30 August 2015
MUSCAT: Short-term interest rates are expected to harden in the coming months, with Oman government raising debt funds to cover deficit in view of falling oil prices.
The liquidity within the financial system has been absorbed as the government has raised OMR500 million so far this year -- OMR300 million in July and OMR200 million in February -- by way of development bond issues. Also, the Sultanate's government is in an advanced stage to float the country's first sovereign sukuk or Islamic bond worth OMR200 million, which will take the total debt issue to OMR700 million.
However, as per the budget document for this year, net local borrowing was estimated to the tune of OMR400 million, which excludes OMR100 million for repayment.The development bonds will help plug a projected OMR2.5 billion deficit in the nation's budget for 2015.
"It is so far not very significant since the financial system has enough liquidity. However, if the issue continues, it will cause a rise in interest rates," said a senior banker working with a leading commercial bank in Muscat.
If government continues borrowing, bank liquidity will be tightened and the lending rates will not remain at the same level.
The official, who does not want to be named, said that the liquidity crunch would first cause increase in interest rate for short-term funds, which will eventually reflect to other rates like corporate and retail loans.
"The borrowing cost of banks will grow initially, which will cause a rise in lending rates of short-term maturities (like call money and inter-bank rates). If it is persistent, it will be reflected in lending rates of long-term maturities," noted the banker.
Oman's budget deficit surged ahead to OMR1,918.5 million in the first half of this year, against a surplus of OMR250 million for the same period in 2014, primarily due to a plunge in oil prices.
According to a Reuters report, central bank data shows lending to the government taking up a growing share of banks' balance sheets, suggesting it could eventually crowd out lending to the private sector. Conventional banks' holdings of government bonds rose 18 percent from end-2014 to OMR668 million in June, expanding at roughly twice the rate of private sector lending.
In addition, the government has resumed selling Treasury bills to banks to finance day-to-day state spending; those holdings surged to OMR624 million rials from zero at end-2014.
In the last couple of years, Omani banks had ample liquidity, resulting in a low interest regime. A couple of Omani banks started offering personal loan for nationals below 4 per cent. But banks would not be able to continue such a low rate, if money market situation is tightened.
MUSCAT: Short-term interest rates are expected to harden in the coming months, with Oman government raising debt funds to cover deficit in view of falling oil prices.
The liquidity within the financial system has been absorbed as the government has raised OMR500 million so far this year -- OMR300 million in July and OMR200 million in February -- by way of development bond issues. Also, the Sultanate's government is in an advanced stage to float the country's first sovereign sukuk or Islamic bond worth OMR200 million, which will take the total debt issue to OMR700 million.
However, as per the budget document for this year, net local borrowing was estimated to the tune of OMR400 million, which excludes OMR100 million for repayment.The development bonds will help plug a projected OMR2.5 billion deficit in the nation's budget for 2015.
"It is so far not very significant since the financial system has enough liquidity. However, if the issue continues, it will cause a rise in interest rates," said a senior banker working with a leading commercial bank in Muscat.
If government continues borrowing, bank liquidity will be tightened and the lending rates will not remain at the same level.
The official, who does not want to be named, said that the liquidity crunch would first cause increase in interest rate for short-term funds, which will eventually reflect to other rates like corporate and retail loans.
"The borrowing cost of banks will grow initially, which will cause a rise in lending rates of short-term maturities (like call money and inter-bank rates). If it is persistent, it will be reflected in lending rates of long-term maturities," noted the banker.
Oman's budget deficit surged ahead to OMR1,918.5 million in the first half of this year, against a surplus of OMR250 million for the same period in 2014, primarily due to a plunge in oil prices.
According to a Reuters report, central bank data shows lending to the government taking up a growing share of banks' balance sheets, suggesting it could eventually crowd out lending to the private sector. Conventional banks' holdings of government bonds rose 18 percent from end-2014 to OMR668 million in June, expanding at roughly twice the rate of private sector lending.
In addition, the government has resumed selling Treasury bills to banks to finance day-to-day state spending; those holdings surged to OMR624 million rials from zero at end-2014.
In the last couple of years, Omani banks had ample liquidity, resulting in a low interest regime. A couple of Omani banks started offering personal loan for nationals below 4 per cent. But banks would not be able to continue such a low rate, if money market situation is tightened.
© Times of Oman 2015
