Capital Intelligence (CI), the international credit rating agency, announced that it has affirmed Oman’s Long-Term Foreign and Local Currency Sovereign Ratings at ‘A’ and its Short-Term Foreign and Local Currency Ratings at ‘A1’. The Outlook for the Ratings is ‘Stable’.
Oman’s ratings reflect a track record of reasonably prudent economic management, which – combined with favourable oil prices – has led to a run of budget surpluses, low levels of public debt and comparatively strong external finances. The ratings are also underpinned by the government’s substantial stock of external assets and the currently sound banking system.
Oman’s economic performance remains satisfactory. The economy expanded by about 5% for the second year in a row in 2013, supported by increased hydrocarbon production and an expansionary fiscal policy. The short-term prospects for the economy are broadly favourable, with the pace of economic growth expected to ease to an average 3.5% during 2014-16, partly due to slower growth in government spending. Inflation eased to 1.9% in 2013 and is expected to remain at a moderate 3% during 2014-16.
According to CI’s estimates, the public finances are currently sound, with the central government budget posting a surplus of around 0.9% of GDP in 2013, compared to 1.7% of GDP in 2012. The government debt stock remained modest at 7% of GDP at year end 2013 and was dwarfed by government financial assets, which were built up over the past decade or so, both for future generations and as insurance against oil or other economic shocks.
CI expects moderating oil prices and the continued growth in public spending to contribute to a narrower budget surplus in the region of 0.6% of GDP in 2014. Based on CI’s assumptions of a further decline in oil prices, and in the absence of any corrective spending measures, CI expects the budget to slip into deficit in 2015-16.
Oman’s external balance sheet is strong and international liquidity is currently high. The country’s comfortable net external creditor position is the counterpart to a long run of current account surpluses, which in turn is largely attributable to high oil prices and the expansion of the liquefied natural gas (LNG) industry. According to CI’s estimates, the current account surplus was around 9.5% of GDP in 2013, while the combined foreign financial assets of the official and commercial banking sectors probably exceeded gross external debt by around 30% of GDP at the end of the year.
The gross external debt stock is expected to remain moderate at 29.2% of current account receipts (CARs) or 20.9% of GDP in 2014, of which very little is attributable to the government. Central Bank foreign exchange reserves of USD16.6 billion (20.1% of GDP) in 2014 would provide solid backing for the fixed exchange rate regime and an adequate buffer against mild exogenous shocks.
Oman’s credit ratings are primarily constrained by the economy’s overreliance on oil and gas. The economy is highly dependent on the hydrocarbon sector which accounts for around 52% of nominal GDP, 61% of exports of goods and services and more than 85% of budget revenue. 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 comparatively expensive to extract by GCC standards, owing to the geological complexity of the ageing fields and the required investment in costly enhanced oil recovery (EOR) schemes.
Oman’s vulnerability to adverse oil sector developments is further exacerbated by the substantial growth in public expenditure over the past few years, which has been partly driven by social demands for jobs and higher living standards, and has also pushed up the fiscal breakeven oil price. Consequently, the budget position is expected to slip into deficit in 2015 and 2016.
The challenge of diversifying the economy and expanding the private sector in order to absorb the fast growing labour force (60% of nationals are under the age of 25) remains a constraining factor on Oman’s credit ratings. Current unemployment data is not available, but the unemployment rate among nationals is probably in the range of 15%-20%. The capacity of the non-hydrocarbon economy to absorb the labour force remains a concern given the initial focus of diversification policies on the state-led expansion of heavy industry – which is both capital intensive and reliant on receiving fuels at below international market prices.
The Outlook for the ratings is ‘Stable’. This means that Oman’s sovereign ratings are likely to remain unchanged over the next 12 months, provided that key metrics evolve as envisioned in CI’s baseline scenario and no other credit quality concerns arise.
The ‘Stable’ Outlook balances Oman’s strong fiscal and external positions, which provide a comfortable buffer to withstand external shocks, against risks emanating from structural and institutional weaknesses, as well as socio-economic challenges associated with a young and fast-growing population.
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