As with other Gulf economies, Oman will need to tap debt resources to meet its medium term funding requirements. Image Credit: Reuters

Dubai: The rating agency Standard & Poor’s, which recently lowered the ratings on Oman to 'BB-/B', has said the country will be able to meet it funding needs.

“In our baseline scenario, we expect the government of Oman will meet its sizable funding needs (including debt redemptions) - totaling almost $50 billion over 2020-23 - through external debt issuance (63 per cent), drawdowns of domestic and external liquid assets (18.5 per cent), domestic debt (15 per cent), and other financial transactions (3.5 per cent),” said Zahabia Gupta, an analyst at S&P.

The pricing of the funding in international capital markets is expected to be very high. According to S&P, if foreign investors were unwilling to roll over maturing debt, the country's depletion of external assets would accelerate, and confidence in the Omani rial's peg to the dollar could diminish.

S&P had earlier assigned a negative outlook for Oman to reflect weak fiscal and external positions.

Gulf states can help out

“Our ratings on Oman are supported by our expectation that support from GCC countries would be forthcoming if the country were to experience significant external liquidity pressures, particularly those that could threaten the peg,” said Gupta.

S&P assumes an average Brent oil price of $30 per barrel (/bbl) during the rest of 2020, $50/bbl in 2021, and $55/bbl from 2022, relative to $64/bbl in 2019

Credit conditions

In March, Oman's Eurobond yields spiked to distressed levels, with maturities of two to three years moving out by as much as 850 basis points (bps) to almost 12 per cent. S&P expects that funding conditions for Oman will improve in the second-half as global economic conditions gradually recover and oil prices track slowly rising demand. The rating agency expects Oman's economy will gradually recover after contracting by 4 per cent this year.

Funding needs

Oman's fiscal deficits and maturing external and domestic debt will average slightly more than $12 billion annually over the next four years, or 17 per cent of annual GDP, according to forecasts. Its estimated fiscal breakeven oil price is close to $90/bbl - the second highest in the GCC after Bahrain.

Owing to a sharp drop in oil prices and production cuts under the recent OPEC+ agreement, S&P expecst Oman's fiscal deficit (excluding investment income on sovereign wealth fund assets) will rise to 17.5 per cent of GDP ($11 billion) from 9.7 per cent in 2019.

This year, funding to meet its fiscal deficit of $11 billion and maturing debt of almost $3 billion could come mainly from external debt issuance of $6 billion, including syndicated loans from banks, bonds, sukuk, and some committed concessional loans from official lenders.

“We anticipate that external market conditions will improve in the second-half of 2020, allowing Oman a window to start to issue commercial debt at lower rates than currently implied by bond yields,” said Gupta.

Qatar, Abu Dhabi, Saudi Arabia, and even Bahrain (rated lower than Oman), were able to recently issue heavily oversubscribed Eurobonds of $10 billion, $7 billion, $7 billion, and $1 billion (with another $1 billion in sukuk), respectively.

Can Oman sustain its currency peg?
Standard & Poor’s expects Oman will maintain sufficient foreign exchange reserves and other external liquid buffers to sustain the dollar currency peg even in the face of heightened liquidity stress.

In its calculation of Oman's usable reserves, S&P deducted the monetary base (and other encumbered assets) from gross foreign exchange reserves because coverage of the monetary base is generally seen as important to maintain confidence in the peg.

The rating agency estimates Oman's usable reserves at $4.6 billion at end-2020, covering 1.2 months of imports. The "rule of thumb" typically used to estimate adequate reserve coverage is three months' of imports.

The external financing needs in Oman stem mainly from the government and, to a much smaller extent, from banks and corporates. In the above scenario, Oman's gross foreign exchange reserves and liquid assets do not cover the monetary base by 2022.

However, S&P notes that some other regional sovereigns do not have full coverage of the monetary base. For example, Bahrain has only 60 per cent average, but investor confidence is supported by backstop financing from its GCC neighbors.

“In the event Oman's external reserves deteriorate significantly, we expect that financial support from neighboring GCC countries would be forthcoming," states S&P. "In our view, if one country's peg were to fall, the contagion effects could be severe for the rest of the GCC.
"We could see large deposit outflows from the region and rising dollarization, which could destabilize banking systems.”