LONDON, May 7 (LPC) - Oman is shut out of the debt capital markets when it is most in need of external financing due to the double impact of the coronavirus crisis and falling oil prices, with government finances likely to hit a critical stage and its currency’s US dollar peg to become unstable within a year.
Low oil prices and the coronavirus are set to push Oman’s fiscal deficit sharply upwards this year, with rating agency Fitch expecting the deficit to climb to around US$12bn, which is 18% of GDP in 2020 based on an oil price assumption of US$35 per barrel. This is up from an estimated US$10bn figure that Fitch published in a briefing on April 6.
In recent years, Oman has relied heavily on external debt to offset a widening deficit caused by lower crude prices. It now finds itself in a situation where it needs external cash more than ever but is effectively shut out of the market.
In March, the sultanate was forced to put a US$2bn syndicated loan on hold after it was downgraded by Fitch further into junk territory - to BB from BB+ - while access to the bond market has also now closed.
“The cost of international debt issuance is currently prohibitive for Oman,” said Krisjanis Krustins, a director in Fitch’s sovereign team.
The sultanate has enough usable assets to be able to stay out of the international debt markets for a year, according to market analysts, and with only US$1.2bn of debt maturing in 2020 a debt crisis is unlikely in the short term.
However, beyond a year the willingness of lenders to fund Oman’s large external financing needs will be critical, and this timeframe could even shrink if market conditions deteriorate further.
“If Oman’s funding conditions continue to be stressed, it may need external financial assistance before the middle of 2021. Clearly, a number of factors including continued weakness in oil prices or the government’s inability to adjust the government budget could all bring this point forward,” said Krustins.
Oman had around US$17bn in foreign assets at the State General Reserve Fund, not all of which are liquid, and another US$17bn in gross foreign exchange reserves at the Central Bank of Oman, including US$2.5bn from the Petroleum Reserve Fund, at the end of 2019.
Fitch expects the government’s funding needs in 2020 will be met mostly through a drawdown of over US$5bn from the SGRF and over US$4bn in new foreign debt, with this year’s US$1.2bn of debt maturities likely to be met by the PRF.
However, substantial drawdown from SGRF brings its own issues.
“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$4bn in new foreign debt includes an assumption by Fitch that Oman will be able to return to the market for a bond or syndicated loan later this year. It could also include some debt from non-market sources, such as UK export credit facilities, the Arab Fund for Development, and loans with guarantees from the Multilateral Investment Guarantee Agency, which provided Oman with a US$1bn loan in 2019.
However, there are also doubts over Oman’s ability to secure debt from non-market sources.
“Our expectation is that financing needs this year will be met through a confluence of FX reserves and SWF drawdowns as well as debt issuance. Part of the latter could be through non-market sources,” said Ehsan Khoman, head of MENA research and strategy 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 scenario, Oman could seek support from other governments in the Gulf Cooperation Council or from the IMF.
“They may become the only options if Oman’s funding conditions continue to be stressed,” said Krustins.
The lack of a precedent could make this more of a challenge.
“There is no history of IMF programmes in the GCC and Oman does not even authorise publication of regular IMF AIV staff reports, but that does not make an IMF deal impossible and Oman did receive pledges of financial assistance from the GCC in 2011 which it has still not fully utilised,” Krustins said.
Additional reporting by Robert Hogg Editing by Chris Mangham