OMAN FINANCIAL CRISIS UPDATE: NEW FUND TO BOLSTER

UNCLAS SECTION 01 OF 02 MUSCAT 000802 SENSITIVE SIPDIS E.O. 12958: N/A TAGS: PREL ECON EFIN MU SUBJECT: OMAN FINANCIAL CRISIS UPDATE: NEW FUND TO BOLSTER EQUITY MARKET AS DEVELOPMENT PROJECTS FACE CLOSER LOOK REF: A. MUSCAT 749 ¶B. MUSCAT 722 ¶C. MUSCAT 384 -------------- SUMMARY -------------- ¶1. (SBU) To help shore up local equity values, Oman will establish a $390 million fund with capital from the government, private sector and pension funds to buy shares in the Muscat Securities Market (MSM). While the government claims that local banking institutions have passed on Central Bank offers to make available U.S. dollars, one new bank has delayed its launch due to the global credit crunch. Amidst a cooling real estate market, demand for residential units in projects aimed at non-GCC buyers continues to soften with prices in some instances down from speculation-driven highs. Although officials insist that government infrastructure and development plans remain on-track, ambitious plans for construction at al-Duqm and elsewhere face an uncertain future. End Summary. -------------- LIFTING STOCK PRICES -------------- ¶2. (U) The Omani government announced on October 20 that it planned to set up a new fund valued at 150 million Omani rials (USD 390 million) to help stabilize the sagging MSM. Oman's Minister of Commerce and Industry, Maqbool bin Ali bin Sultan, stated that the government would provide 60% of the fund's capital, with the remaining 40% coming from "the private sector and pension funds." He further stated that the government "hopes the creation of this fund will return confidence in the investment climate." According to the MSM website, the government has already invited some financial and banking institutions to contribute to the fund, which will be professionally managed "on a commercial basis." Reports suggest that a new entity may be created to manage the capital committed by the government, while contributions by pension funds and the private sector will be administered by one or more brokerage firms or banks. ¶3. (U) As currently envisioned, the stabilization fund will buy securities of MSM-listed companies, especially index heavyweights, and later sell the shares when there is reasonable appreciation, thereby providing liquidity for investors and earnings for the fund's contributors. Financial experts consulted by the local media cautioned investors not to expect a major upsurge in the markets as the aim of the fund is to steady the MSM and prevent panic selling rather than push the market higher. The MSM, which on November 16 dropped to a 19-month low, down 50% from its peak value in May 2008, surged over three percent on November 19 in anticipation of the government's unveiling of the stabilization fund. -------------- NO NEED FOR DOLLARS? -------------- ¶4. (U) While the MSM is in need of funds by investors, the Executive President of the Central Bank of Oman (CB),Hamoud bin Sangour al-Zadjali, told local press on November 16 that Omani banks were in good health. Earlier, the CBO, in coordination with the Ministry of Finance, had decided to make U.S. dollar funds available to local banks through direct lending and reverse swap facility whereby banks would be able to buy dollars in exchange for Omani rials and then later sell them back for rials at specified exchange rates. According to Zadjali's press statement, however, no local banks had taken the CBO up on its offer for dollars. Zadjali also told local dailies that it was "desirable" for small banks and insurance companies to merge in order to reduce their risks, and noted that the promoters of Oman Commercial Bank, scheduled for launch by the end of the year, had requested to postpone its start until mid-2009 due to the global financial crisis. -------------- SOFTENING DEMAND FOR EXPAT-OWNED HOMES -------------- ¶5. (SBU) To the relief of many renters and prospective property purchasers, the rapid escalation of real estate prices in Oman has finally slowed. While some development projects and properties remain in demand, apartment and villa sales in Oman's integrated tourism complexes (ITCs) - the MUSCAT 00000802 002 OF 002 only locations where non-GCC nationals can own freehold property in Oman - are struggling. It is estimated that roughly 65% of all properties so far sold at ITCs have been bought by local investors intent on re-selling them for a profit before construction is complete. The credit crunch, falling equity values, and global economic slowdown, however, have cut deeply into the ITC target end-use market: affluent expatriate residents, wealthy foreign second home seekers, and perhaps speculative investors in emerging overseas markets. (Note: Omanis and GCC nationals are unlikely to reside at ITCs since they can buy similar properties at less expensive prices elsewhere in the Sultanate. End Note.) ¶6. (SBU) With approximately 40% of all properties sold in ITCs now estimated to be on the re-sale market, ITC developers face an oversupply of units. A local buyer of an apartment at "The Wave" project near Muscat, the first ITC in Oman, lamented to emboff that she was unable to sell her property even at 15% less than what she paid for it. One Muscat realty brokerage is listing over 20 units at The Wave, a stark turn-around from 18 months ago when eager buyers lined up as early as 4:00 AM on the day the first units went on sale. As a result of this softening demand, it is likely that some of the 18 new ITCs planned for Oman may never make it off the drawing board. -------------- DOWNBEAT ON DUQM -------------- ¶7. (SBU) In addition to ITCs, some planned government-financed infrastructure and development projects also face an uncertain future due to tight credit and declining oil revenues (ref B). In contrast to officials who boldly proclaim that development will continue unabated, Minister of Oil and Gas Mohammed al-Ruhmi told press earlier this month that "the global financial crisis might cause delay in the refinery and petrochemicals complex in al-Duqm." Contacts indicate that other building projects in al-Duqm (ref C) and elsewhere are being re-examined as the government sorts out its spending priorities. GRAPPO