Oman and Dubai both enter 2017 with requirements to raise large amounts of money from loan and bond markets. They do so with some comfort that there is demand among banks to lend, but must be aware that scheduling prowess could help make or break their plans.
Getting it right will require enough transparency about the overall pipeline to put lenders at ease, but also enough “fear of missing out” to keep them motivated to step in early.
Separating out borrowing over a number of well-spaced transactions will be another key requirement, yet underplaying the hand risks the possibility of running up against a prolonged period of volatility in a year that is sure to be plagued by geopolitical disruption.
Oman faces a projected OR3bn ($7.79bn) budget deficit for the year, with revenues expected to be OR8.7bn and spending at OR11.7bn. As low oil prices continue to weigh on the Oman economy, the government has outlined new austerity measures, spending cuts and ways to increase non-oil revenues, such as taxing tobacco and alcohol.
But the Oman government’s central deficit-covering policy this year will be to make use of state owned assets to raise funding. Several loans will be raised by Oman Oil entities, as well as from financial and other non-oil government owned businesses.
For its part, Oman’s neighbour Dubai is close to picking banks for a $3bn loan to fund its airport expansion. But discussion of a $2.9bn deal to back the emirate’s metro 2020 development plans are said to have “gone quiet” as the emirate also seeks to avoid deal congestion.
“Unintentional cannibalisation ” is the catchphrase among bankers looking at both Gulf states. They want to have a reasonable level of confidence about the likely size and amounts of loans and which of their peers will be taking part, the level of state support and nature of underlying risk, as well as an idea of how strongly bonds will factor in the mix.
Prospective bondholders for any Oman or Dubai entity will be even keener to gauge the possibility of loans sitting above them in the capital structure.
Azerbaijan provides a cautionary tale of what can go wrong when state borrowers with big programmes don't balance their timing. According to bankers, the country’s recent funding impasse results from it having tried to do too much at once, while not being specific about the overall size of its programme or the form of individual components.
Loans bankers still want to do business in Azerbaijan, but negotiations over funding will stay stalled until they get greater clarity.
With the professions of lending support that Oman and Dubai have received from banks, the funding conundrum appears to be firmly in the states’ hands. But there is a flipside to this equation. Banks must also decide whether they are going to pile into the first deal that comes along or hold out for better terms. Whatever entity is in the market from these countries, the risk underlying the loan is effectively going to be to the respective governments.
So it is reasonable to expect that terms for deals will become more generous to hold-out banks, as other institutions fill their country limits up with successive trades from different state entities.
Holding out too long, though, carries the risk of missing out entirely. Factors such as sudden buoyancy in the price of oil, or a wild swing of core currencies could also drastically change funding requirements or credit risk.
Whatever happens, Gulf funding looks set to be an exciting game of poker. Strong opening plays in both Oman and Dubai are sure to get everyone to the table.