Oman – Sovereign Ratings Affirmed; Outlook Remains Positive

(MENAFN- Capital Intelligence Ltd) Capital Intelligence Ratings (CI Ratings or CI) today announced that it has affirmed Oman’s Long-Term Foreign Currency Rating (LT FCR) and LT Local Currency Rating (LT LCR) at ‘BBB-’. At the same time, CI Ratings has affirmed the sovereign’s Short-Term (ST) FCR and ST LCR at ‘A3’. The Outlook on the ratings remains Positive.

Rating Drivers

The ratings reflect Oman’s improving capacity to absorb external shocks, including gradually increasing resilience to oil price volatility. This is supported by increasing foreign exchange reserves as well as accelerated reform implementation under Vision 2040. Recent measures continue to reduce the state’s footprint in the economy through debt reduction, restructuring, and the partial divestment of state-owned enterprises (SOEs). In parallel, the government has enacted new legislation to deepen private sector participation in non-hydrocarbon industries, attract foreign direct investment (FDI), strengthen labour market resilience, and modernise the banking and financial sector. The ratings also take into account the authorities’ continued fiscal consolidation efforts, including initiatives to broaden the revenue base, and the active use of oil windfalls during 2022–24 to prepay, repay and buy back costly external debt. These efforts have contributed to a reduction in central government debt ratios and improved the debt maturity structure.

The ratings continue to be 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 ratings continue to be constrained by still limited economic diversification and significant structural budgetary weaknesses, including the vulnerability of revenues to volatile oil prices and relatively high expenditure rigidities, as well as moderate contingent liabilities arising from SOEs. The ratings also take into consideration Oman’s exposure to geopolitical risk due to the uncertainties surrounding elevated tensions between the new US administration and Iran.

Oman has accelerated the implementation of its Vision 2040 agenda through structural reforms and stronger institutional capacity, increasing the likelihood of a gradual but material reduction in its reliance on hydrocarbons. Since our last review, the government has introduced personal income tax legislation, which imposes a 5% tax rate on high-earners, effective January 2028. The government has also overseen the sale of 20% of Asyad Shipping, a subsidiary of the state-owned Asyad Group, via IPO on the Muscat Stock Exchange. CI notes that persistent reform implementation since 2021 has started to yield tangible results, with non-hydrocarbon sectors contributing 72.4% of real GDP in Q1 25, compared to 72.0% in 2024 and 69.9% in 2020. Moreover, non-hydrocarbon revenues accounted for 33.2% of total central government revenues in H1 25, compared to 30.5% in H1 24. FDI inflows reached OMR5.2bn (12.1% of GDP) in Q1 25, raising the total stock of FDI to 70.9% of GDP as of March 2025.

The public finances remain strong, supported by sustained fiscal consolidation efforts, with expenditure rationalisation – including gradual reductions in social subsidies – partially mitigating the impact of lower hydrocarbon revenues. Consequently, the central government budget – excluding investment income and dividends from Energy Development Oman (EDO) and other SOEs – recorded a surplus of 1.3% of GDP in 2024, compared to 2.4% in 2023, before sliding to a small deficit of 0.6% of GDP in H1 25 (from a surplus of 0.9% during the same period in 2024). Moving forward, CI expects the central government budget to post an average deficit of 0.8% of GDP in 2025-27 given declining hydrocarbon prices. Notwithstanding the above, the central government budget position – including investment income and dividends from EDO and other SOEs – is expected to register an average surplus of 1.5% of GDP in 2025-27. The government is poised to continue fiscal adjustment, with the progressive implementation of the tax administration modernisation programme aiming to close the tax compliance gap by 50% over four years. Additionally, the new income tax law is expected to raise non-hydrocarbon revenues by approximately 0.3% of non-hydrocarbon GDP annually. Moreover, the introduction of a 15% domestic top-up tax on multinational companies will further boost non-hydrocarbon revenues and improve the budget structure.

