The plummeting price of oil has led to job losses, threats of strikes and a rapidly slowing economy. Whatever happens next, 2016 is certainly going to be a tough year for Oman and the rest of the GCC. Team Y reports
During a six-hour emergency meeting in Muscat last week, the atmosphere in the closed room must have been tense. Sitting around the table were the heads of 21 trade union groups representing the oil and gas industry in Oman. They were there to make a tough decision: whether to call strikes in protest against mass lay-offs in the sector amid the catastrophic slump in oil prices that has spread panic through the Middle East.
That the unions are even contemplating such a drastic step – strikes are prohibited by law in the Sultanate – is an indication of the strength of feeling, some might say desperation, as we face uncertain fiscal times.
With the price of a barrel of Oman oil still scraping along the bottom – it was at $46.08 on Monday (November 2) – and the Government looking at a huge hole in the budget, the economy is being squeezed, along with all those who call Oman home.
The figures make for difficult reading. Oman’s budget deficit hit RO2.68 billion in the first eight months of this year. Last year, we had a RO205 million surplus. Up to 1,300 Omani workers in the oil and gas sector have been laid off, with the threat of more to come.
Car industry sales have dropped by up to 29 per cent, some three-star hotels in Muscat are reporting occupancy rates of just 25 per cent, while the country’s retail sector has expanded just 2 per cent year-on-year, far lower than forecast.
Oman is not the only one with its financial back against the wall. Kuwait and Bahrain are also facing fiscal deficits for the first time in two decades. It’s estimated that all major oil exporting countries have lost a total of US$1 trillion in oil sales because of the declining price over the past year.
A recent report by the International Monetary Fund (IMF) warned that Iraq, Saudi Arabia and Libya could run out of money in less than five years because of the oil slump. Ominously, the IMF also said that Middle Eastern countries with large budget deficits, including Oman, would run out of cash in five years or less if they don’t diversify their economies or borrow money.
Ole Hansen, the head of commodity strategy at the Denmark-headquartered Saxo Bank, which also has offices in Dubai and Abu Dhabi, says it will take some time for the oil price to recover.
“A slumping oil price driven by oversupply, compared with falling demand, tends to take much longer to correct itself,” Hansen says.
“The price will eventually recover as we move deeper into 2016, but initially not much higher than US$60.
“In order to ensure a price high enough to attract renewed investment, we eventually will need to see the price recover back towards the US$70-80 area but it is unlikely this can be achieved until 2018/19.”
Bear in mind that Oman’s budget was set in line with an oil price of about US$80 per barrel.
Oman’s oil and gas trade unions have decided it’s time to make a stand. If their demands are not met, a strike will be called for November 18 and the choice of such a symbolic date is not an accident.
“Around 200 workers are sitting at home without a job after being dismissed and we heard that more will be terminated next month,” Saud Salmi, the chairman of Oman Oil and Gas Sector Worker’s Union, told a local newspaper last weekend. “Our main demand is that the Government should intervene to stop laying off workers in the sector. Moreover, the laid-off workers should be taken back or have to be given jobs in other sectors.”
Retrenched Omanis let go by contractors have been left with loans to pay, families to feed and homes to maintain without an income from the main breadwinner.
It was announced on Tuesday that both public and private companies will no longer be able to lay off Omanis without first consulting the Government.
Y spoke to one oil and gas insider, who works for an Omani company, who said that contractors are being asked to slash their prices by 20 per cent by one major oil and gas firm in the Sultanate. However, these are contractors who are not bidding for a tender but have already started work on their projects.
“If they have to cut their prices, it means they will have to cut their staff,” says the insider. “A few guys I know have been let go and another one has been told his job will go in March next year.
“I know that one company is going through their existing contractors to see where money can be saved. What will happen is that people employed by the contractors will lose their jobs.”
Pulling in the monetary belt and keeping a tighter hold on the purse strings is one way to ease the situation, but it’s by no means the solution.
And while the Government can cut back on some projects, it is committed to ventures such as the airport – said to be costing upwards of RO1.85 billion in total – and the joint GCC Railway project.
However, an economic brief from the National Bank of Kuwait (NBK) earlier this week said Oman would be able to prop up its burgeoning deficit through its sovereign wealth fund, as well as its “strong credit and low sovereign debt levels”.
“Having the highest parity price of oil between the Gulf Cooperation Council, it is likely that the Sultanate will record a fiscal deficit during the current year as well as the next two years,” the Kuwait-based Alrai quoted NBK as saying. “Nevertheless, the authorities will avoid doing anything significant to reduce spending in the near term in an attempt to maintain a supportive financial environment.
“The authorities are planning to move forward with its development plans and projects after the decline in oil prices, which has raised the need to move towards an economic diversification policy.”
