Oman – Outlook Revised to Positive; Sovereign Ratings Affirmed

(MENAFN- Capital Intelligence Ltd) 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 LT 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 the Short-Term (ST) FCR and ST LCR at ‘B’.

Rating Drivers

The change in the outlook reflects the faster than previously projected decline in central government debt, underpinned by ongoing fiscal consolidation measures and proactive debt management. The central government budget position has remained in surplus despite prolonged voluntary hydrocarbon production cuts, while hydrocarbon and divestment proceeds are being used to prepay, repay and buyback relatively expensive external debt. The outlook also reflects the increase in government financial assets, as well as the implementation of structural reforms outlined in Oman Vision 2040. The latter includes state-owned enterprise (SOE) restructuring as part of efforts to reduce the budget’s vulnerability to fluctuations in oil prices and improve the economy’s shock absorption capacity, in addition to increasing the private sector’s involvement in the economy.

The ratings are supported by prudent economic policies, the relative soundness of the banking system, and CI’s expectation that financial support for the sovereign would be forthcoming from other GCC countries in the event of need.

The central government budget remained strong in H1 24, posting a surplus of 1% of GDP, compared to 1.5% in H1 23. This was attributable to continued fiscal consolidation measures, including spending rationalisation and a reduction in social subsidies. Central government debt is estimated to have declined to 33% of GDP at end-June 2024, from 36.5% in December 2023, with repayments and buybacks – notably of eurobonds and sukuk – amounting to 2.6% of GDP. The decrease in external government 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 arising from still tight local and international monetary policies. Interest expense declined to 7.2% of total revenues in H1 24, from 7.9% a year earlier, and is projected to decrease to an average of 6.4% over the next two years.

Moving forward, CI’s baseline scenario assumes that hydrocarbon prices will average USD76.7 /barrel in 2024-26, exceeding the budget’s average fiscal breakeven oil price of USD70.7/barrel. We expect the central government budget surplus (including divestment proceeds) to average 2.5% of GDP during the forecast period, and central government debt to decline further to 31.5% of GDP by end-2024, which is lower than our previous projection of 33.2%.

Gross financing needs remain low and are expected to decline to an average of 2.3% of GDP in 2025-26, from 3.4% in 2024. Government deposits increased to 15.9% of GDP in H1 24 (from 15.7% in 2023), and cover around 3.2 times the central government’s short-term debt on a remaining maturity basis.

Government contingent liabilities stemming from SOE debt remain a potential – albeit declining – source of fiscal risk. Following the reorganisation of non-hydrocarbon SOEs under the Oman Investment Authority (OIA) and hydrocarbon SOEs under Energy Development Oman (EDO), SOEs have been deleveraging, with debt falling to around 26% of GDP in 2023 (from 29.9% in 2022). Just over a quarter of the debt is directly guaranteed by the Omani government.

Risks to the fiscal outlook stem from the likelihood of higher-than-projected social spending, as well as from lower demand for hydrocarbons in the event of tepid growth in the Chinese economy. These risks are expected to be partially mitigated by the implementation of fiscal reforms in 2024-2026, aimed at improving tax collection and administration, increasing the proceeds of sales from government assets, and containing the wage bill further through the new public employment law.

The ratings continue to be supported by the government’s demonstrated commitment to structural reforms, with several new laws being adopted in 2023 and 2024, including the labour law, public employment law, and social protection law (which saw the establishment of Oman’s Social Protection Fund). This year, the government is expected to press ahead with efforts to gradually reduce the state’s footprint in the economy via its divestment programme.

External strength is improving. Oman’s current account position is expected to remain in surplus in 2024, with the size increasing to 2.7% of GDP (from 1.8% in 2023). We expect the current account to continue posting surpluses averaging 2.1% of GDP in 2025-26. Official foreign currency reserves at the central bank (which do not include the external liquid assets of the OIA) increased to USD18.2bn in June 2024, from USD17.5bn in December 2023. Reserve adequacy is high, with official reserves providing approximately 284% coverage of external debt falling due in 2024 and 29.4% coverage of broad money (M2). In our opinion, external liquidity risks are also mitigated by the likelihood that Oman would receive financial assistance from more affluent GCC countries if needed.

Although not a measure of international liquidity due to the limited liquid investments, the assets under the management of OIA increased to around OMR19.2bn (45.8% of GDP) in 2023, of which OMR7.1bn is in the country’s Future Generations Fund and the remainder in the National Development Fund (NDF). CI notes that 60% of these assets are invested locally, and that NDF continues to play a pivotal role in the implementation of reforms under Oman Vision 2040.

Economic growth remained moderate in Q1 24, reflecting voluntary hydrocarbon production cuts. Real GDP expanded by 2% during the period, and is projected to increase by an average of 1.8% in 2024, before accelerating to an average of 3.3% in 2025-26. Oman’s current growth outlook benefits from external demand for crude and condensate oil and key manufacturing goods (plastics, chemicals, base metals). Economic growth is also expected to benefit from high FDI in the hydrocarbon sector, as well as infrastructural projects in the non-hydrocarbon sectors.

The relatively sound financial condition of the Omani banking sector, which benefits from good capital buffers and a currently moderate stock of non-performing loans, is a supporting factor for the ratings. Moreover, reliance on cross border funding continues to decline, with foreign liabilities accounting for 11.0% of total liabilities in June 2024 (11.2% in December 2023). Concentration risk however remains high, in common with almost all other banks in the GCC.

The ratings remain constrained by the limited diversification of the economy and significant – albeit declining – structural budgetary weaknesses, including the vulnerability of revenues to volatile oil prices and relatively high expenditure rigidities, as well moderate contingent liabilities stemming from SOEs. The ratings also take into account Oman’s exposure to geopolitical risk due to potential regional spillovers from the war in Gaza and elevated tensions between the US and Iran.

Rating Dynamics: Upside Scenario

The ratings could be upgraded in the next 12 months if the improvement in the public finances and the decline in debt persist, particularly if supported by reforms that help reduce the reliance on hydrocarbons and improve non-oil 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 decline in oil prices.

Contact

Primary Analyst: Dina Ennab, Sovereign Analyst, E-mail: ...
Committee Chairperson: Morris Helal, Senior Credit Analyst

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