Abdulaziz Al Balushi, Group CEO, OMINVEST: Interview

Interview: Abdulaziz Al Balushi

How successful have bond issuances been in providing funding for government spending and as a mechanism for private sector financing?

ABDULAZIZ AL BALUSHI: When the government unveiled the budget for 2019, it forecast a $7.3bn budget deficit, of which $6.2bn was to be funded through debt. However, as of November 2019 Oman had issued $3bn in external debt, less than half of the budgeted amount. It is also significantly lower than the $8bn issued in 2018. The lower-than-expected deficit is primarily due to stability in oil prices, reduced public expenses and revenues from new projects. Instead of tapping deposits to fund deficits – government deposits account for 33% of total banking deposits in Oman – the government has relied primarily on foreign debt, which has also helped ease the tight domestic liquidity situation.

Despite being downgraded to junk status by credit rating agencies, Oman’s recent $3bn bond issue was successful as it attracted orders of up to $14bn and was issued at reasonable interest rates. Five-year bonds were issued at 5% and 10-year bonds at 6%. The success of the issuance is partly reflective of the negative yield environment in developed economies, which has resulted in global investors searching for investments elsewhere. It is also reflective of Oman’s reputation as stable with strong fiscal buffers.

While government borrowing has helped plug deficits and maintain liquidity, private borrowing has also played an important role. Foreign borrowing by Omani banks has helped shore up capital adequacy and helped maintain overall liquidity.

What can the government do to improve credit ratings, and are structural reforms necessary to ensure long-term ratings stability?

AL BALUSHI: Moody’s downgrade of Oman to junk status in 2019 followed Fitch’s downgrade in 2018 and S&P’s in 2017. Since the collapse of oil prices in 2014 a major concern of ratings agencies has been government debt alongside a current account deficit. Oman’s debt-to-GDP has reached over 50%, and external debt maturities are scheduled for 2021 and 2022.

The government, however, is working on a number of initiatives and structural reforms that will help reverse the trend of downgrades. Through a disciplined austerity programme it has already reduced public expenses by lowering subsidies on fuel products and utility services. Although oil and gas account for over 70% of state revenues, the government is working to ease dependence on energy by diversifying the economy through large-scale projects. One such initiative is Tanfeedh, which focuses on developing manufacturing, tourism and logistics. Authorities are also working to privatise state-owned enterprises, and the implementation of a value-added tax in 2020 will raise revenues and help narrow the deficit.

In which ways is the government helping to increase liquidity and general access to credit?

AL BALUSHI: Oman’s contracting sector has had to endure lengthy delays in payments on government contracts amid weak economic conditions in recent years. To address this, Tanfeedh has helped create a task force known as the Implementation Support and Follow-up Unit. The unit ensures that contractors, vendors and service providers are eligible for compensation against delays in government contracts. All such contracts must have a clause that provides companies the right to claim late payment penalties.

Late payment in contracts have had ripple effects on the overall liquidity of the banking system, and as such it is imperative to ensure that contractual obligations between parties are honoured. The Central Bank of Oman has also been working with all stakeholders to resolve the tight liquidity conditions by allowing banks to give relief to construction firms by providing them with extensions on loan payments to contractors.