A Wobble Over Power Bills Indicates Oman’s Finances Tightening

(Bloomberg) --

Oman may have backtracked on a decision last month to cut payments to electricity and water suppliers, but the damage to its standing among investors won't be easy to fix.

State-owned Oman Power & Water Procurement Co. said on May 17 it was partially suspending payments because of the coronavirus pandemic, a delay that would have hit the international firms and banks that built and funded the Gulf state's power stations.

OPWP reversed the decision 10 days later after several companies complained and the Ministry of Finance stepped in to say funding would be made available. But the move and the reaction to it highlighted the challenge Oman's new sultan faces to reform the economy.

“It sent a shock wave around the industry,” said Thomas Wigley, a partner at law firm Trowers & Hamlins in the capital, Muscat. “It does point to the seriousness of the budgetary issues facing Oman as a result of the low oil price and shutdown of the economy forced by Covid-19.”

The $80-billion economy, which produced around 820,000 barrels of crude a day in April, has been battered this year by Brent's 42% plunge and virus-related lockdowns. Gross domestic product will contract 2.8% in 2020, the worst performance since the 1980s, according to the International Monetary Fund. And the government's fiscal deficit will climb to almost 17% of GDP, the highest in the six-member Gulf Cooperation Council.

Sultan Haitham bin Tariq Al Said, who in January succeeded his cousin Qaboos, the nation's ruler for almost 50 years, has announced several potentially unpopular steps to save money. In May, he slashed salaries for new civil servants by as much as 23%.

Oman's dollar bonds have lost 14% this year, more than those of any other Middle Eastern government aside from Lebanon, which defaulted in March. Still, they have rallied in the past month and are no longer in what investors consider to be distressed territory -- their average yields have fallen to 7.8% from 9% in that period, according to data compiled by Bloomberg. S&P Global Ratings said on May 11 that other GCC members would probably rescue the sultanate if it came under “significant” liquidity pressures.

A spokesman for Nama, the holding company overseeing Oman's power sector, confirmed the sequence of events but declined to comment on OPWP's motives or the impact of its actions.

OPWP is the country's sole bulk buyer of electricity and desalinated water. It was going to defer a so-called capacity investment charge from April. The charge accounted for 230 million rials ($597 million), or 37%, of utilities' revenue last year, according to a rough estimate by Ubhar Capital, a Muscat-based investment firm.

Sembcorp Salalah Power & Water Co., Oman's biggest listed utility, suffered the second-largest decline last month among the 30 stocks on the nation's main index. Its shares pared losses after OPWP changed tack, but still fell 13%.

The payments saga could make it more difficult for OPWP to raise money for new electricity plants and other infrastructure. Oman is planning a slew of public-private projects from hospitals to slaughterhouses, having set up a dedicated authority for the program last year.

Even if Oman can drum up interest, developers may propose higher costs and want greater financial assurances. Oman issued government guarantees for its first private energy plants, but didn't for those built more recently. Those that did have a guarantee would have been in a stronger legal position than those that didn't if OPWP had reduced payments, according to Wigley, the lawyer.