Oman struggling to manage its Sovereign Wealth Fund

As Oman stares at a probability of a high budget deficit for 2020, its State General Reserve Fund (SGRF) assets have fallen by about a third to $ 14.3 billion.

Recently a Fitch Rating showed that Oman could consume the State General Reserve Fund (SGRF) by “over $ 5 billion” to fund its budget deficits. In the early days of the 2014 Oil crisis, Oman frequently utilized international debt markets to support enormous budget deficits. Thus, its debt to GDP spiked to nearly 60% last year. Yet, Assets held by Oman’s sovereign wealth funds were left untouched.

But now the twin blow caused by the coronavirus pandemic and falling oil prices has left the liable Gulf state with fewer choices to support its soaring 2020 annual budget deficit.

Is Oman pledging its future?

Established in 1980 by a royal decree, the State General Reserve Fund (SGRF) was first formulated as a financial reserve to cover potential losses and secure public finances. The money was saved precisely for this kind of emergency Oman is currently facing.

Yet, SGRF’s current assets are inadequate to fund the budget shortfall for years in the row. SGRF assets are anticipated to be exhausted by 2021 without any foreign funding this year, even if we take into account further fiscal reform and recovering oil production.

In the coming years, the outlook looks grim given that no budget surplus is projected until at least 2023. A lack of demand for oil prompted by the coronavirus outbreak worsens the situation. The Oil industry accounts for about three-quarters of the government’s annual income.

Short-term Relief

Beyond the possibility of a future economic diversification, the Omani economy remains dependent on Oil production, which might become unsustainable in the long term as the world is “gradually moving away from oil,” the International Monetary Fund said in a report.

According to the IMF, GDP growth in Oman was 0.5% in 2019 — while the projected figures for 2020 and 2021 are -2.8% and 3%, respectively.

In this context, the second objective pursued by the SGRF is to support government efforts in diversifying long-term income resources, “funding for the future generation,” it writes.

Headquartered in Muscat, the state-owned entity invest in emerging and developed markets across more than 35 countries with an annual return on investment over 7%.

According to SGRF’s website, its portfolio includes government bonds, private investments and public assets across 10 economic sectors that can “easily be converted into cash any time.” The fund also partners in joint ventures in Vietnam, India, Uzbekistan and Brunei.

Lebanon’s former Minister of Economy and Industry Nasser Saidi believes Gulf sovereign wealth funds should rather bolster domestic economies by supporting local industries and innovation, introducing new technologies and helping governments to digitalize their economies.

As Oman’s precarious fiscal situation worsens, further exhaustion of the SGRF could become a requirement.