S&P Affirms Oman Ratings at ‘BB-‘ on Favorable Oil Prices

S&P Global Ratings has affirmed its ‘BB-‘ long-term and ‘B’ short-term foreign and local currency sovereign credit ratings on Oman. The rating agency has maintained its ‘stable’ outlook on the sultanate’s ratings.

As per its new report released on Friday, S&P expects that Omani government’s fiscal reform program and favorable oil prices will support the sultanate’s fiscal and external metrics through 2023.

S&P currently expects oil prices to average US$100 per barrel for the remainder of 2022 and US$85 per barrel in 2023. Consequently, it expects that these favorable terms of trade will benefit Oman’s fiscal and balance-of-payments performance through 2023.

‘We note that the government has used windfall oil revenue to reduce debt. In the first half of 2022, Oman engaged in several liability management exercises, including a voluntary buyback of US$700 million in Eurobonds. We estimate government debt will decline to RO18.6 billion (US$48.32 billion) (45% of GDP) by year-end 2022 from RO20.8 billion (US$54 billion) (63% of GDP) at year-end 2021,’ S&P said.

Additionally, the Omani government has continued to reduce reliance on oil receipts and improve fiscal sustainability, in line with its medium-term fiscal plan to 2025, the rating agency noted.

‘We expect the government’s reform momentum will continue over 2022-2025. We expect fiscal reforms to continue, for instance with the introduction of personal income tax on high earners, which is set to kick in from 2023, and a possible increase of value-added tax (VAT) to 10%,’ it added.

The stable outlook, S&P said, balances the recent strengthening in Oman’s fiscal and balance-of-payments positions against the economy’s structural susceptibility to adverse oil price shocks at a time of heightened global economic uncertainty. Beyond the current favorable terms of trade, it expects oil prices to decline over 2023-2024, weakening Oman’s fiscal and external performance.

S&P said it could raise Oman ratings over the next 12 months if continued reforms strengthened the sultanate’s fiscal position. A further strengthening of Oman’s external position, for example, through higher accumulation of foreign currency reserves or faster deleveraging in the state-owned enterprise sector could also foster a positive rating action, it added.

The rating agency further said that it could lower the ratings over the next 12 months if fiscal reform implementation slowed, or less favorable terms-of-trade or external financing conditions resulted in larger fiscal deficits and weaker debt metrics than it currently expects.

Stronger growth

S&P expects higher oil prices and production volumes, as well as public investment spending, to be the key drivers of Oman’s stronger economic growth this year.

‘We expect Oman’s real GDP will grow by nearly 4% in 2022, up from 3% last year, largely due to increasing hydrocarbon production under the OPEC+ agreement. We assume oil production will increase to 1.135 million barrels per day in 2025, from an estimated 1.04 million barrels per day this year and 0.966 million barrels per day in 2021,’ S&P noted.

Although hydrocarbon production should drive growth this year and next, in the outer years of the forecast period S&P expects the non-oil sector to be the leading driver of growth.

‘We forecast non-oil growth averaging 2.3% over 2024-2025, relative to 1.8% in 2022. After holding back on capital expenditure during the past two years, we anticipate government and public entities investment will recover. The government announced slightly higher spending than budgeted on development projects through 2025,’ the rating agency said.

S&P estimates that Oman will achieve a fiscal surplus of about 6.9% of GDP this year, well above the budgeted deficit of 4.6% of GDP.