190203 sultanate
A view of the old souq in Muscat. At around 7.4 per cent, the sultanate’s 2028 bond yields about 70 basis points more than Bahrain’s debt of similar maturity. Image Credit: Supplied

Dubai: The sultanate has been slow to implement reforms following the fall in oil prices in 2014 and is seeking to tap the debt market for a fourth year. Fitch Ratings downgraded its debt in December. Concerns over Oman’s buffers have also sparked a debate on whether it’ll need a bailout similar to the one that Bahrain got last year.

“Oman has the most concerning credit trends in the region,” said Abdul Kadir Hussain, the head of fixed income at Arqaam Capital, a Dubai-based investment bank. “Issuance needs are high.”

Oman’s bonds are cheap relative Gulf Cooperation Council peers. At around 7.4 per cent, the sultanate’s 2028 bond yields about 70 basis points more than Bahrain’s debt of similar maturity — even though Oman is rated two levels higher at BB+ by Fitch.

Still, Emirates NBD Asset Management isn’t rushing to buy. When Bahrain’s bonds slumped following a ratings cut by Fitch in March, the Dubai-based money manager picked them up at a bargain. But the money manager stayed away when Fitch downgraded Oman in December. Without reforms, buying the debt would require a “leap of faith,” said Salman Bajwa, who heads the firm.

Fiscal gap

The government plans to raise $6.2 billion offshore and at home, but will need to borrow more should oil prices decline, Arqaam Capital’s Hussain said. It may have to pay a premium of at least 45 basis points to its existing debt, with the December sell-off sparked by Fitch’s downgrade still fresh in investors’ minds, said Sergey Dergachev, senior portfolio manager at Union Investment Privatfonds GmbH in Frankfurt.

“In order to secure a GCC support package similar to that given to Bahrain, Oman would have to undertake serious budgetary reforms, and would also have to see a change in its more neutral political orientation to a more pro-Saudi position,” said Mohammad Elmi, a London-based emerging-market portfolio manager at Federated Investors UK. Brent crude prices at around $60 per barrel are below what Oman needs to balance its budget, he said.

Trading opportunity

Philipp Good, Zurich-based chief executive officer of Fisch Asset Management AG, said he isn’t worried about the nation’s credit profile, for now. The sultanate is starting to diversify away from oil, investing in infrastructure and focusing on tourism, he said. Oman also plans to introduce value added tax this year.

“I see it as a double-B credit; it is priced as a single-B credit,” Good said. “As long as we have this discrepancy, you can imagine we’d remain overweight.”

“For now, assets and liquidity in the sovereign wealth fund provide comfort and cushion,” Arqaam’s Hussain said. “But the government needs to show strong impetus for reform, otherwise this can erode quickly.”