Oversubscribed international bonds underscore market demand in Oman

In January 2018 Oman issued its largest-ever bond in the international market as investor confidence increased amid rising oil prices. The $6.5bn bond attracted orders worth $15bn as the price for Brent crude oil rose from lows of $45 per barrel in June 2017 to $69 on January 31, 2018. The bond was sold in three tranches: the five-year tranche raised $1.3bn, the 10-year tranche $2.5bn and the 30-year tranche $2.8bn. The latter attracted the largest interest and offered the highest margins, indicating that international investors were seeking long-term, high-yielding assets and were continuing to chase emerging market debt, despite the rise in US yields. In addition to international borrowings, Oman borrowed OR250m ($649.3m) through two bond issuances in the local market with five-year and 10-year maturities at interest rates of 4.8% and 6%, respectively.

Budget

In Oman’s 2018 budget, the government forecast a deficit of OR3bn ($7.8bn), or 32% of total revenues and around 10% of GDP. The deficit was budgeted to be financed through OR2.5bn ($6.5bn) of domestic and foreign borrowings, while the remaining OR500m ($1.3bn) was expected to be funded through withdrawals from reserves. As of early November 2018 the government had issued bonds worth a total of OR2.8bn ($7.3bn) in the local and international market, exceeding the borrowing target set in the budget. Additionally, in the first five months of 2018 the government did not withdraw a single rial from its reserves as a surge in revenues and large borrowings boosted the economy. The increase in revenues came as a result of a rise in oil prices as Brent crude oil averaged $72 in the first 11 months of 2018 compared to $55 in 2017 and Oman’s 2018 budget oil price assumption of $50.

Fiscal Consolidation

Revenues from oil and gas remain a substantial portion of Oman’s total revenues, at 71%. The rise in oil price is expected to narrow Oman’s budget deficit significantly, while neighbouring countries in the Gulf, such as the UAE and Kuwait, are expected to return to fiscal surpluses in 2018. Going forward, sovereign borrowing in Oman and other GCC countries is expected to decline in the wake of fiscal consolidation and economic recovery. According to a 2018 report by credit ratings agency Standard & Poor’s (S&P), GCC countries are expected to borrow about $68bn from domestic and international commercial sources that year, down from $80bn in 2017. The strategy to tap the international bond market is reducing liquidity pressures on the domestic banking systems.

International Issuances

Oman is now seeking to raise as much as $1.2bn to finance infrastructure at the Duqm Special Economic Zone. Standard Chartered Bank is working as a global coordinator to help Oman’s debt management office raise funds. On the corporate side, banks and financial institutions in Oman issued a number of bonds and sukuk (Islamic bonds) in 2018. The largest issuance in the domestic market that year was made in June by Ominvest, the country’s largest investment company, with a perpetual bond issuance worth OR60.6m ($157.4m). In addition, leasing companies also issued bonds in the local market.

S&P downgraded Oman’s rating to “BB+”, or junk status, in May 2017 and further to “BB” in November that year, citing concerns about Oman’s weak external reserves due to weak oil prices and the country’s rising international debt. However, despite the credit rating downgrades by S&P as well as Moody’s since 2016, the oversubscriptions in Oman’s international bonds and moderate interest rates underscore healthy demand.

Investor confidence in Omani bonds is also buoyed by a moderate debt-to-GDP ratio; government efforts to diversify the economy away from hydrocarbons through Tanfeedh, the National Programme for Enhancing Economic Diversification; and a stable geopolitical climate. Another reason why the government has been able to issue international bonds at attractive rates is low global interest rates. Although interest rates in the US have started to climb in 2018 and are expected to rise even further, they are still low by historical standards.