Crisis looming in cash-strapped Oman worries bond investors

Dubai

BOND investors rattled by Bahrain's fiscal woes last year are bracing themselves for the next potential crisis in the Gulf region: Oman.

The cash-strapped sultanate has been slow to implement reforms following the crash in oil prices in 2014, and is seeking to tap the debt market for a fourth year. Its budget deficit is among the largest of all the sovereigns tracked by Fitch Ratings, which downgraded its debt to junk in December.

Concerns over Oman's dwindling buffers have also sparked a debate on whether it will need a bailout similar to the one that Bahrain got last year.

Abdul Kadir Hussain, the head of fixed income at Arqaam Capital, a Dubai-based investment bank, said: "Oman has the most concerning credit trends in the region. Issuance needs are high."

Oman's bonds are cheap relative Gulf Cooperation Council (GCC) peers. At around 7 per cent, the sultanate's 2028 bond yields about 40 basis points more than Bahrain's debt of similar maturity - even though Fitch has rated Oman two levels higher at BB+.

Still, Emirates NBD Asset Management isn't rushing to buy. When Bahrain's bonds slumped following a ratings cut by Fitch in March, the Dubai-based money manager picked them up at a bargain. But the money manager stayed away when Fitch downgraded Oman in December. Without reforms, buying the debt would require a "leap of faith", said Salman Bajwa, who heads the firm.

The government plans to raise US$6.2 billion offshore and at home, but will need to borrow more if oil prices decline, Arqaam Capital's Mr Hussain said.

Sergey Dergachev, senior portfolio manager at Union Investment Privatfonds in Frankfurt, said it may have to pay a premium of at least 45 basis points to its existing debt, with the December sell-off sparked by Fitch's downgrade still fresh in investors' minds. "Other GCC issuers are also trying to borrow and muddle through until oil prices recover, but most of them have larger cushions to help weather the downturn," said Brett Rowley, the Los Angeles-based managing director for emerging markets at TCW Group Inc, which manages US$191 billion.

Oman's 2019 budget "confirmed that it has chosen to pursue growth over fiscal consolidation". While Bahrain has benefited financially from its close relationship with Saudi Arabia, Oman has resisted pressure to take sides in regional spats. The sultanate has pursued independent policies that sometimes put it at odds with its neighbours, including its good relations with Iran and Qatar.

Mohammed Elmi, a London-based emerging-market portfolio manager at Federated Investors, said: "In order to secure a GCC support package similar to that given to Bahrain, Oman would have to undertake serious budgetary reforms and have to make a change in its more neutral political orientation to a more pro-Saudi position." UK Brent crude prices at around US$60 per barrel are below what Oman needs to balance its budget, he said.

Philipp Good, Zurich-based chief executive officer of Fisch Asset Management, said he is not worried about the nation's credit profile for now. The sultanate is starting to diversify away from oil, investing in infrastructure and focusing on tourism, he said. Oman also plans to introduce value added tax this year.

"I see it as a double-B credit; it is priced as a single-B credit," he said. "As long as we have this discrepancy, you can imagine we'd remain overweight." Government debt will probably climb to 58 per cent of gross domestic product by 2020, from 48 per cent last year, said Fitch. Oman's net foreign assets will shrink to a negative 8 per cent of GDP in 2020, from an asset position of 7 per cent in 2018. This reflects the government's external borrowing, the drawdown of reserves and use of the sovereign wealth fund for financing.

"For now, assets and liquidity in the sovereign wealth fund provide comfort and cushion," Arqaam's Mr Hussain said. "But the government needs to show strong impetus for reform, otherwise this can erode quickly." BLOOMBERG