Ripples from the slide in oil prices are now reaching other sectors, including retail and automotive. At least two car companies have let several employees go in recent months and one mall is struggling to rent out its shops as caution spreads, while others are seeing customers less willing to spend so freely.
Some retailers that have taken outlets in new malls have yet to open, with one source saying they would rather pay a weekly fine of RO100 for not opening on time than open for business and struggle for trade.
One source within the car industry told Y of his concern for the current state of the market, enhanced by the fact he can see no signs of business improving in the immediate future.
“There has been a remarkable slip in sales over the past nine months. I have been working in the industry for 18 years, but I have never seen this kind of situation. Our sales are down by approximately 20 per cent. The market is not very positive at the moment and doesn’t look like picking up,” he says.
Times will only get harder if Oman presses ahead with proposals to gradually cut petrol subsidies from next year in a bid to claw back some of that budget black hole. An official from the Ministry of Finance recently confirmed to Gulf News that the Sultanate would be following the UAE in reducing petrol subsidies, estimated to have cost Oman almost RO900 million this year alone. It seems officials will plough ahead with the cut despite reports that a study by Oman’s Chamber of Commerce revealed 68.7 per cent of those surveyed in business and government opposed the move.
On the streets of Muscat, the views of the ordinary man and woman swing from stoical optimism to a bleak pessimism. “I’m worried about the whole economy, you can only stretch an elastic band so far before it snaps,” says one British expat who has been in Oman several years.
An Indian expat says he is seeing the effects of the downturn already. “Everybody is struggling. I know people who have taken their children and gone back to India and others are getting ready to leave. It’s not easy there either, but they would rather take their chances, feeling there are better prospects.
“I know people who have lost their jobs, I’m talking about qualified civil engineers and contractors.
“My friend has a three-star hotel and occupancy is down to 25 per cent. He has had to close the hotel’s restaurant.
“It’s going to be a long year and it’s about digging deep. My advice is to have your bags ready and have a plan.”
Saniya, an expat housewife and a mother of three, came to Oman 20 years ago from India seeking a better future.
“It’s an amazing country and we have been blessed to come here,” she says. “However, from the start of the recession period of 2007, when the economy fell, our troubles haven’t really stopped. Every year we feel that the situation might improve but it’s simply not getting better.
“I have children who go to school and college and the expenses are tremendous now. My husband’s salary is not rising and we don’t know what to do. We can’t go back to India because the kids are settled here and we wouldn’t know how to start work or get settled. My husband does fear for his job loss and we are trying to invest some money in building assets back home because we are facing uncertainty here.
“We’ve cut down on our expenses, although it’s really hard. Oil prices have fallen so low and we don’t know what the future holds for us.”
Tourism and the hospitality industry have already been targeted as alternative revenue streams that will secure Oman a bright future.
But questions remain as to whether the Sultanate has a cohesive enough strategy in place to make tourism a viable long-term solution. No one wants to go down the Dubai route, building ever more projects only to implode in 2009 and then start the whole process again after being bailed out by Abu Dhabi. It also seems that the budget traveller is being ignored here. So where does Oman fit in?
“Oman is not ready to rely on tourism yet. It’s getting there, but the main problem is there is no infrastructure to support tourism. Unless, of course, you want to become a destination hotel where people just come to stay and then fly out again. It’s a very niche market of tourists you’re going to attract like that, though,” says Marius Wolmarans, general manager of the Radisson Blu Hotel, Muscat.
“If you look at the big tourist spots, there are just no facilities. There are no toilets on the way and there’s nowhere to stop and refresh. They [Oman] are still way, way behind with that.
“If you look at the mix of hotels, it’s mainly four and five-star, which attracts high-end tourists. There are no real budget hotels that are attracting the younger Y Generation; there is nothing for them.”
As Wolmarans points out, there is still also a long way to go with basic infrastructure, a comprehensive public transport system, for instance, to accommodate the millions of extra visitors expected to pour through the new Muscat International Airport, which is slated to open early next year.
Until this happens, the knock-on effect of the oil price slump will continue to be felt by many of Muscat’s hotels. “We have seen the effect of falling oil prices in quite a few areas,” says Wolmarans. “Some of our corporate clients have found their business here reduced or stopped completely. The projects they have been working on have either been placed on hold or cancelled, which leads to less travelling customers for us.
“The price of hotel accommodation in the market is down on last year by quite a margin, and that’s across the market. That’s typical of less demand – we have to drop our prices to get the clients in.”
But even reduced prices are not enough to tempt some tourists into the nation’s top resorts. Most hotels in Muscat are down 10-18 per cent in last year’s revenues, according to one industry source. This is down to a combination of falling oil prices, instability of the euro and less visitors from Russia.
