05 January 2009
There is widespread praise for the government's decision to boost spending despite a projected earnings shortfall, and to follow through on all commitments towards infrastructure building and utility projects

MUSCAT -- Business leaders and market analysts have hailed the 2009 general budget as a prudent recipe for sustaining the Omani economy in the face of slumping international oil prices and a worsening global financial crisis. There is also widespread praise for the government's decision to boost spending despite a projected earnings shortfall, and to follow through on all commitments towards infrastructure building and utility projects. Khalil bin Abdullah al Khonji, Chairman of the Oman Chamber of Commerce and Industry (OCCI)Oman Chamber of Commerce and Industry (OCCI)

, said the enhanced outlays made in the 2009 budget augured well for the country's economic outlook during the course of 2009.

"We hope oil prices will average over $45 per barrel during the year, and if this is indeed the case, then the budget looks very optimistic. Still, we must think in terms of investing more in sustainable areas of the economy, such as industry, tourism, and so on. We also need to support existing industry, which is likely to face major challenges as a result of the (global economic) recession and the severe competition that will ensue." Speaking to the Observer, Al Khonji welcomed the substantial spending allocations made in the budget, which he said, would help the private sector generally tide over short-term impacts from the global crisis.

But he warned that some sectors, most notably the real estate industry, had already begun to take a hit from the emerging slump. While land prices have fallen significantly, property rentals and new real estate developments too were being hurt by the downturn, he said. For its part, the OCCIOCCI is reinforcing efforts to support the private sector, particularly as small and medium enterprises (SMEs) face up to the slowdown, he said. "We will be hosting a major seminar and exhibition in February designed to help SME particularly during this juncture. SMEs are the backbone of the economy, particularly with regard to their contribution to Omanisation."

Growth-oriented
Nasir Issa al Ismaily, General Manager of the Export Credit Guarantee Agency of Oman SAOC (ECGA), welcomed the "growth oriented" nature of the 2009 budget. "It is encouraging that despite the prevailing lower oil prices, the 2009 budget is also characterised by increases in the estimated revenue compared to the 2008 budget, from RO 5,614 million to RO 5,400 million or almost 4 per cent," he said. Equally heartening is the commitment to implement a number of projects conceived as part of the 7th Five-Year Plan, on top of a host of new developmental ventures. "The budgeted government expenditure shows an increase of 10 per cent over the 2008 budget, or 25 per cent of total revenue.

Such expected increases in expenditure will have a positive spillover effect for the national economy," Al Ismaily noted. Additionally, the 11 per cent increase in the 2009 gross expenditure, estimated at RO 6,424 million, will further spur economic growth and provide more opportunities for the private sector, he added. "Thus, the 2009 state budget is a reflection of the government's commitment to tackle macroeconomic challenges to boost further economic growth despite the prevailing global financial crisis and economic meltdown. The growth-oriented budget will definitely inspire the confidence needed in the market," ECGA's General Manager stated.

Excellent budget
Commenting on the 2009 budget, Ashok Hariharan, Partner & Head of Tax for KPMG in Oman and UAE, noted: "It is an excellent budget given the extremely difficult and challenging environment currently faced not only by Oman but the rest of the world. The government has taken the right steps in not curtailing its expenditure which is budgeted to increase by 11 per cent over the 2008 budget even though revenue is budgeted to increase by only 4 per cent."The government's decision to ramp up allocations towards developmental projects despite lower projected revenues is commendable, says Hariharan.

"We have to appreciate that oil prices have fallen by more than 70 per cent over the peak reached in 2008. Given this extraordinary situation, the government had no choice but to budget oil revenues at $45 per barrel -- the same as in the previous year and significantly lower than $55 per barrel originally considered. It is in this background that the government needs to be complimented for continuing with its current development programmes and in fact allocating a higher budget of RO 800 million (10 per cent increase) towards development expenditure compared to the previous year. Indeed, an amount of RO 665 million has been allocated for new development projects."

