UPDATE 2-Oman finance ministry cuts 2020 budget for govt agencies by 5%

(Adds detail, circular sourcing)

DUBAI, March 17 (Reuters) - Oman’s ministry of finance has cut by 5% the budget allocated to government agencies for 2020, according to two sources and a government circular seen by Reuters.

The decision was “in response to the financial challenges of the country,” a source at the ministry of finance said.

Oman, a small Gulf oil producer rated ‘junk’ by all major rating agencies, is expected to see its deficit widen this year because of lower oil prices.

“Based on the government’s decision to reduce the approved budgets of civil, military and security agencies for the year 2020 by 5%, the Ministry of Finance would like to inform all government agencies that the aforementioned percentage has been deducted from the approved budget for each agency,” a finance ministry circular dated March 12 said.

The circular said no further funding would be made available if ministries do not stick to their amended budgets.

The ministry asked government agencies to “continue to review all aspects of spending”.

Crude prices plunged last week after the collapse of an output curbs agreement between OPEC and non-OPEC producers triggered an oil price war between Saudi Arabia and Russia.

Oman’s economy, burdened by high levels of debt, is particularly vulnerable to oil price swings, which now add to expectations of a regional and global economic slowdown due to the coronavirus outbreak.

Oman has reported 24 cases of coronavirus so far.

Rating agencies Moody’s and Fitch this month cut Oman’s rating further into junk territory, citing continued erosion of the country’s fiscal and external balance sheets.

Last month, Oman’s Sultan Haitham bin Tariq al-Said said the government would work to reduce public debt and restructure public institutions and companies to bolster the economy.

“We believe there is a real prospect for acceleration of fiscal reform under Oman’s new sultan, Haitham bin Tariq, who ... has made debt reduction a policy priority,” Fitch said this month.

Oman had projected a budget deficit of 2.5 billion Omani rials ($6.50 billion) in 2020, corresponding to a fiscal deficit of 8% of gross domestic product.

It planned to fund 80% of the deficit through foreign and domestic borrowing, but economic disruptions caused by the coronavirus outbreak could complicate those plans, S&P Global Ratings said in a report.

Sources told Reuters earlier this month that Oman was in talks with banks for a $2 billion loan, a move which could partially shield it from volatility in the bond markets.

Yields on Oman’s international bonds due in 2048 spiked by nearly 4 percentage points since the OPEC talks collapsed. The Omani rial -- which is pegged to the U.S. dollar -- weakened to historic levels last week after oil prices plunged. ($1 = 0.3847 Omani rials) (Additional reporting by Yousef Saba Editing by Catherine Evans)