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.
*Bloomberg
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The flights: Etihad, Emirates, British Airways and Virgin all fly from the UAE to London from Dh2,700 return, including taxes
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Al Jazira's foreign quartet for 2017/18
Romarinho, Brazil
Lassana Diarra, France
Sardor Rashidov, Uzbekistan
Mbark Boussoufa, Morocco
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Milestones on the road to union
1970
October 26: Bahrain withdraws from a proposal to create a federation of nine with the seven Trucial States and Qatar.
December: Ahmed Al Suwaidi visits New York to discuss potential UN membership.
1971
March 1: Alex Douglas Hume, Conservative foreign secretary confirms that Britain will leave the Gulf and “strongly supports” the creation of a Union of Arab Emirates.
July 12: Historic meeting at which Sheikh Zayed and Sheikh Rashid make a binding agreement to create what will become the UAE.
July 18: It is announced that the UAE will be formed from six emirates, with a proposed constitution signed. RAK is not yet part of the agreement.
August 6: The fifth anniversary of Sheikh Zayed becoming Ruler of Abu Dhabi, with official celebrations deferred until later in the year.
August 15: Bahrain becomes independent.
September 3: Qatar becomes independent.
November 23-25: Meeting with Sheikh Zayed and Sheikh Rashid and senior British officials to fix December 2 as date of creation of the UAE.
November 29: At 5.30pm Iranian forces seize the Greater and Lesser Tunbs by force.
November 30: Despite a power sharing agreement, Tehran takes full control of Abu Musa.
November 31: UK officials visit all six participating Emirates to formally end the Trucial States treaties
December 2: 11am, Dubai. New Supreme Council formally elects Sheikh Zayed as President. Treaty of Friendship signed with the UK. 11.30am. Flag raising ceremony at Union House and Al Manhal Palace in Abu Dhabi witnessed by Sheikh Khalifa, then Crown Prince of Abu Dhabi.
December 6: Arab League formally admits the UAE. The first British Ambassador presents his credentials to Sheikh Zayed.
December 9: UAE joins the United Nations.
Election pledges on migration
CDU: "Now is the time to control the German borders and enforce strict border rejections"
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October 1: 1 Round One of the inaugural UAE Desert Championship (rally)
November 1-3: Abu Dhabi Grand Prix (Formula One)
November 28-30: Dubai International Rally
January 9-11: 24Hrs of Dubai (Touring Cars / Endurance)
March 21: Round 11 of Rotax Max Challenge, Muscat, Oman (karting)
April 4-10: Abu Dhabi Desert Challenge (Endurance)
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