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S&P: Oman ‘BB/B’ ratings affirmed, outlook stable

(Report by S&P Global)


-Oman’s twin fiscal and external deficits, although narrowing, remain elevated.

-We expect economic growth to average 3% over 2018-2021, as new crude production comes on line.

-We are affirming our ‘BB/B’ ratings on Oman.

-The outlook is stable.

Rating Action

On Nov. 9, 2018, S&P Global Ratings affirmed its ‘BB/B’ long- and short-term foreign and local currency sovereign credit ratings on Oman. The outlook is stable.

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The stable outlook incorporates our expectation that Oman will manage to finance its fiscal and external deficits over our base case forecast for 2018-2021, while economic growth steadies at around 3% per year. Should Oman’s external debtor position deteriorate beyond our current expectations, we could take a negative rating action. We could also downgrade Oman if the central bank’s reserve levels dropped significantly. We could consider raising the ratings on Oman if our forecasts for the country’s fiscal and external positions substantially improve, perhaps due to markedly slower external debt accumulation.

The government assumes medium-term fiscal targets, implying faster consolidation than we currently assume, partly via the introduction of a value-added tax (VAT) and increased excise taxes. If these more ambitious budgetary targets are met, we think that both net public borrowing and net external financing would decline beyond our current projections and, in turn, benefit Oman’s credit quality.

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The ratings are supported by Oman’s modest government net debtor position, which we estimate at around 1% of GDP as of end-2018. Since widening to more than 18% of GDP in 2016, Oman’s general government budgetary deficit is narrowing, set to reach an estimated 7.4% of GDP this year. Oman’s fiscal and external deficits have historically moved together because the country finances the budget via borrowing from abroad.

However, we think that the twin deficits may diverge, since tax revenue measures–as opposed to reducing capital spending, which is linked to imports–could support fiscal
consolidation efforts, leaving the current account with a relatively wider deficit. At this time, however, we expect modest consolidation between now and 2021, since the outcome remains highly sensitive to energy prices, crude oil production volumes, and the government’s ability to timely implement various
tax revenue measures. The ratings on Oman also reflect potential support from neighboring countries
in the Gulf Cooperation Council, for example, in the event of significant deterioration in its external reserves that support the Omani rial’s peg to the U.S. dollar.

Our view of Oman’s creditworthiness is constrained, however, by the country’s high dependence on the hydrocarbon sector, and the risk of even larger fiscal deficits predominantly financed by external borrowing, given the limited domestic market funding. Despite acting as a stable nominal anchor for the
economy, we view monetary policy flexibility as low given the currency peg.