Market speculation pressures Omani balance sheets

Oman distanced itself from implementing Gulf economic policies and has not imposed a value added tax.
Sunday 03/03/2019
Receding buffers. A general view of the Central Bank of Oman’s building in Muscat. (Twitter)
Receding buffers. A general view of the Central Bank of Oman’s building in Muscat. (Twitter)

LONDON - Fears of a crisis of confidence in Oman’s financial assets rose after international credit rating agencies downgraded the country’s sovereign bonds to critical levels, resulting in higher borrowing and debt servicing costs for the sultanate.

Although the grade given Oman by credit rating agencies was higher than Bahrain’s, the yield on its outstanding 2028 notes was 7%, 0.4% higher than equivalent Bahraini bonds.

Analysts said sovereign bonds investors feared Oman would have a crisis like the one faced by Bahrain last year when Manama’s debt servicing costs rose and speculation over unpegging the Bahraini dinar from the US dollar increased.

Bahrain emerged from the crisis because of aid from Saudi Arabia, the United Arab Emirates and Kuwait. That aid package was conditioned on implementation of wide-ranging financial and fiscal reforms, including establishing a value added tax. Large structural reforms were put in place and market confidence was restored.

However, observers said Muscat may not find a similar lifeline because of the sultanate’s independent political positions, which are not always in line with those of its Gulf neighbours, especially on issues such as the war in Yemen, Iran’s destabilising policies and the crisis with Qatar.

Oman distanced itself from implementing Gulf economic policies and has not imposed a value added tax, which went into effect in Saudi Arabia and the United Arab Emirates more than a year ago and in Bahrain this year.

Analysts said Omani balance sheets cannot remain isolated from the regional context the sultanate is in. It may face difficult financial decisions in a global climate that tends to favour political and economic alliances.

Cash-strapped Oman has been slow to implement reforms after oil prices declined in 2014 and its borrowing increased. Muscat’s budget deficit is also one of the highest among the sovereign entities monitored by Fitch Ratings Agency, which downgraded the sultanate’s credit rating to high-risk levels in December.

Omani bonds are the cheapest among all Gulf Cooperation Council countries, meaning that Oman’s sovereign borrowing costs are higher than those of the other members.

Bloomberg News quoted Abdul Kadir Hussain, head of fixed income at the Arqaam Capital in Dubai, as saying Muscat was attempting to raise $6.2 billion through local and international debt issues but it would need to borrow more if oil prices fell.

He said Oman’s sovereign wealth fund’s reserves could help it resist for some time “but the government will need to show strong determination to implement reforms; otherwise these reserves can quickly erode.”

While Bahrain has benefited financially from its close relationship with Saudi Arabia, Oman has refused to pick sides in regional conflicts, Bloomberg News said. The sultanate has maintained policies, including friendly relations with Iran and Qatar, that have sometimes put it at odds with its neighbours.

Mohammed Elmi, an emerging-market portfolio manager at Federated Investors UK, said: “Oman’s securing of a Gulf aid package, similar to the one obtained by Bahrain, will necessitate serious budget reforms and a change in political alignment that brings it closer to its Gulf neighbours, especially Saudi Arabia.”

Concerns are growing over the Central Bank of Oman’s declining foreign exchange reserves. Analysts and international financial institutions deem current oil prices to be well below what Muscat needs to ease pressure on its financial balances.

Sergey Dergachev, senior portfolio manager at Union Investment Privatfonds GmbH in Frankfurt, said the massive sell-off of Omani sovereign bonds in December is still in the mind of investors. That will add to borrowing costs and put an additional 0.45% premium on its sovereign debt cost, he said.

However, Philipp Good, CEO of Fisch Asset Management in Zurich, said he is not worried about Oman’s creditworthiness, noting the sultanate’s efforts to diversify its economy away from oil by investing in infrastructure and focusing on tourism.

Credit rating agency Fitch Ratings’ forecasts indicate that Oman’s public debt will reach 58% of GDP by next year, up from 48% at the end of 2018.