The insider said Oman’s tourism needs major improvements to reach world-class levels. “The new airport is not ready, there aren’t enough tour guides, there isn’t any public transport and taxis aren’t regulated so they can charge whatever they want. There isn’t enough to do and on Fridays, everything shuts down. It doesn’t lead to good business in tourism.”
Murtadha al Lawati spent seven years working in the banking sector and has recently started his own tourism-focused company and believes that the country’s approach to tourism is not as it should be.
“I always question whether we are targeting the right demographic. Oman is not about going to the opera or staying at a five-star hotel, it’s about sleeping under five million stars.
“Unfortunately, we are not promoting that aspect. We get these hotshot people who come to Oman and stay at a five-star resort, but that’s all they do; they stay there and don’t leave because they don’t need to. We are not creating the atmosphere for people to spend money in the economy.”
Al Lawati shares Wolmarans’ view, saying that Oman isn’t yet equipped to switch the source of its income from oil to tourism. “We are not ready for tourism to become our major source of income at the moment because we haven’t got the infrastructure in place. Our hotels are some of the most expensive in the world.
“Our tourism should be about experiencing the country and experiencing the culture, which is not what we are doing at the moment. There has to be a big shift in where we are spending the money, how we are spending the money and what we are spending the money on. Big five-star hotels are not what we need.
“Almost anywhere else in the world you have the choice of staying in a five-star hotel or living in a hostel depending on your budget.
“We have to really diversify the choice and ensure we’re catering for everyone from the five-star market, right down to those people who just want a bed to sleep in.”
However, Murtadha adds: “I’m not worried for the future because if you look at it, it’s a cycle that has been happening on and off for the past seven or eight years. Oil prices go down and back up again. The only unfortunate thing is that we haven’t learned enough to realise that.”
But at the end of the day, it’s about jobs and the future of young Omanis, who are also noticing a change. “I’m in my last semester at college and looking for a job, but haven’t been able to find one yet,” says Mohammed. “I have expat friends who are graduates and intelligent people but are not finding jobs. The situation is worsening by the day. We hope that Oman will do something to boost economic growth.
“We are still hopeful that Oman won’t get drastically affected, although our economy is heavily dependent on oil. I think Oman has done a good thing by developing its SMEs.”
Tariq, another young Omani, says the emphasis will shift to individuals adjusting to the changing economy.
“The fall in economy and oil price drop is definitely going to affect the expatriate population and also a lot of Omanis. These companies are going to have to adjust themselves to survive and to do that, one of the adjustments they’re going to seek is downsizing. A lot of people are going to have to leave and in order to stay, they’re going to have to raise their standards and up their performance for the company to feel that they are a valuable asset.
“Inevitable changes are going to happen, such as having a tax system. [This will] take time to adapt to since we’ve never had to pay taxes. I am in a business that’s not directly related to oil. My plan is to diversify my businesses and not focus on one thing.
“It is of highest priority that we focus on other sectors because, at the moment, oil is the biggest and the others are not big enough for the economy to stand on.”
Ole Hansen, the head of commodity strategy at Saxo Bank
Q: Will the price of oil recover? Or will we continue to see it hovering around the US$50 mark in 2016?
A: Slumping oil price driven by oversupply (compared with falling demand) tends to take much longer to correct itself. A producer will, as an initial reaction to a falling price, try to offset falling revenues by increasing production as much as possible. This is what we have seen played out since Opec’s now famous decision last November to go for market share instead of trying to support a higher than justified price. With no immediate outlook for a change of heart from Opec (read Saudi Arabia), the rebalancing process can only be achieved by falling non-Opec production and robust demand.
US oil production has fallen by roughly 400,000 barrels from its peak earlier this year, but it remains almost unchanged since the beginning of the year. During the same time, the number of oil rigs have fallen by 60 per cent and this shows the incredible resilience and ability of US shale oil producers to continue to squeeze profits out of lower prices.
The rebalancing process is well under way and US production is expected to slow further at the current sub-US$50 price tag. The main worry from a producer’s perspective remains the current outlook for growth, which is slowing, and also who will yield when it comes to making room for Iran and its extra 500,000 to 1 million barrels of extra oil next year. Opec is divided on the issue of keeping production high and with the warning signs glowing ever more red across the cartel, we could potentially see a softening on this stance from internal pressure.
The price will eventually recover as we move deeper into 2016, but initially not much higher than US$60. In order to ensure a price high enough to attract renewed investment we eventually will need to see the price recover back towards the US$70-80 area, but it is unlikely this can be achieved until 2018/19.
Q: What is your forecast for oil?
A: Below US$55 for the remainder of the year and probably also during the first quarter of 2016. After then, a slow recovery towards US$60 by the end of 2016.
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