Ambassador and MinFin Macki Talk Economy-- Oman's

C O N F I D E N T I A L SECTION 01 OF 02 MUSCAT 000161 SIPDIS SIPDIS E.O. 12958: DECL: 2019-03-03 TAGS: ECON EFIN PGOV MU SUBJECT: Ambassador and MinFin Macki Talk Economy-- Oman's Counter-cyclical Policies Can Be Sustained Two Years REF: a) A) MUSCAT 147, B) MUSCAT 53 MUSCAT 00000161 001.2 OF 002 CLASSIFIED BY: Gary A. Grappo, Ambassador, Department of State, US Embassy Muscat; REASON: 1.4(B),(D) ¶1. (C) SUMMARY: In an hour-long discussion with the Ambassador, one of Oman's most influential ministers reviewed the global, regional, and domestic economic situation, making a strong case, buttressed by recent Moody's and S&P assessments, that Oman was on a strong financial footing that would permit it to continue prudent development and counter-cyclical budget plans. Conservative investment decisions had limited Oman's equity exposure before the financial crisis, thereby checking its investment losses and allowing the Sultanate to move forward with deficit spending to further diversify the economy. END SUMMARY. ¶2. (C) The Ambassador and DCM called on Minister of National Economy, and Deputy Chairman of Oman's Financial Affairs Council, Ahmad bin Abdulnabi Macki February 24. The Ambassador inquired about the minister's current views on the global economic situation, noting the steps the U.S. Administration now had underway to bolster the American economy. Macki observed that the current crisis was "unprecedented" and that world leaders would need to be careful in the coming days. That said, he professed satisfaction with the steps the G-7, EU, and G-20 were taking to improve the global financial system. Clearly, the banking supervision and credit rating agencies need work, especially in the U.S. President Obama was off to a strong start focusing on America's end of the financial crisis, and dealing with regional issues with his Al-Arabiya interview and the closure of Guantanamo Bay as a holding facility. ¶3. (C) BUYING TWO YEARS. Relatively speaking, the GCC (with the notable exception of the emirate of Dubai) had been spared the worst of the crisis because, as a whole, it was holding very little debt, said Macki. For example, Oman was carrying debt equal to only 5% of GDP (Note: S&P puts external Omani debt at 6% of GDP) or OMR (Omani rials) 950 million ($2.47 billion). Nevertheless, he estimated GCC sovereign fund losses so far at $450 billion. Those losses combined with low oil prices are putting pressure on GCC government finances. Macki maintained, however, that the GCC �A;states, including Oman, could sustain counter-cyclical budget policies for at least two years using reserves and/or running moderate budget deficits. ¶4. (C) "I HAD A FEELING". Oman could hold the line, argued Macki, because of conservative budget decisions made prior to the crisis that increased allocations to various state investment funds by several billion OMR and executed conservative portfolio allocations within the funds. Macki said that early on, and despite heavy cabinet opposition, he was able to allocate increased funding to the Oman Investment Fund, the State General Reserve Fund, the Emergency Fund, and a Basic Infrastructure Fund because he "had a feeling" it would be necessary. ¶5. (C) Similarly, Macki explained that the State General Reserve Fund had experienced only a 12.8% "book loss" so far, or OMR 638 million ($1.7 billion). The key to the relatively modest loss was a move to reduce equity exposure from 40% to 11% of the portfolio before the roof caved in. Again, Macki noted he made the reallocation out of a gut feeling that it was time be more conservative. This fund now holds a mixture of cash, equities, bonds, and real estate and will not be used for deficit financing. The Emergency Fund instead will be raided for about OMR 2.2 billion ($5.72 billion) to fund the projected budget deficit. (Note: Oman's 2009 budget estimates a deficit of OMR 810 million ($2.106 billion) for the current year (ref B). End Note.) ¶6. (C) MOODY'S COMES CALLING. Both Moody (and more recently S&P) have reaffirmed investment grade credit ratings, both long and short term, for the Sultanate. Aside from prudent financial management, Macki attributed the ratings to extra efforts to be transparent with the rating agencies in a time of economic uncertainty. MUSCAT 00000161 002.2 OF 002 ¶7. (C) DUBAI. Turning to the regional exception, Macki viewed Abu Dhabi's $20 billion bond offering to shore up Dubai finances as a good solution that should resolve Dubai's problem. "The old days are gone forever," he said, adding that Dubai "cannot borrow to such an extent again." ¶8. (C) DEVELOPMENT TO CONTINUE. The cost of the government's current 5-year development plan is slated at OMR 7 billion, stated the minister. Only OMR 2.5 billion has been spent so far, however, leaving OMR 5 billion to be spent over the final two years of the plan. Spending that much in the final two years was unlikely, he remarked, but the point was that funding for Oman's development needs in the coming years was not an issue. ¶9. (C) Macki confirmed the Sultanate's intent to continue its development of the port of Duqm as a priority (ref A) with current planned spending of OMR 1.7 billion with OMR 600 million borrowed from Japan. While the current focus in Duqm is the new port, the "whole area will be developed systematically," including plans for an airport, roads, rail et al. Perhaps alluding to Dubai, Macki said "there will be no white elephants or prestige properties; we have to answer to Oman's citizens." ¶10. (C) The OMR 7 billion for the 5-year development plan does not include major upgrades to the airports in Muscat and Salalah to the tune of OMR 1.5 billion over three years. Similarly, Macki stated, development of the industrial port city of Sohar would continue. Brazilian mining company Vale do Rio Doce would soon lay the corner stone of a OMR 1.4 billion iron pellet plant and port enhancement in Sohar that would take ore and convert it into pellets for distribution in the region. Oman Shipping Company would also build 12 feeder ships for transporting the pellets. ¶11. (C) COMMENT. Even allowing for self-promotion, it is clear why Macki has remained one of the Sultan's most consequential ministers since assuming his current position in 1995. Moody's and S&P ratings provide an independent assessment that the Sultanate's conservative approach to managing its oil windfall has bought time for oil price recovery and allowed for continued efforts to diversify the economy. END COMMENT. GRAPPO To view the entire SMART message, go to URL http://repository.state.sgov.gov/_layouts/OSS SearchResults.aspx?k=messageid:0ab3af31-bff8- 47b0-abc4-76810696435f