Capital Intelligence (CI), the international credit rating agency, today announced that it has affirmed Oman’s Long-Term Foreign Currency 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 translated into 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 ratings are constrained by the high dependence on hydrocarbon exports, which renders both the economy and the public finances susceptible to oil price shocks. The ratings are also constrained by fiscal rigidities, institutional shortcomings – including limited transparency in policy making and accountability – as well as weak data disclosure with regard to government financial assets. The ratings also take into account the socio-economic challenges stemming from growing unemployment and longer-term domestic political risk factors.
Oman’s economic performance remains good. The economy is expected to have expanded by 5% for the second year in a row in 2013, supported by increased hydrocarbon production and expansionary fiscal policy. The short-term prospects for the economy are broadly favourable, with the pace of economic growth expected to ease to about 3.4% in 2014, partly reflecting slower growth in government spending compared to last year. Inflation is moderate and is expected to average at just over 3% this year and the next.
The public finances are currently sound, with the central government budget expected to have posted a surplus of around 2.5% of GDP in 2013, according to CI’s estimates, compared to 1.7% of GDP in 2012. The government debt stock is modest at about 6.9% of GDP at year end and is dwarfed by government financial assets, which have been built up over the past decade or so both for future generations and as insurance against oil or other economic shocks.
CI expects that moderating oil prices and the continued growth in public spending to contribute to narrower budget surpluses in the region of 1.2% of GDP in 2014 and 2015. However, the balance of risks is currently tilted to the downside as a significant decrease in oil prices from current levels or overrun in current expenditure could push the budget into deficit.
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. The current account surplus was around 10% of GDP in 2013, according to CI’s estimates, 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 moderate at an estimated 29% of current account receipts (CARs) or 21% of GDP in 2013, of which very little is attributable to the government. Central bank foreign exchange reserves of $15.7bn (19.2% of GDP) at end 2013 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 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 cash flow 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 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 pushed up the fiscal breakeven oil price. Consequently, the budget has become more vulnerable to a sustained decrease in oil prices, and fiscal consolidation efforts may need to be stepped up to prevent the fiscal position slipping into deficit in the medium term.
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 jobless 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 ‘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 that could pose challenges for economic policy.
The ratings could be raised if significant progress is made towards reducing the budget’s reliance on oil and gas and enhancing job creation through economic diversification. Conversely, the ratings could be lowered if the public finances deteriorate, e.g. in the event of a substantial increase in current spending or a prolonged fall in oil prices, or if social and political tensions escalate.
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