Oman's sovereign ratings raised

Oman's ratings also reflect the very low level of government debt, the robustness of the public finances to oil price and other external economic shocks and the authorities' track record of prudent economic management. The credit outlook for Oman is Stable.

Oman's economy continued to grow strongly in 2007, supported by high oil prices, expansionary economic policies, and increased confidence in future growth prospects. Nominal GDP increased by about 13%, taking GDP per capita to just over $15,000 - approximately 90% higher than in 2002. Real GDP is estimated by CI to have expanded by 7.9%, up from 7.2% in 2006.

The short- to medium-term outlook for the economy is favourable based on current expectations of high but gradually declining world energy prices, and ongoing and planned investment to boost oil and gas capacity, improve physical and social infrastructure, and diversify the economy. CI expects real GDP growth to average around 7% annually in 2008-2010 and GDP per capita (in nominal terms) to approach $20,000 by the end of the period.

Helped by high oil prices and the expansion of the liquefied natural gas (LNG) industry, the current account of the balance of payments has recorded relatively large surpluses over the past eight years and is expected to remain in surplus in 2008-2010. Current account surpluses have translated into a strong external balance sheet, which in turn mitigates the economic and financial risks associated with external shocks. CI estimates that the combined foreign financial assets of the official and commercial banking sectors exceeded gross external debt by about 48% of GDP at the end of 2007 and projects an increase in the net external asset position to 74% of GDP by 2010.

Central bank foreign exchange reserves of $9.5bn (23% of GDP) at end-2007 provide solid backing for the fixed exchange rate regime and a strong buffer against external shocks. In the event of severe external pressures, the authorities could draw on the government's foreign assets, which CI estimates to be almost twice as large as central bank reserves.

The public finances are also sound. The central government budget, including CI estimates of transfers to government reserve funds, has posted surpluses in each year since 1996, with the exception of 1998. The budget surplus is estimated by CI to have been around 13% of GDP in 2007 and is projected to increase to about 16.5% in 2008 in response to the first increase in oil production in seven years and sharply higher oil prices. Government debt is very low, at an estimated 6% of GDP at end-2007, and is covered roughly nine-fold by government financial assets (excluding equity stakes).

Oman's ratings continue to be constrained by the country's over-reliance on oil and gas and the challenge of expanding the private sector to absorb a fast growing labour force. Oman's oil dependence is problematic, not only because oil prices tend to be volatile and can generate cashflow shocks, but also because the country's proven reserves are modest in size and hard to extract owing to the geological complexity of ageing fields. Annual oil production declined steadily between 2001 and 2007, and output in 2008 is expected to be around 20% lower than the peak reached in 2000. The authorities are hopeful that the decline in output will be partially reversed over the medium term, though production is expected to become increasingly dependent on the use of costly enhanced oil recovery (EOR) schemes.