(MENAFN- Capital Intelligence Ltd) Rating Action
Capital Intelligence Ratings (CI Ratings or CI) today announced that it has revised the Outlook on Oman’s Long-Term Foreign Currency Rating (LT FCR) and Long-Term Local Currency Rating (LT LCR) to Positive from Stable. At the same time, CI Ratings has affirmed the sovereign’s LT FCR and LT LCR at ‘BB’, and Short-Term (ST) FCR and ST LCR at ‘B’.
The change in the outlook reflects the significant decline in gross central government debt and CI’s expectation that fiscal and external balances will remain in surplus over the coming years, returning government and external debt to low levels in net terms. The ongoing improvement in the public and external finances is supported by favourable oil prices and more prudent fiscal and debt management policies, including the utilisation of recent hydrocarbon windfalls to repay, prepay and buyback relatively expensive external debt. The ratings are also supported by Oman’s relatively sound banking system, and by CI’s expectation that financial support for the sovereign would be forthcoming from other GCC countries in the event of need.
The ratings are constrained by the limited diversification of the economy and significant structural budgetary weaknesses (including the vulnerability of revenues to volatile oil prices and relatively high expenditure rigidities), as well as by the modest pace of structural reforms and contingent liabilities stemming from State Owned Enterprises (SOEs). The ratings also take into account Oman’s exposure to geopolitical risk, although the regional environment appears to be improving given the recent agreement between Saudi Arabia and Iran to restore diplomatic relations.
The central government budget position improved significantly in 2022, posting a surplus of 2.7% of GDP, compared to a deficit of 3.0% in 2021. Central government debt declined to 42.2% of GDP (111% of revenue) at end-2022, from 62.9% (169%) a year earlier, reflecting improved debt dynamics and the use of windfall oil revenues to reduce the debt stock.
The decrease in government external debt has helped to improve the debt structure (although the majority of debt is still denominated in foreign currency and held by non-residents) and alleviate some of the pressure on the interest bill from tighter local and international monetary policies. Interest expense declined to 8.1% of total revenues in 2022, from 9.4% a year earlier, and is expected to remain below 9% over the next two years.
CI’s baseline scenario assumes that hydrocarbon prices will remain high throughout 2023-24, averaging USD85/barrel – exceeding the budget’s average fiscal breakeven oil price of USD68/barrel. Consequently, we expect the budget surplus to average 2.5% in the next two years and for central government debt to decline further to 40.7% of GDP by end-2024.
Notwithstanding the positive developments, risks to the fiscal outlook could stem from higher than projected social spending, large OPEC+ oil production cuts, and the potential adverse spillovers from the war in Ukraine on the demand for hydrocarbons. Although the Omani government has implemented numerous reforms aimed at increasing revenue mobilisation and reducing expenditure rigidity, the pace of these reforms has slowed down in the past two years with the public finances remaining overly reliant on hydrocarbons.
Reflecting high hydrocarbon prices and increasing demand for Oman’s manufacturing exports, the current account is expected to have posted a surplus of 6.8% of GDP in 2022, compared to a deficit of 6.1% in 2021. This trend is expected to continue going forward, with the current account surplus expected to average 3.5% of GDP in 2023-24. Official foreign currency reserves at the central bank (which do not include the assets of the Oman Investment Authority, OIA) declined to USD17.6bn in December 2022 (from USD19.7bn in December 2021), as a result of debt repayments throughout the year. Reserve adequacy remains good, with official reserves providing approximately 258% coverage of external debt falling due in 2023 and 42.9% of broad money (M2).
At present, short-term external liquidity risks are further mitigated by liquid external government assets at the sovereign wealth fund, the OIA, which are estimated to reach 37% of GDP in 2023. Although not part of our baseline scenario, CI also believes Oman would likely receive financial assistance from more affluent GCC countries if needed (as evidenced by the USD1bn budget support extended to the sovereign from Qatar in 2020).
The economic outlook is broadly favourable. Real GDP is expected to have expanded by around 5.0% in 2022 and is projected to increase by an average of 3.9% in 2023-24. Oman’s current growth outlook benefits from continued external demand for crude and condensate oil and key manufacturing goods (e.g. plastics, chemicals, base metals). Domestic demand is expected to remain subdued over the next two years due to sluggish private sector credit growth. The banking system remains relatively sound, however, benefitting from good capital buffers and a currently moderate stock of non-performing loans.
Rating Dynamics: Upside Scenario
The ratings could be upgraded by more than one notch in the next 24 months should the improvement in the public finances and the decline in debt prove durable, particularly if supported by reforms that help address the reliance on hydrocarbons and limited revenue mobilisation.
Rating Dynamics: Downside Scenario
The Outlook could be revised to Stable should geopolitical risks increase and/or fiscal and external metrics deteriorate, for example due to an unexpected sharp decline in oil prices.
Primary Analyst: Dina Ennab, Sovereign Analyst, E-mail: email@example.com
Committee Chairperson: Morris Helal, Senior Credit Analyst
About the Ratings
The credit ratings have been issued by Capital Intelligence Ratings Ltd, P.O. Box 53585, Limassol 3303, Cyprus.
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