Islamic Finance

Oman to tap investors to plug budget deficit

Published 09 Sep,2020 via Bloomberg Markets - Oman’s government is planning to tap international and local debt markets this year as it seeks to plug the widest budget deficit among Gulf Arab economies.

The sultanate, rated junk by the three major rating companies, hired Bank Muscat for a local-currency Islamic bond offering, according to the Finance Ministry. The sale will target local and small investors through a book-building process, it said in a statement on Wednesday.

The Finance Ministry didn’t provide details of what would be its first international debt offering in over a year.

The biggest Arab oil exporter outside OPEC was among the more vulnerable economies in the six-nation Gulf Cooperation Council even before the virus outbreak and the crash in oil. Oman’s dire financial straits are a major challenge for Sultan Haitham Bin Tariq Al Said, who took power in January.

The Finance Ministry said it “is working to complete its funding plan, which includes an international bond and sukuk offering to fund the remainder of its needs this year.”

Oman is following other governments from the region in offering debt as they take advantage of low borrowing costs. Bahrain on Wednesday became the latest sovereign issuer to wade back into debt markets.

Besides signing a bridge loan for 770 million rials ($2 billion) and issuing 550 million rials in development bonds this year, the ministry said Oman has also been tapping its reserves and privatizing some assets.

Oman is on track to run its biggest budget shortfall since 2016, estimated this year at 16.9% of gross domestic product by the International Monetary Fund. The country’s sovereign rating was downgraded twice in 2020 by Moody’s Investors Service.

Facing what Oxford Economics has called a “crunch point” next year, when it has to refinance a maturing $1.5 billion bond, Oman has few options besides loading up on more debt. The government’s fiscal deficits and external debt maturities will amount to $12 billion to $14 billion -- or about 20% of GDP -- per year from 2020 through 2022, according to Fitch Ratings.

Oman’s economy has been struggling since the last oil crash in 2014. Like its neighbors, it was forced to tap international debt markets to plug budget deficits but it was slower to implement fiscal reforms despite dwindling reserves.

Spreads on some of Oman’s securities have stabilized after briefly surpassing 1,000 basis points versus U.S. Treasuries, the threshold for debt to be considered “distressed,” in the first half of the year. Its debt is the worst performer among Gulf Arab peers this year, declining 0.6%.

Oman had discussed the possibility of financial aid with other Gulf states to help it cope with the economic impact of the coronavirus pandemic and low oil prices, Bloomberg reported in June, citing two officials in the region and a U.S. government official familiar with the contacts.

But the sultanate’s resistance to taking sides in regional disputes and adopting Saudi Arabia’s foreign policies means that in contrast to Bahrain, it may not be able to count on other Arab nations to come to its rescue.

Unlike Oman, Bahrain benefits from the backstop of $10 billion in financial aid pledged by its regional allies, including Saudi Arabia, in 2018.

(Updates with details on Oman’s finances starting in fourth paragraph.)

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Zainab Fattah, Turki Al Balushi and Abeer Abu Omar