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Sukuk takes bigger slice of Oman’s shrinking debt market

Residents in Muscat. Oman's government is taking steps to increase the size of its debt market Alamy via Reuters
Residents in Muscat. Oman's government is taking steps to increase the size of its debt market
  • Debt market down 7%
  • Sukuk up 230%
  • Long-term growth expected

Oman’s total debt capital market contracted by 7 percent to $44 billion last year as the government took advantage of its budget surplus from higher oil and gas prices to make early payments.

The energy boon helped its budget surplus total $2.4 billion.

Despite the shrinking debt market Fitch Ratings said sukuk issuance in Oman is rapidly growing in popularity.

It expanded by 230 percent on the previous year to over $1 billion in 2023. Bond issuance fell by 56 percent to just under $5 billion in the same period.

The share of sukuk in the debt capital market grew by more than 3 percent to a little over 21 percent, the agency said in a new report.

Sukuk are sharia-compliant bonds that were developed as an alternative to conventional bonds, which are not considered permissible by many Muslims as they pay interest and may finance businesses involved in activities not allowed under Islamic law.

“We do not expect a significant short-term surge in the debt capital market size, mainly due to the indication in Oman’s budget that the authorities will continue to pay down government debt,” said Bashar Al-Natoor, global head of Islamic finance at Fitch.

He added that over the medium-to-long term the debt capital market in Oman will grow, supported by government initiatives and issuance from sovereign and government-related entities.

The Omani debt capital market is in an early stage of development and one of the smallest among GCC countries. 

The government has taken steps to develop it with new sukuk and bond regulation and a sustainable finance framework.

The regulations are expected to help build confidence among both sharia-sensitive investors and those interested in environmental, social and governance issues, said Al-Natoor. 

The Islamic finance industry in Oman went beyond $28 billion at the end of last year, Fitch estimates.

This was split between Islamic banking assets, outstanding sukuk and takaful (Islamic insurance) contributions. 

The Islamic banking market share rose to around 17 percent of total banking assets last year, 20 percent of financing and 19 percent of deposits. 

Islamic banks’ financing grew by nearly 12 percent year on year, well above the 2.5 percent growth recorded by conventional banks.

Deposits for both Islamic and conventional banks grew at the same level, however, at 12.5 percent.

Fitch previously said it anticipates government spending to remain prudent and the 2024 budget does not indicate any significant backtracking on fiscal consolidation measures.

It said the government will use part of the surplus to continue debt repayment although the pace of debt reduction will ease this year. Government debt as a proportion of GDP is expected to fall to 33 percent in 2024 from 36 percent in 2023. 

In September 2023 Fitch upgraded Oman's rating to BB+ – just short of an investment-grade rating – with a stable outlook.

S&P revised its outlook on Oman to positive from stable last month, supported by expectations that the economic reform programme in the sultanate would lead to faster-than-expected deleveraging in many state-owned enterprises, without dampening economic growth. 

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