Why Oman Has Work To Do Before Bond Sale

Before Oman succumbs to the temptation of selling Eurobonds, some analysts say the sultanate will first need to convince the market it’s pushing through reforms to tame its budget deficit.

“Investors continue to demand a higher risk premium on Oman due to technical and economic reasons,” said Mohammad Ahsan, managing director of rates and fixed income at Mashreq Bank in Dubai, who expects the nation to sell bonds in March or April. But “it should tap the debt markets sooner rather than later,” he said, given the pause in U.S. interest rate increases.

The nation has been slow to implement reforms following the crash in oil prices in 2014. Its budget shortfall is among the largest of all the sovereigns tracked by Fitch Ratings, which downgraded its debt to below investment grade in December.

Moody’s Investors Service late Tuesday cut Oman to junk, saying the scope for fiscal consolidation will remain more significantly constrained by the government’s economic and social stability objectives.

Not only have concerns over Oman’s dwindling buffers sparked a debate on whether it will need a bailout similar to the one that Bahrain got last year, analysts are also questioning if the sultanate can keep its borrowing in check.

Debt sold by the government and companies in Oman had a record monthly gain in February, according to Bloomberg Barclays indexes going back to 2014. Still, yields on Oman’s bonds due 2028 remain higher than similarly rated peers and even lower-rated Bahrain’s. The gap widened as Oman’s yields rose this week.

While the Gulf Arab monarchy plans to slash its borrowing for 2019 by as much as 70 percent and rely on asset sales to plug its budget deficit, Jean-Michel Saliba, a London-based economist at Bank of America Merrill Lynch, isn’t convinced they won’t keep tapping the market if oil prices and fiscal discipline disappoint.

“Authorities would still need to increase domestic or external borrowing to cover for the projected shortfall, even with current asset sales plans,” Saliba wrote in a report.

The bandwagon

Oman will probably raise $2 billion to $3 billion in bonds and loans, a senior government official said in February.

If the nation does tap the international bond market, it would join a plethora of governments who sought to take advantage of sudden surge in risk appetite.

Saudi Arabia raised $7.5 billion in January, Qatar is weighing plans for an offering and Sharjah, the third-biggest sheikhdom in the United Arab Emirates, is asking banks to help arrange the sale of Islamic dollar bonds.

“It would make sense for them to tap the market when they are confident they have a good and credible story to tell in terms of their efforts to control deficits and when they can be relatively certain in their assessment for what will be needed to be raised this year,” said Abdul Kadir Hussain, the head of fixed-income asset management at Dubai-based Arqaam Capital. “It could all easily unravel if they come to market without a good story.”