Rating downgrade not a hurdle
Oman seems to be intent on making the most of the emerging and frontier market debt boom this year. That is why, even after a credit rating downgrade to junk status by S&P Global Ratings, the country intends to issue more bonds this year.
Oman’s Finance Minister Darwish Al Balushi, in an interview to Bloomberg, said that the country plans to issue $2 billion of Islamic bonds in the month of May alone. The amount raised will reduce its budget gap.
According to the International Monetary Fund, the nation’s budget deficit had ballooned to nearly 21% of gross domestic product (GDP) in 2016. Al Balushi said that the deficit is expected to decline to 12% of GDP in 2017 and continue falling in subsequent years.
Making the right call?
The decision to raise more money via bonds, even after a credit rating downgrade, could actually be the right one for Oman. A look at the graph above shows that even after the rating downgrade, yields on outstanding Omani bonds did not spike. The current yield is as of May 17.
On the next business day after the downgrade on May 12, Oman had gotten investment-grade ratings for its 2021 and 2026 bonds from Fitch. Both these bonds were issued in 2016.
Given the fact that investors continue to have an appetite for high yielding bonds, Oman may find several takers for its issuance yet again. Al Balushi referred to this when he told Bloomberg, “We respect the opinion of S&P as a professional entity, but at the same time we are confident in the strength of our economy and we trust that the international financial market has a lot of confidence in our economy.”
Steps to improve the economy
Apart from trying to ride a wave of emerging and frontier market assets, Oman has undertaken several steps to improve its finances and economy.
The country has been decreasing spending and focusing on non-oil revenue by increasing taxes and fees. It has also restructured subsidies on fuel and gas, among other resources. There are plans to introduce a value-added tax, and, according to media reports, talks on merging its sovereign funds – the nearly $18 billion State General Reserve Fund and the $6 billion Oman Investment Fund.
Thus, a credit rating downgrade might turn out to be only a minor hiccup in Oman’s plans to reduce its budget gap and keep improving and diversifying its economy.