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By Martin Dokoupil
DUBAI, May 20 (Reuters) - Oman’s banks have enough capital to withstand the impact of severe shocks to the country’s economy, the central bank said, after conducting stress tests on the banking system.
“Thanks to the comfortable capital levels in the banking sector in Oman, even after the application of severe shocks, the system as a whole appeared quite resilient,” the central bank said on Tuesday in its financial stability report.
Oman, which pegs its rial to the U.S. dollar, has a conservative approach to financial regulation and many banks operating in the country are mainly focused on the sultanate or the Gulf region, which limits exposure to external shocks.
The country is also grappling with rising pressure on its public finances after it ramped up spending by more than 27 percent from 2011 to 2013, mainly on welfare and thousands of new state jobs. Its finance minister said this month that the government was looking closely at cutting costly subsidies, with petrol an obvious target.
“When assessed with respect to the international benchmarks, most of the banks were found to be in a comfortable position to face the liquidity shocks under the assumed scenarios,” the central bank’s report said.
Banks in the small non-OPEC oil exporter would be able to sustain an average 19 days with cash and 21 days with cash and securities as of the end of December.
“Once the liquidity crisis sets in, the banking sector would need liquidity supply to the tune of 2.3 billion rials to sustain for one month,” it said.
In absolute terms, a credit shock could deplete banks capital by 447.3 million rials, or about 14.2 percent of the pre-shock regulatory capital, the stress tests found.
The central bank also urged banks to diversify their funding base as government and public sector enterprises contribute roughly one third of total deposits.
“Such a trend posed a covert though critical risk should these groups decide to make significant withdrawals from the banking sector or shift deposits to (the central bank)” it said.
The bank also said that forecasts of rising fiscal deficits after 2015 highlighted the need for measures to contain non-developmental current expenditures and increase non-oil revenues from 2013 onwards. The bank said it saw scope to refine its macro-prudential tools.
The International Monetary Fund has painted a bleak picture of Oman’s public finances. It has said the sultanate was likely to slide into a deficit of 3.0 percent of gross domestic product in 2015, which would widen to 11.4 percent in 2019 as weaker oil prices eroded export receipts. (Editing by Jane Merriman)