Oman confronts its issues head on

Omani authorities are sparing no efforts to address the challenges associated with meeting public finance requirements. Where possible, officials desire to rely more on external financing and less on state reserves.

This is a commendable strategy, creating opportunities to meet the requirements of institutional investors in particular.

Within the Gulf, Oman ranks fifth in terms of the size of its sovereign wealth fund (SWF), only ahead of Bahrain. The Sovereign Wealth Institute puts Oman’s holdings at $40 billion, notable in relation to the magnitude of the economy. The figure is divided into $34 billion for the State General Reserve Fund and $6 billion for Oman Investment Fund.

An existing plan calls for securing 84 per cent of public finance requirements through local and international borrowing with the balance via state reserves.

There is a strong logic for seeking financing, especially to overcome the double-digit budgetary deficit. The budget for fiscal 2017 assumes expenditures and revenues of $30.1 billion and $22.4 billion, respectively. The deficit is thus sizeable, comprising 25 per cent of total spending on the one hand and more than 11 per cent of the GDP on the other. These hard facts pose poses a sustained challenge and cannot be overlooked.

Oman’s sovereign credit standings are in difficult circumstances, brought on by low oil prices. The petroleum sector contributes three quarters of treasury income and more than a third of GDP.

This reality supports the drive for securing external finance. It also underscores the need to strengthen the role of the private sector and further opening up the economy. Moody’s maintains a stable outlook for the economy, though it downgraded ratings twice in 2016, by two notches in February to A3 and then to Baa1 in May.

Still, in late 2016, Standard & Poor’s affirmed a BBB-/A-3 for long-term and short-term foreign and local currency sovereign credit ratings. However, S&P downgraded outlook for the sultanate to negative due to fiscal imbalance.

Fitch is pleased with sultanate’s low public and external debt though annoyed by the double-digit budget deficit. The rating agency expects an improved balance sheet on the back of an overhaul of governmental subsidies and plans to introduce VAT as well as stronger oil prices.

While not a member of Opec, Oman follows the cartel’s wishes on production and prices. Reports suggest that Oman is seeking financing options on two fronts. The first relates to a possible bond sale in excess of $2 billion, with maturities of 5, 10 and 30 years. The second is an Islamic sukuk through mandated banks.

The longer maturity of bonds should extend a lending hand as the country streamlines its spending priorities. One report expects sale of bonds worth as much as $2.5 billion.

By one account, Oman needs to secure $5.5 billion in 2017, hence the need for all possible options, including conventional bonds and Islamic finance, among others.

Securing external financing and engaging in economic reforms cannot be separated. Oman is on the right path all things considered.

The writer is a Member of Parliament in Bahrain.