Oman's dollar peg under pressure as weak oil prices hit state finances

Forward contracts for Omani rial hit five-month high last month

Passing in front of the Central Bank of Oman building, a couple of lone cars brave a common sand storm and a rare rain shower that momentarily halted evening rush hour on Wednesday evening, Oct. 12, 2011, in the Commercial Muttrah Business District in Ruwi, Muscat, the capital of the Sultanate of Oman. (Silvia Razgova / The National)
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The currency market is exposing how vulnerable Oman is to falling oil prices.

Forward contracts for the Omani rial, which is pegged at a rate of 0.39 rial to the dollar, jumped to a five-month high in June, according to prices compiled by Bloomberg. The contracts are about 70 per cent higher than those for Qatar, a country that has seen its trade links with neighbors cut off amid a diplomatic standoff with four Arab nations.

While few expect Oman to scrap the 30-year-old peg, the trend is raising questions on how long the country can weather the pressure of oil prices at US$50 a barrel without spending cuts to reduce the budget deficit. Saudi Arabia, whose economy is 10 times larger than Oman's, saw its peg come under pressure in 2016 before lowering expenditure and selling bonds.
"Oil prices have been on the back foot in the second quarter and much of the speculation against Gulf Cooperation Council countries' pegs to the dollar has this time really focused on Oman, rather than Saudi Arabia," said Monica Malik, the chief economist at Abu Dhabi Commercial Bank PJSC. "It is seen as being in a more vulnerable position, given the size of its fiscal and external deficits."

Oman’s 2016 budget deficit of about 21 per cent was the highest in the GCC. While the nation pump about a tenth of Saudi Arabia’s monthly oil output, its gross debt as a proportion of GDP in 2016 was almost three times the kingdom’s, according to International Monetary Fund data.

Brent crude has declined 14 per cent this year. It was at $48.95 a barrel as of 1:22 pm in London on Monday. That’s about $30 below the price needed to balance Oman’s budget, according to IMF estimates.

Forward contracts for the rial that expire in 12 months climbed to 850 points on June 28, according to data compiled by Bloomberg. They stayed at that level for most of July before easing to 800 last week.

For all the pressure, Malik says the fixed exchange rate will probably stay because “the dollar peg is very important to anchor currency expectations, which is vital for capital inflows, which is critical for Oman at a time of low oil income,” she said.

Fitch Ratings lowered Oman’s credit rating outlook to negative from stable in June, citing the diminishing strength of the nation’s balance sheet as the government sells bonds to finance deficits and bolster the central bank’s reserves.

The country’s gross debt-to-GDP was 34.3 per cent in 2016, IMF data show. That will likely increase after Oman raised $7 billion in multiple international offerings this year.