Healthy demand: Bonds

For the first time since 1997, the government of Oman issued $2.5bn foreign bonds in June 2016 with maturities of five years and 10 years. Later, in September 2016, the government expanded the size of the issue to $4bn. During 2016 Oman joined several other governments and companies in tapping the global bond market to fund budget shortfalls after price of crude oil plunged by more than half from its peak in 2014. Oman’s budget deficit ballooned to OR5.3bn ($13.8bn) in 2016, significantly higher than the budgeted OR3.3bn ($8.6bn).

During the first nine months of 2017 the deficit narrowed to OR3bn ($7.8bn), a 32% decline compared to the same period in 2016. This was driven by a 30% recovery in oil prices to an average of $50.60 per barrel in the first nine months of 2017, up from $38.90 in the same period of the previous year.

Issuing Further Debt

In 2017 the government continued with its borrowing programme. In March it issued a $5bn bond in tranches of five, 10 and 30 years. It was double the size that most investors were expecting and received an overwhelming response by international investors, as order books totalled $20bn, four times the size of the issue.

Following the successful bond sale, Oman issued its inaugural $2bn international sukuk (Islamic bond) in May 2017. At $6.9bn, the order book was again oversubscribed by more than three times.

Since issuance, prices and yield of Oman’s bonds have remained stable. The 30-year bond was issued at a yield of 6.5% in early 2017, and its yield was at around the same level as of year end.

In addition to bond sales in the international market, there have also been a number of issuances in the local debt market. There were three government bond issues totalling OR300m ($779m) in 2016 and four issues amounting to OR600m ($1.6bn) in 2017. For five-year bonds, yields at issuance rose from 3.5% in early 2016 to 5.25% as of mid-2017.

Investor Confidence

Investor interest in the bond and sukuk issuances during 2016 and 2017 demonstrate healthy demand despite credit rating downgrades by S&P and Moody’s during the year. S&P downgraded Oman’s rating to BB+, or junk status, in May 2017 from BBB- previously, citing concerns over the sultanate’s weak external reserves due to the prolonged drop in oil prices.

Despite Oman’s weak fiscal position, investors’ confidence in the sultanate’s bonds is buoyed by a low debt-to-GDP ratio, the government’s efforts to diversify the economy away from hydrocarbons through the Tanfeedh programme and a stable geopolitical climate. Another reason for the government’s success in issuing international bonds at attractive rates is low global interest rates. Although interest rates in the US have started to rise and are expected to rise further by 2018, they are still low by historical standards. The benchmark 30-year Treasury yield in the US is at 2.8% currently, still much lower than around 4% in early 2014 and above 5% before the financial crisis of 2009. While rates are set to increase in the US, Europe is still maintaining near-zero interest rates to stimulate a sluggish economy. Hence, in the current environment, investors in the developed market are hungry for higher-yield issues in emerging and frontier markets.

Oman’s sovereign bond and sukuk issuances are healthy as they will stimulate its small capital markets and incentivise the development of new financial instruments. With an increase in sovereign issuances by the government, Oman’s private sector may also be encouraged to tap into the debt market. This will help relieve pressure on the country’s banking sector as the drop in oil prices has reduced the sector’s liquidity. The Capital Markets Authority, the regulator, fully supports a vibrant fixed-income market, which is essential to the development, financial stability and diversification of the economy.