Oman’s sultan faces ‘balancing act’ as credit crunch looms

DUBAI: Holders of more than $20 billion of Oman’s dollar bonds want the new sultan to push through urgent reforms to ward off a credit crunch in the Gulf’s worst performing economy. The swift appointment of Haitham bin Tariq al-Said after the death of Sultan Qaboos bin Said Friday reassured investors, as some had feared a protracted succession that could have exposed Oman to external interference. While world leaders welcomed Haitham’s promise to uphold a balanced foreign policy, analysts said he needed to tackle unemployment and strained public finances in the indebted country. “It is in the domestic politics and economic policy realm where the ultimate success of Haitham’s leadership will be determined,” Robert Mogielnicki of the Washington-based Arab Gulf States Institute said. Rated junk by all three major agencies, Oman’s debt to GDP ratio spiked to nearly 60 percent last year from around 15 percent in 2015, and could reach 70 percent by 2022, according to S&P Global Ratings. It faces rising refinancing risks as a result of large government external debt maturities in 2021 ($4.3 billion) and 2022 ($6.4 billion) that could add significant pressure to foreign exchange reserves if the debt is not rolled over, S&P associate director Zahabia Saleem Gupta said. The relatively small oil producer has relied heavily on debt to offset a widening deficit caused by lower crude prices and held back on austerity measures that could cause unrest. “The country is pursuing a sustainable fiscal adjustment path: austerity measures are to be combined with a decisive impulse toward diversification,” said Fabio Scacciavillani, chief economist at Nuverse and former chief economist at an Omani sovereign wealth fund. “It is a delicate balancing act which might encounter resistance in certain quarters,” he said. Qaboos was finance minister and central bank chairman. He was also premier, defense and foreign minister and head of the armed forces. He resisted turning to Gulf neighbors for financial aid in order to maintain an independent foreign policy. When protests broke out in Oman during the 2011 Arab Spring, Qaboos sacked more than a third of the Cabinet, created thousands of jobs and gave money to the unemployed. Haitham cannot afford such largesse. “Qaboos had too many roles and was reclusive and that meant his advisers would not tell him the challenges the country was facing,” a diplomat in Oman said. “Inevitably he [Haitham] will be more receptive to the challenges of the country,” he added. Haitham, who was culture minister and in charge of Oman’s development plan, is likely to form a team of policy advisers after 40 days of mourning, which started Sunday. If he appoints a prime minister and moves to decentralize power this would signal willingness to improve decision making, the diplomat said. Oman will be the Gulf’s worst performing economy over the next two years, with gross domestic product growth forecast at 0.5 percent this year and 0.8 percent in 2021, according to Jason Tuvey, senior emerging markets economist at Capital Economics. This year, it plans to raise over $5 billion in debt to partly cover some $6.5 billion of estimated deficit, equivalent to 8 percent of GDP. It will cover the rest of the deficit by drawing from reserves, already eroded in recent years at a pace which has raised concerns over the sustainability of the Omani rial’s peg to the U.S. dollar. Fiscal slippage could occur in Haitham’s first year, when spending tends to increase, said Carla Slim, economist at Standard Chartered. But his ascension “could act as a catalyst for the pace of reform and medium-term fiscal planning,” she said. Oman has delayed bringing in a 5 percent value added tax from 2019 to 2021, and economic diversification has lagged, with oil and gas still accounting for over 70 percent of government revenues.