In Sure Hands

Weakening economic conditions have led to liquidity crunches and rising rates of non-performing loans, but strong regulation has ensured that the foundation of the financial industry has remained strong.

The fall in oil prices has had a series of cascading financial effects on oil-exporting countries, and Oman is no different. Less diversified and more reliant on hydrocarbon revenues than some of its GCC neighbors, the Sultanate has seen its financial position weaken significantly. The government, long the primary driver of employment and investment, now finds itself less able to serve as the source of economic activity, and international observers have grown increasingly concerned about the growing deficit. Today, the Sultanate is taking action to shore up its credit rating, bring spending down to more stable levels, and find new sources of liquidity, all moves designed to not just improve the financial sector’s viability today but lay the foundation for success in the years to come.


One of the most significant results of the fall in oil prices was a weakening of the government’s fiscal position and a corresponding drop in credit ratings as the international financial community expressed its concerns about the health of the Omani financial system. Rating agencies Standard & Poor’s and Moody’s both lowered their ratings of Omani credit in mid-2017, citing structural vulnerabilities due to decreased oil revenues. S&P lowered Oman’s rating to BB+ from BBB- in May 2017, citing the Sultanate’s vulnerability to low oil prices and potential political instability to the government’s continued current account deficits. S&P’s rating included a negative outlook, signifying that the agency expects further negative performance over the next few years. Moody’s expressed a similar sentiment in lowering the Sultanate’s rating from Baa2 to Baa1 in July 2017, writing that efforts to address structural vulnerabilities had progressed slower than expected. Despite the government’s efforts to boost non-oil revenue, Oman has seen the deficit continue to increase; through the first five months of 2017 the government posted a deficit of OMR2 billion, equal to 7.5% of GDP and two-thirds of its budgeted 2017 deficit of OMR3 billion. Although revenue increased by 19.2% Yoy, a 10% rise in current account spending meant that deficits persisted. The simplest solution to Oman’s fiscal issues—a rise in oil prices—appears unlikely, so structural changes are underway to ensure that Oman doesn’t get locked into a nasty borrowing cycle that could tank its currency. The government has been able to raise funds, selling USD5 billion worth of bonds in March 2017 and obtaining a USD3.55 billion loan from a group of Chinese banks, which suggests that there is still confidence in the overall system, but an understanding that new revenue sources are needed is at the forefront of the industry as a whole.


In the commercial banking sector, the fall in oil revenues can be seen in decreased liquidity and falling demand for credit. Since 1974, the Central Bank of Oman (CBO) has regulated the commercial banking sector, applying stringent reserve requirements that have fared banks well in difficult times. The central bank requires Omani banks to hold a capital adequacy ration of 13.25%, and all commercial banks are comfortably above this ratio, which indicates that the sector is not at risk of inadequate assets due to non-performing loans. As of June 2017, the commercial banking sector saw deposits rise 2.7% YoY to OMR18.7 million, with government deposits rising 4.5% and private deposits, which account for 65.6% of total deposits, rising by 2.4%. After credit to the private sector increased by over 11% YoY in 2016, lending increased by 6.8% in the first half of 2017. Interest rates have been creeping up as the weaker economic environment has led to a rise in non-performing loans (NPLs). Moody’s expects NPLs to rise to 3% of gross loans by the end of 2017, a sharp rise from the 1.9% of gross loans recorded in December 2015. With these indications of weakness, the commercial banking sector faces a difficult balance between boosting liquidity while maintaining robust asset rations. Interbank lending rates, the interest charged on short-term lending rates between banks and thus a responsive metric of liquidity, reached 1.384% as of late 2016, well up from the previous year. With concerns high, the CBO has taken actions to boost commercial reserves, tendering more than USD38 million of bonds in September 2017 as part of a larger strategy to issue debt to inject new capital into the economy.


The Muscat Securities Market (MSM), Oman’s only stock exchange, was founded in June 1988 and has since functioned as the Sultanate’s only stock exchange. The MSM has undergone a series of reforms over the years to become a more stable and attractive exchange; a 1998 royal decree gave the Capital Market Authority (CMA) regulatory powers and split the MSM into two bodies, establishing the Muscat Clearing and Depository Company to oversee security transfers. More recently, the CMA has been working to raise disclosure requirements in an effort to bring the MSM up to par with global standards for exchanges. A number of companies, including some blue chip stocks, were suspended in September 2017 for failing to disclose adequate information. These efforts have helped the MSM achieve steady growth over the years. As of September 2017, the exchange had 135 companies and bonds listed, with a market capitalization of OMR17.52 billion.


The CMA is unique in that it is also the regulatory body in charge of the Omani insurance industry. Oman’s insurance sector has shown growth rates above the larger economy in recent years thanks to one of the world’s fastest-growing populations. The market is still relatively small in absolute terms—there are some 30 insurance companies operating in the Sultanate, with gross premiums of OMR456.4 million in 2016, up from OMR446.24 the previous year—but the potential has national and regional participants eager to develop the sector. Growth hasn’t been spread evenly across all insurance sectors; for example, auto and engineering insurance saw YoY decreases of nearly 20% in 2016 as lower oil prices led to decreased economic activity. Health and life insurance, however, saw significant growth directly attributable to population expansion and new social policies incentivizing the purchase of insurance. Life insurance premiums rose by a staggering 203.4% YoY in 2016 due to a new bank initiative that let customers choose their insurer. New healthcare initiatives aimed at increasing access through technology also helped boost enrollment by offering new options for low-income Omani citizens. As with the banking system, Oman’s regulatory bodies have made efforts to ensure that the insurance sector’s firms are adequately capitalized and not at risk of failure. In September 2017 the CMA announced its approval of a pair of mergers, noting that larger financial entities are better able to withstand market volatility. Moving forward, the insurance sector will continue to build upon the services that are less reliant on oil revenues. Despite the growth in recent years, the life and health insurance still have plenty of potential for further penetration as the Omani population continues to mature and demand new services. With foreign insurers looking to enter the market as well, the insurance sector looks ready to be one of the centerpieces of Oman’s financial industry.

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