Despite the decline in the central government budget position, the government continued its debt reduction efforts in H1 25, repaying external and internal borrowings to the tune of OMR0.775bn (1.8% of GDP). According to the 2025 budget statement, the government expects to finance the budget deficit through the issuance of external and domestic debt as well as withdrawals of OMR400mn (0.9% of GDP) from the general reserves. So far, the government has secured OMR0.411mn through external and internal borrowings.

Deleveraging has resulted in lower central government and broader public sector gross debt, with the former expected to have decreased to 32.7% of GDP in H1 25 (from 34.5% in 2024) and the latter to 63.7% in 2024 (from 69.5% in 2023, and compared to a peak of 103% in 2021. The reduction in central government external debt through repayments and buybacks has improved the debt structure, although the majority of the debt stock continues to be denominated in foreign currency and held by non-residents. Interest expense on government debt declined to 7.3% of budget revenue in 2024, from 8.3% in 2023, and is projected to average 7.1% over 2025-27.

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 EDO, SOEs have been actively reducing their debt, while the OIA used divestment proceeds from 17 SOEs to prepay external SOE debt in 2023-24. As a result, SOE debt fell to an estimated 30% of GDP in 2024 (from a peak of 41.1% in 2021). CI notes that the OIA plans to divest of a further 25-29 individual assets by 2029, which will further reduce government contingent liabilities. Explicit government guarantees are fairly low and are estimated to have declined to less than 4% of GDP in 2024.

Risks to the fiscal outlook arise from the possibility of higher-than-anticipated social spending, alongside the declining hydrocarbon prices. Other risks could arise from the materialisation of contingent liabilities from SOEs. These risks are expected to be partially alleviated by fiscal consolidation measures in 2025-26, designed to enhance tax collection and administration, increase proceeds from government asset sales, and further control the wage bill under the new public employment law. However, CI observes significant long-term risks to Oman’s fiscal outlook, notably from the global transition to renewable energy. With the non-hydrocarbon budget deficit projected at 28.2% of non-hydrocarbon GDP in 2025, substantial non-hydrocarbon resources will be required to address this imbalance. Success in mobilising these resources through fiscal reforms and revenue diversification will be critical to sustaining fiscal stability and supporting the sovereign rating.

External strength is improving. Oman’s foreign currency reserves (which do not include the external liquid assets of the OIA) increased to USD18.2bn in June 2025, from USD17.8bn in December 2024. Reserve adequacy is high, with official reserves in December 2024 providing approximately 297.5% coverage of external debt falling due in 2025 and 27.5% coverage of broad money (M2). The current account position is expected to have posted a surplus of 2.1% of GDP in 2024 (2.5% in 2023) and is projected to post an average deficit of 1.4% of GDP in 2025-27. This is attributable to the expected decline in hydrocarbon prices as well as the continued increase in investment related imports.

The relatively sound financial condition of the Omani banking sector, which benefits from good capital buffers and a currently moderate stock of NPLs, is also a supporting factor for the ratings. Reliance on cross-border funding continues to decline, with banks’ net foreign asset position remaining positive in 2024. Concentration risk remains high, however, in common with many other banks in GCC countries.

Rating Outlook

The Positive Outlook indicates a better than even chance that that the ratings will be upgraded in the next 12 months. This is based on our expectation that ongoing structural reforms will help to gradually reduce Oman’s vulnerability to hydrocarbon prices, improve revenue mobilisation, as well as further reduce fiscal risks from SOEs.

Rating Dynamics: Upside Scenario

The ratings could be upgraded by more than one notch in the next 12-24 months in the event of a larger than envisaged improvement in the public finances, particularly if supported by a significant reduction in the reliance on hydrocarbons and far greater non-oil revenue mobilisation.

Rating Dynamics: Downside Scenario

The ratings could be lowered by one notch in the next 12-24 months should geopolitical risks increase and/or fiscal and external metrics deteriorate significantly (for example, due to a prolonged and sharp decline in oil prices or policy slippage).

Contact

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

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