Oman is most likely to face a “forced currency devaluation” in coming years due weak oil prices and low financial buffers, according to a new report.
In its report issued on Wednesday, BMI Research, a Fitch Group Company, said that the “probability of such a move is rising.”
Oman’s crude oil price have declined to $45.9 per barrel driven by weakness in global energy markets since early-2017, thus exacerbating the vulnerabilities due to its modest financial buffers and brining concerns over the sustainability of the Rial’s peg to the dollar, the report said.
“A reluctance to hike interest rates amidst slowing economic growth, and weaker political ties with the rest of the Gulf than its neighbours, provide additional reasons to be cautious about the currency peg,” BMI said.
It expects Oman’s budget deficit to reach 12.2 percent of GDP this year, with the current account shortfall of 8.0 percent of GDP.
Continued crude oversupply and financial market instability are set to keep oil prices low over the coming years, which BMI said will be “highly damaging” for a country where the hydrocarbons sector accounts for more than three-quarters of government revenue.
Brent is expected to average $57 per barrel this year, but the price increase is still below levels needed to remove speculation on the currency.
As of October 2016, the Central Bank of Oman’s foreign exchange reserves amounted to OMR7.1 billion ($18.4bn), equivalent to around four months of imports. The country’s two sovereign wealth funds – the State General Reserve Fund and Oman Investment Fund – have a combined assets of $19bn, but follow a long-term investment strategy, thus funds cannot be drawn easily, BMI said.
“Oman’s ability to defend the currency against speculative outflows is therefore more limited than its peers: its reserves cover only 85 percent of its gross external financing requirements (GEFR) for the next five years,” BMI said.
By comparison, Saudi Arabia has foreign exchange reserves amounting to approximately 100 percent of GDP – or more than three times its GEFR, the consultancy said.
In March 2016, Hamoud bin Sangour Al Zadjali, executive president of the Central Bank of Oman told its in-house “Al Markazi” magazine that devaluation of Rial against other Gulf currencies was a rumour, insisting continuing with the 1986 currency peg to the US dollar at one Rial to $2.6008.
