July 23, 2019 / 1:41 PM / a month ago

Deficit cut, Fitch note give respite to Oman's debt investors

DUBAI (Reuters) - Oman’s bond investors gained some respite this week as Fitch affirmed its rating for the indebted country and the government published encouraging deficit figures, potentially paving the way for the Gulf oil producer’s next debt sale.

Rated junk by all three major rating agencies, Oman has relied heavily on borrowing over the past few years to spur growth and refill its coffers – depleted because of lower oil prices.

Fitch this week affirmed its BB+ rating with a stable outlook, saying that its assessment took into consideration Oman’s “undiversified economy, high fiscal and external deficits and debt ratios,” but that the country’s external assets position remained stronger than peers with a similar rating.

The statement came after Oman late last week published fresh figures about its state budget deficit, which in the first five months of this year decreased to 358.4 million rials ($930.98 million), a 67% reduction on an annual basis.

Oman’s financial position is among the weakest of the Gulf oil exporters - with gross government debt at 53.5% of GDP last year, according to the IMF - so the deficit data and Fitch’s affirmation reassured investors in its debt.

“Fitch’s rating affirmation and recent budget figures gave a bit of comfort to the market,” said Zeina Rizk, director of fixed income asset management at Arqaam Capital.

Oman’s bonds due in 2047 were up by over 40 basis points on Tuesday, Eikon Refinitif data showed.

“BREATHING TIME”

Oman’s deficit through the first five months of this year was “the smallest shortfall in this time period since 2014,” said Jean-Paul Pigat, head of research at Lighthouse Research.

It was not fully clear what led to such a sharp reduction.

Total government revenues this year until the end of May increased by 15% year on year, with net oil revenues up 6% and gas revenues up 14%.

But the largest percentage gain was from unspecified ‘other revenues,’ which rose 53%, and from corporate income taxes, up 46%.

The country is expected to issue around $2 billion in new debt this year, sources previously told Reuters, out of total funding requirements of over $6 billion.

“Oman needs to tap the market this year, but in order to be able to do so, the market needs a tangible fiscal reform plan,” said Rizk.

Despite its junk ratings, and structural fiscal problems, Oman is not in a “default like scenario,” said Aarthi Chandrasekaran, portfolio manager at Abu Dhabi-based Shuaa Capital. “They have some breathing time to put the economy in order maybe till 2021 before things turn critical.”

While encouraging, the May budget figures are no guarantee that Oman’s fiscal position will continue improving this year.

Part of the deficit reduction was due to lower public expenditure, down 4.3% on an annual basis, but S&P Global Ratings expects spending to increase during the rest of the year, said Zahabia Saleem Gupta, associate director at S&P.

The agency estimates the fiscal deficit will rise to 10.6% of GDP in 2019 from 8.9% in 2018, mainly because of lower oil prices compared to last year and stable oil output, she added.

Editing by William Maclean

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