LONDON, May 7 (LPC) – Oman is excluded from debt capital markets when it needs external financing the most due to the double impact of the coronavirus crisis and falling oil prices, public finances being likely to reach a critical stage and the peg of its currency to the US dollar would become unstable within a year.
Low oil prices and the coronavirus are expected to drive Oman’s budget deficit sharply this year, with rating agency Fitch expecting the deficit to climb to around $ 12 billion, or 18% of GDP in 2020 based on an oil price assumption of $ 35. per barrel. This is an increase from the estimated figure of US $ 10 billion that Fitch released in an April 6 briefing.
In recent years, Oman has relied heavily on external debt to offset a growing deficit caused by falling crude prices. Today it finds itself in a situation where it needs external liquidity more than ever but is in fact excluded from the market.
In March, the Sultanate was forced to suspend a US $ 2 billion syndicated loan after it was downgraded by Fitch to junk territory – to BB from BB + – while access to the bond market is now closed.
“The cost of issuing international debt is currently prohibitive for Oman,” said Krisjanis Krustins, director of Fitch’s sovereign team.
The sultanate has enough usable assets to be able to stay out of international debt markets for a year, according to market analysts, and with just $ 1.2 billion in debt maturing in 2020, a crisis of debt is unlikely in the short term.
However, beyond one year, the willingness of lenders to finance Oman’s large external financing needs will be critical, and this timeframe could even be reduced if market conditions deteriorate further.
“If Oman’s financing conditions continue to be stressed, it may need external financial assistance before mid-2021. Obviously, a number of factors, including the continued low oil prices or the government’s inability to adjust the government’s budget, could all advance this point, ”Krustins said.
SPECIES IN RESERVE
Oman held around $ 17 billion in foreign assets in the State General Reserve Fund, not all of which are liquid, and an additional $ 17 billion in gross foreign exchange reserves at the Central Bank of Oman, of which 2, $ 5 billion from the Petroleum Reserve Fund, end of 2019.
Fitch expects the government’s financing needs in 2020 to be met primarily through a drawdown of over US $ 5 billion from FRMS and over US $ 4 billion in new foreign debt, the 1.2 billion. billion US dollars of debt maturities this year to be covered by the FRP.
However, the substantial withdrawal of the FRMS comes with its own problems.
“In our view, the government’s ability to deplete reserves is limited by the need to maintain confidence in the currency peg,” Krustins said.
The US $ 4 billion in new foreign debt includes a Fitch assumption that Oman will be able to come back to the market for a bond or a syndicated loan later this year. It could also include certain debts from non-market sources, such as the UK Export Credit Facilities, the Arab Development Fund, and loans with guarantees from the Multilateral Investment Guarantee Agency, which granted Oman a $ 1 billion loan in 2019.
However, there are also doubts about Oman’s ability to obtain debt from non-market sources.
“Our expectation is that the financing needs this year will be met through a confluence of foreign exchange reserves and SWF drawdowns as well as through the issuance of debt securities. Some of these could come from non-market sources, ”said Ehsan Khoman, MENA research and strategy manager at MUFG.
“Given the fluidity of the current market environment, the nominal composition of the above is uncertain and conditional on what the sovereign deems most optimal for its balance sheet.”
In the worst case, Oman could seek support from other governments in the Gulf Cooperation Council or the IMF.
“They may become the only options if Oman’s financing conditions continue to be stressed,” Krustins said.
The lack of precedent could make this more difficult.
“There is no history of IMF programs in the GCC and Oman does not even allow publication of IMF staff regular reports AIV, but that does not make an agreement with the IMF impossible and Oman has received financial aid pledges from the GCC in 2011 that it has not yet fully utilized, ”Krustins said.