Last week S&P downgraded Oman’s LT foreign currency rating by one notch to B+. “Oman’s public sector finances, as indicated by the net debt level, will materially weaken over the next three years, notwithstanding the implementation of measures to reduce fiscal deficits,” S&P noted in its report. Adding, “This is partly driven by our assumptions of restrained oil price growth and slow economic recovery from the Covid-19 pandemic.” This was the second time this year that the rating agency has cut its rating for Oman; the country is rated Ba3 and BB- by Moody’s and Fitch, respectively, both rating agencies have also downgraded Oman’s rating twice this year.
S&P has forecast that Oman’s gross government debt could reach 84% of GDP by the end of the year, from 60% in 2019. Noting that quasi-sovereign debt ratio could rise to 43%, from 30% over the same period. S&P estimates that the nation’s real GDP will contract by -5% as a result of the OPEC+ production cuts and the economic impact on domestic demand and investment from the Covid-19 disruption. Interestingly, the IMF has forecast a 10% fall in growth this year, by far the steepest in the region.
The government has moved to ease the fiscal burden by announcing the 5% VAT levy earlier this month (effective in six months), bringing the rate in-line with regional nations. The six GCC nations introduced a 5% VAT in 2016 while the UAE’s came in 2018, followed by Bahrain’s in 2019. Oman’s Minister of Commerce and Industry Ali bin Masoud al Sunaidy said “VAT is something people don’t like it but this is something we have been lobbying for. It will come into effect sometime in the beginning of next year.”
We do not hold Oman, mainly due to its sub-investment grade rating. We could, however, hold the nation on our Next Generation Strategy, but we choose not to due to the country’s shaky economic fundamentals; despite the very attractive yield, that would and has attracted many investors. Oman has today come to the market with a bond offering, and has been in discussions with neighbouring Gulf countries for financial support, according to the prospectus. Currently guidance on the two-tranche deal is a yield of 7% on the 7-year and 7.625% on the 12-year. The current 7-year bond is trading at 6.4% while the 12-year trades at ~7.3%; clearly the Sultanate of Oman is keeping something on the table in order to attract interest.
Investing in highly rated and “wealthy” GCC nations such as Abu Dhabi and Qatar are clearly better choices for our portfolios at this point in the economic cycle.