Stakes rising in Oman for regional financial aid

Potential assistance for Oman from wealthier neighbours in the Gulf may not be quite the turning point it was for Bahrain two years ago.

Oman’s bondholders are hoping it obtains a similar lifeline, and credit assessors from Fitch Ratings to S&P Global Ratings see that as a possibility. The sultanate discussed the option with other Gulf states, people with knowledge of the matter told Bloomberg in June.

But the size of any aid package will likely “be calibrated to facilitate, but not meaningfully replace, debt market funding,” Fitch analysts including Hong Kong-based Krisjanis Krustins said this week as they lowered Oman’s sovereign rating deeper into junk.

The sultanate’s dollar-denominated bonds have lost 1.6 per cent this year, the worst performer in the region.

That raises the stakes for Oman, which has lagged behind most peers in implementing fiscal reforms despite dwindling reserves and a budget deficit Fitch estimates could reach 20 per cent of gross domestic product this year.

Investors demand a premium to hold Oman’s debt over Bahrain’s note of similar maturity – a reversal from 2018 before the $10bn rescue lifted the fortunes of the island nation – even though its debt is rated one level higher by Fitch and S&P.

Oman doesn’t have much time to “muddle through,” said Michael Cirami, a Boston-based money manager at Eaton Vance Corp., which oversees about $465bn. “They need to make really tough decisions in the next year or so.”

Oman’s fiscal deficits and external debt maturities will amount to $12bn to $14bn – or about 20 per cent of GDP – per year from 2020 through 2022, according to Fitch. The government hasn’t tapped the overseas debt market since raising $3bn last year.

Fitch said Oman recently secured a $2bn loan in anticipation of bond issuance abroad later this year.

The outlook is a major challenge for Sultan Haitham Bin Tariq Al Said. The ruler made lower debt a priority when he succeeded his cousin in January, and authorities have since looked to lower spending as declines in oil prices and the pandemic cut into revenue.

Decrees issued on Tuesday scrapped some ministries and merged others. The move may be “geared towards greater delegation of executive responsibilities away from the Sultan,” and could improve the government’s transparency and decision-making, which have slowed Oman’s economic reforms and fiscal adjustment in the past five years, said Moody’s Investors Service’s senior analyst, Alexander Perjessy, in Dubai.

Some of the more painful measures, including value added tax and a possible personal income tax, will have to be implemented during a critical period through 2022, according to Abdul Kadir Hussain, the head of fixed-income asset management at Arqaam Capital in Dubai.

“The new sultan is making all the right noises as far as the required fiscal consolidation is concerned, but more concrete steps will have to follow if this declining trend is to be arrested,” Hussain said.