Muscat: Oman’s currency being tied to the US dollar is “sustainable” and the government is in good fiscal health, according to leading financial analysts.
A report by credit ratings agency Moody’s suggested that Oman – among other GCC states - may face a rough patch against the strengthening US dollar, just as the Sultanate starts to move away from dependence on oil revenue and faces up to falling oil prices.
Experts, however, say that Oman’s currency is safe, thanks to the Sultanate’s increasing foreign exchange reserves and strong supply of money.
The vote of confidence came as Hamood Sangour Al Zadjali, Executive President of the Central Bank of Oman, told Times of Oman in an exclusive interview that no decision has yet been taken on whether to raise interest rates after the recent US hike.
And Fabio Scacciavillani, Chief Economist at Oman Investment Fund, said the claim that the dollar peg was in danger was “grossly overblown”. He added: “The Omani rial is pegged to the US dollar and if anyone opens the home page of the Central Bank of Oman he would immediately verify that at the end of December 2016 the Foreign Assets of the Central Bank stood at OMR7,791m, while the money supply (M1) totalled only OMR4,978.7.
“In other words, the central bank can certainly sustain the peg. Furthermore, the Omani public sector holds conspicuous assets outside the central bank and has obtained foreign credit that can finance the current account deficit for the foreseeable future,” he added.
Even the Moody’s report states Oman will be able to sustain the currency peg for nearly a decade, if oil stays above $50 a barrel and there are no major economic hurdles.
Oman IS studying whether to raise the country’s key interest rates, after the Federal Reserve lifted their rates, the country’s central bank chief told Times of Oman.
Four GCC states – Saudi Arabia, the United Arab Emirates, Kuwait and Bahrain – have already followed the Federal Reserve’s decision to raise key rates.
“No decision has been taken so far,” said Hamood Sangour Al Zadjali, executive president of the Central Bank of Oman.
“So far, the interest rates in the local market are relatively higher than rates prevailing in international markets,” noted the central bank chief, refuting the argument that a disparity in interest rates will lead to capital outflows.
“So it is still profitable for investors to invest in Omani rial deposits.”
All six GCC states have their currencies pegged or closely linked to the US dollar.
Al Zadjali also said that an increase in US Federal Reserve rates (ranged between 0.75 per cent and 1 per cent) might increase cost of borrowing of Omani companies, especially state-owned entities, in the overseas markets. Several state-owned companies, including Duqm Refinery, are considering raising funds from international markets by way of syndicated loan or issue of bonds.
Still, Oman enjoys good confidence and a significant response from international investors for its debt issues, added the central bank chief.
Kanaga Sundar, head of research at Gulf Baader Capital Markets, said that some of the GCC countries, including Oman and Kuwait, had planned their borrowing programme ahead of the Federal Reserve’s rate increase to save on interest rates. “However, this will eventually reflect in additional cost of borrowing,” added Sundar.
Al Zadjali said that there is no plan to increase the upper interest ceiling of 6 per cent on personal loans provided by commercial banks.
“While, Gulf Cooperation Council (GCC) countries are well-positioned on average to withstand external payment pressures, Oman and Bahrain are more exposed due to their low levels of foreign exchange reserves and large current account deficits,” Mathias Angonin, a Moody’s Analyst and co-author of the report, said.
“Oman has a much larger external gap, and the current account deficit is expected to average 11.6 per cent of GDP over the same period,” Mathias added.
In 2016, Oman had the highest current account deficit among the GCC countries, which Moody’s estimates at 20.1 per cent of the GDP, and the highest external breakeven oil price at $78.4 per barrel, according to the International Monetary Fund (IMF).
According to Moody’s, the GCC authorities are unlikely to abandon US dollar pegs as they have bolstered macroeconomic stability and private sector confidence, lowered transaction costs, and helped to avoid the currency volatility experienced by most emerging economies.
A few days ago, Oman raised $5 billion from an international bond sale.
Economists said that completing the entire foreign borrowing plan for 2017 in a single issue, by selling $5 billion of international bonds, reveals global investors’ confidence in Oman and its ability to overcome the current economic downturn.
The 30 year old peg with the US dollar came under pressure when Oman’s current account plunged from an average surplus of 10 per cent of GDP over the period of nine years from 2005-2014 to a deficit of more than 10 per cent of GDP in 2015-16, due to the Sultanate’s heavy dependence on crude oil prices. Crude prices crashed from $114 in June 2014 to $30 in January 2016 after an over-supply glut that has not cleared markets to date.
Renewed concerns of the GCC dollar peg rose when US Federal Reserve hiked interest rates for the second time in months; however Oman’s foreign exchange reserve and assets remain high and coupled with prudent fiscal measures by the government provide a strong cushion to the country’s peg.
According to Loai Bataineh, CEO of Ubhar Capital, there is no threat to the peg due to smart policies of the central bank but the only challenge is to bring foreign direct investment in the country.
“We don’t have a big issue regarding currency peg. We have positive cash flow in the market and the central bank has taken some smart measures to keep the currency peg. In the near future there is certainly no threat to the peg, however, the challenge is to work on making Omani markets more attractive to investors outside,” he explained.