Capital Intelligence (CI), the international credit rating agency, today announced that it has affirmed Oman’s Long-Term Foreign Currency and Local Currency Ratings of ‘A’ and its Short-Term Foreign and Local Currency Ratings at ‘A1’. The Outlook for Oman’s ratings remains at ‘Stable’.
Current economic performance is relatively strong, but downside risks have increased in tandem with the decline in international oil prices. The Omani economy expanded by circa 2.9% in 2014, compared to around 4.7% in 2013, supported by the growth in non hydrocarbon sectors. The economy is expected to continue its steady growth, averaging 3.3% during 2015-17, driven by growth in the trade and infrastructure sectors and supported by Gulf Cooperation Council (GCC) funded projects.
According to CI’s estimates, the public finances are currently sound overall, with government financial assets comfortably exceeding a gross government debt stock that amounts to a modest 8.6% of GDP in 2015. However, the central government budget position continued to weaken in tandem with the steep decline in oil prices, and is expected to post a growing deficit of 3.8% of GDP in 2015, compared to 1.2% of GDP in 2014. In the absence of any expenditure adjustment, lower oil prices are likely to translate into budget deficits of increasing magnitude in the coming years, with CI foreseeing deficits of about 8.5% and 7.0% of GDP in 2016 and 2017, respectively.
Oman’s external balance sheet is strong and international liquidity is currently high. The country’s net external creditor position is the counterpart to a long run of current account surpluses, which in turn are largely attributable to previous periods of high oil prices and the expansion of the liquefied natural gas (LNG) industry. According to CI’s estimates, the current account surplus is expected to drop to 1% of GDP in 2015, while the combined foreign financial assets of the official and commercial banking sectors exceeded gross external debt by around 30% of GDP in the same period. However, increasing downside risks stemming from a possibly prolonged period of low hydrocarbon prices are expected to push the current account balance into deficit in 2016-17.
The gross external debt stock is expected to remain moderate at 23.9% of current account receipts (CARs) or 24.2% of GDP in 2015, very little of which is attributable to the government. Central Bank foreign exchange reserves of USD17.0 billion (21% of GDP) in 2014 provide solid backing for the fixed exchange rate regime, as well as an adequate buffer against mild exogenous shocks.
Oman’s credit ratings are primarily constrained by the over-reliance 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 also pushed up the fiscal breakeven oil price.
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 amongst Omani 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 regarding 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 – which indicates that Oman’s credit ratings are likely to remain unchanged over the next 12 months – balances Oman’s limited indebtedness and strong international liquidity against risks emanating from oil price shocks and structural economic and institutional weaknesses. While CI expects Oman’s ratings to be capable of withstanding a downturn in oil prices this year (given low indebtedness and sizeable reserve cushions), a more prolonged period of oil prices could – in the absence of spending adjustment – result in the steady erosion of credit fundamentals and lead to a downward rating action.