Oman faces higher costs but rating will remain

Oman’s external debt and funding costs are set to increase over the next three years, but the government’s balance sheet remains “reasonably strong”, according to ratings agency S&P Global.

It affirmed ratings of BB/B on the sultanate’s long-term and short-term sovereign debt in a note issue yesterday, saying the government’s recent policy actions, including the introduction of a national programme for fiscal balance, could present an opportunity to fast-track fiscal consolidation by cutting spending and improving revenue collection. However, it also affirmed a negative outlook on the country’s rating.

“The negative outlook reflects the risk that in the absence of substantial fiscal measures to curtail the government deficit, or a more favourable external environment, fiscal and external buffers will continue to erode,” S&P Global said.

Depending on how the national programme’s concrete measures and implementation timelines progress over the coming months, fiscal pressure may reduce in the medium term, the ratings agency said.

“The near-term planned privatisation of two SOEs [state-owned enterprises] could also provide some temporary fiscal relief,” it added.

Oman’s debt ratings are supported by the sovereign’s still-modest net government debt stock level of 0.4 per cent of gross domestic product in 2019. This is underpinned by relatively strong liquid government asset stocks estimated at about 50 per cent of GDP.

Timely support from neighbouring countries in the GCC is also expected in the event of a significant deterioration in the country’s external reserves, it said.

Like most oil exporters, Oman was affected by the collapse of oil prices in 2014, which have now rebounded to an average of about $60 per barrel.

The government has made strides toward diversification away from hydrocarbon receipts, but fiscal deficits are expected to remain high against a backdrop of weak oil prices, according to S&P.

Oman derives about 35 per cent of GDP, 60 per cent of exports and 70 per cent of fiscal receipts from hydrocarbon products.

“Given this high reliance on the hydrocarbon sector, we view Oman’s economy as undiversified and subject to global oil industry dynamics,” S&P Global said. “We also view monetary policy flexibility as low, given the [Omani rial currency peg to the US dollar], although we note that [the peg] has provided a stable anchor for the economy for several decades.”

S&P expects rising oil and gas production from 2020, believing that growth in the non-oil sector will drive real GDP growth of 2.4 per cent on average between 2020-22.