Oman set for new bond sale and counts on GCC support

Dubai: As Oman wades back into the international debt market after more than a year, it’s seeking to boost investor confidence by raising the possibility of assistance from its Gulf neighbors.

The sultanate is in preliminary talks to win support from some states in the region, according to its bond prospectus. Derivatives traders have pared back wagers for a devaluation of the Omani rial on anticipation that the wealthier Gulf states will come to the country’s rescue - as they did for Bahrain two years ago - if its peg to the dollar comes under threat.

Fiscal shortfall

Oman has lagged most peers in implementing fiscal reforms despite dwindling reserves and a budget deficit S&P Global Ratings estimates could reach 18% of gross domestic product this year. The government is facing increasing pressure to tap global debt markets as a widening fiscal shortfall leaves the sovereign underfunded by about 1.3 billion rials ($3.4 billion) to 1.4 billion rials, according to Morgan Stanley.

“Given the weakness in external balances, the buyers will likely be those who ascribe a greater probability of support if it comes down to it, in the Bahrain-type of model,” said Todd Schubert, head of fixed-income research at Bank of Singapore.

The sultanate’s long-standing role as a mediator on regional and international issues, including with Iran, and its geographical position on one of the world’s busiest shipping lanes, make its stability important to Gulf states and international allies like the U.S.

At the same time, Oman’s resistance to taking sides in regional disputes and adopting Saudi Arabia’s foreign policies could complicate efforts to secure help from its neighbors.

Debt comeback

Oman plans to sell benchmark-sized dollar bonds due in three, seven and 12 years - just days after S&P cut its debt rating to B+, four rungs below investment grade. While the government said it wants to introduce a delayed 5% value-added tax in April, S&P said fiscal austerity measures will probably only be rolled out gradually.

“The new deal comes at a tricky time for the country,” said Abdul Kadir Hussain, the head of fixed-income asset management at Arqaam Capital in Dubai. “The market knows they need the funding. It’s relatively close to year-end, so investors generally tend to get a bit defensive around this time of the year anyway.”

Underscoring the hurdles, Turkey’s sovereign wealth fund and Ukraine’s state-controlled oil and gas company Naftogaz Ukrainy pulled debt offerings on Tuesday.

While Oman may offer a “mid-to-high 7%” yield on the 12-year debt, the deal could be priced lower “if the market is willing to give them credit for potential GCC support,” Hussain said.

Oman’s bonds are the worst performers in the region this year, and, until now, the country had stayed out of the market after raising $3 billion last year.

“This will significantly reduce the pressure to raise domestic debt or draw down their reserves,” said Monica Malik, chief economist at Abu Dhabi Commercial Bank. “The funding requirement will remain high going forward, so continued access to the international debt market is important.”