terms of credit profiles along with Angola, Bahrain, and Iraq.

It’s break-even oil price – the price required to balance its government budget – is $82, according to Fitch Ratings.

The ongoing OPEC+ cuts are only set to deepen deficits in the GCC and stall growth. Under the latest round of agreed cuts, Oman will slash its crude production by 23 percent.

Speaking with S&P Global Platts, Oman’s oil minister Mohammed Al-Rumhy highlighted how market stability was being undermined as a result of monthly production cuts.

Days before the price of oil collapsed, Moody’s had downgraded Oman’s rating due to rising government debt and lower fiscal buffers. The rating agency put it under review for downgrade in late March due to heightened vulnerability to oil shocks.

Fitch Ratings also downgraded Oman in March to “reflect the continued erosion of Oman’s fiscal and external balance sheets, which could accelerate in an environment of lower oil prices despite prospects for faster implementation of fiscal consolidation measures.”

In April, the World Bank predicted that its economy would contract by 3.5 percent in 2020 due to the oil price slide, which would put further strain on its fiscal and external deficits. It estimated public debt to exceed 70 percent of GDP in 2020 and beyond.

Piling on top of that has been the disruption from the pandemic. Following a countrywide lockdown in mid-March, it has endured a slowdown in industrial activity, services, and tourism.

Fitch predicted that Oman’s non-oil economy will slip into a recession of 5 percent this year, and noted that “support from the rest of the GCC may be necessary for the sustainability of their currencies and debt levels.”

Ismail Numan Telci, Vice President at ORSAM and Associate Professor at Sakarya University, pointed out how the pandemic has had a devastating impact on trade revenues, especially given Oman’s dependency on Asia.

“The fact that Omani partners in Asia have been badly affected by Covid-19 caused a slump in Asian demand to Omani crude exports. Asian partners are taking the lion’s share in Omani crude exports, therefore, such a slump in demand has necessarily affected Omani fiscal stability,” said Telci.

Oman has the highest Chinese exposure among GCC states, with 45 percent of its exports – mostly oil – going to China.

It currently owes over $3.5 billion to Chinese banks, which is 5 percent of its GDP. A few days ago, Bank of Muscat completed a bilateral loan of $150 million with the China Development Bank (CDB).

Haitham presses forward

The double whammy of the collapse in oil prices coupled with Covid-19 couldn’t have come at a worse time for Oman.

It was beginning to address a host of domestic challenges following the death of its iconic ruler Sultan Qaboos bin Al Said, who was succeeded by his cousin Haitham bin Tariq Al Said in a smooth transition of power on January 11.

Diversification plans – underpinned by the Vision 2040 program – were underway to wean the country off its hydrocarbon dependence.

In his address to the nation on February 23, after paying respects to his predecessor’s role in building the modern Omani state, Sultan Haitham pledged to “take the necessary measures to restructure the state’s administrative apparatus” in order to “achieve good governance, performance, integrity and accountability.”

Only three weeks later, Haitham and his government had to contend with a record oil price plunge and a global pandemic.

In response, Haitham established an inter-ministerial committee to tackle the fallout. He introduced a 10 percent cut across the board to government ministry budgets, signaling an intent to reduce spending and introduce fiscal discipline.

Haitham has prioritised restructuring the state and its administrative apparatus, and last week he signed a series of royal decrees that began to flesh out those commitments.

A private office was established to oversee civil ministries; while an Oman Investment Authority would oversee and coordinate operations of Oman’s fifty-plus state-owned companies (with the exception of part state-owned Petroleum Development Oman). 

Additionally, the $17 billion authority will oversee the country’s sovereign wealth funds and refocus on domestic investment.

While it is still early to know the impact of these measures, Haitham’s strategy to implement good governance and efficient administration is evident.

The GCC: a stumbling bloc(k)?

Politically, the region remains fraught.

Tensions in the Gulf have been stoked by the United Arab Emirates (UAE) and Saudi Arabia’s joint war in Yemen, the Saudi-led blockade of Qatar, and Oman’s relationship with Iran. Reported Emirati meddling in Oman’s internal affairs has caused a great deal of friction as well.

It is against this backdrop of intra-GCC conflict that a financial bailout for Oman is being considered. Apart from a GCC-sponsored aid deal in 2011, Oman traditionally has not accepted financial support from its neighbours.

Oman’s importance is highlighted by its geostrategic maritime location, making its stability integral to Gulf states and allies like the US. 

Till now, Muscat’s role as a mediator on regional and international matters has been a pillar of its foreign policy, which has allowed it to deftly chart a path of neutrality in the region.

“Rather than aligning with certain blocs against any of its neighbours, Muscat sees long-term peace and stability in the Gulf and greater Middle East as only possible when all actors are accommodated and engaged respectfully,” said Giorgio Cafiero, CEO of Gulf State Analytics, a Washington DC-based geopolitical risk consultancy.

However, that neutrality is likely to come under strain in much more polarised regional bloc.

Any involvement with Doha in an aid deal won’t go down well with Riyadh and Abu Dhabi. Oman-Qatar ties have strengthened since the blockade began in 2017, there will be pressure on Muscat to bend the knee – especially with a new ruler on the throne.

“There is no doubt that pressures from Saudi Arabia and the Emirates will give Muscat a set of real foreign policy challenges to address,” Cafiero said, adding that Oman would be determined not to allow that pressure to compromise its sovereignty and relationships with Doha and Tehran.

Last month, Haitham met with the Qatari foreign and finance ministers. The talks had followed a series of meetings and phone calls between Oman, Kuwait, and Qatar.

Cinzia Bianco, a Research Fellow at the European Council of Foreign Relations, remarked how Oman is open to a unified Gulf strategy that could nudge the fractured bloc toward rapprochement:

But with regional polarities so stark, Bianco believes it’s unlikely that a GCC-led bailout will be immune from any politicisation:

Against this backdrop, Oman’s position now appears to be a precarious balancing act: as it attempts to preserve diplomatic independence without alienating neighbours, while trying to secure much-needed investment, trade – and now financial aid – to stave off economic collapse.