Likewise, the government's participation in domestic, regional and international institutions has been budgeted to increase by 43 per cent to RO 355 million, Hariharan points out. "This includes financing of projects undertaken by Oman Oil CompanyOman Oil Company, Omran and other government financed institutions. It is measures like these which would help generate confidence in the private sector to make sure that Oman is not significantly affected by the global economic crisis."

Deficit rise logical
Hariharan also argues that the growth in the deficit is within understandable bounds. "The budgeted deficit has increased to 5 per cent of the GDP or 14.4 per cent of total revenues compared to 3 per cent of GDP and 7.4 per cent of total revenue in 2008. The deficit as a percentage of GDP, whilst certainly higher than 2008, cannot be regarded as alarming. This is particularly appropriate given that inflation is expected to come down to below 10 per cent during 2009 compared to the peak levels reached in 2008 (12.4 per cent for January to October 2008)." An important feature of the budget, Hariharan further explains, is the budgeted increase in current & capital revenues of the government by 22%.

"A detailed analysis shows that the Government is budgeting a 35 per cent increase in revenue from income taxes for 2009 to RO 225 million (despite there not being any increase in the tax rates). Whilst this might appear strange, it is understood that collections from income taxes during 2008 far exceeded the budgeted amount of RO 166 million. The Government is also expecting a 50 per cent increase in revenue from customs duties and a 24 per cent increase from non-Omani labour licences. All this suggests that the Government is not expecting any significant downturn in 2009 in the economic activities. This is not unreasonable considering the fact that many projects are at different stages of implementation and it would be in everyone's interest to make sure that these are completed as planned."

Positive signals
According to Philip Stanton, Ernst & Young Managing Partner -- Oman, the 2009 budget "delivers both good news and encouragement" to the Omani private sector. "The fact that Oman is projecting higher project expenditure and real GDP growth in 2009 when many countries will be in recession sends a strong message that the country remains very attractive for investment," Stanton told the Observer. Describing the budget as "both conservative and realistic", he said it provided a measure of stimulus that would allow the private sector to enter the new year with confidence. "The ongoing global financial crisis does however place additional burden on companies as borrowing, foreign exchange and commodity prices continue to fluctuate.

Companies will be encouraged by the extend of government spending projected for 2009, however they will need to be fully aware of the unusual operational and financial risks they face due to the ongoing crisis. Pro-active businesses who plan for and manage such risks effectively will view the stimulus in the budget favourably as they could allow them to sustain growth in 2009." Stanton however warns that 2009 could be a challenging year for many companies in Oman. "Sustaining profit margins will be secondary to generating sufficient cash to meet operating and borrowing commitments. Key to many companies success and survival during this challenging time will be how quickly they can convert their production to cash. Therefore delivering quality services or products which encourages customers to pay their debts on time will be of greater importance than ever before," he stressed.

Fine balance
Sunil Dhall, Vice-President at Gulf Baader Capital Markets, described the budget as "pragmatic", particularly as it maintains a fine balance between growth and the government's fiscal position. "The increase in expenditure will continue to give the economy much needed momentum and shows the confidence of the government to maintain healthy growth despite lower oil prices. We definitely see the average oil price realisation for 2009 above $45 projected in the budget once the OpecOpec supply cuts start taking effect, as well as the anticipated depreciation in the USD along with a pickup in demand towards the end of 2009.

It is possible that the government might be able to end with a surplus once the 2009 books are closed. Even otherwise the projected deficit can be met with withdrawals from the SGRF." Dhall further added: "The continued emphasis on healthcare (19 per cent increase) and education (11 per cent increase) shows the intent to invest in the long term human capital of the country in an effort to improve productivity and create employment. The local MSM stock market should see a rise in the coming days as investor confidence is restored and activity picks up."

By Conrad Prabhu

© Oman Daily Observer 2009