Moody’s has today lowered Oman’s foreign currency bond ceiling to A2 from Aa3 and foreign currency deposit ceiling to A3 from A1. The short-term foreign currency bond ceiling remains unchanged at Prime-1, whereas the short-term foreign-currency deposit ceiling was lowered to Prime-2 from Prime-1. Oman’s local currency country risk ceilings were lowered to A2 from Aa3.
Today’s rating action also applies to Oman Sovereign Sukuk S.A.O.C for which the backed senior unsecured rating was downgraded to A3 from A1 and placed under review for downgrade.
RATINGS RATIONALE
Primary rating driver — highly negative impact of lower oil prices on oman’s fiscal and economic strength
The fall in the price of oil, which has continued through the opening months of 2016, has left Oman with a weaker credit profile than it had prior to the shock. Oil & gas exports accounted for about two thirds of total goods exports in 2014, oil & gas revenues’ share in total government revenues was 90 per cent, and fiscal and external breakeven oil prices are amongst the highest in the region and compared to other oil-exporting sovereigns. Furthermore, Oman has a comparatively weaker asset cushion, with government financial assets amounting to only about three years of spending, according to Moody’s 2016 estimate.
Between September 2014 and September 2015, the oil price roughly halved. Since then, it has fallen a further 40 per cent. Moody’s recently revised its oil price assumptions for Brent to $33 per barrel in 2016 and to $38 per barrel in 2017, rising only slowly thereafter to $48 by 2019.
In Moody’s base case scenario, which incorporates fiscal adjustment measures as outlined in the 2016 budget, the government’s fiscal balance would deteriorate to a deficit of around 17 per cent of GDP in 2016 and narrow only gradually to around 13 per cent in 2018. This is a sharp departure from surpluses of more than 5 per cent of GDP on average between 2009 and 2013.
As a result, Moody’s expects Oman’s government debt to rise to more than 35 per cent of GDP by year-end 2018, from only 5 per cent in 2014. In addition to increased debt issuance, Moody’s expects the government of Oman to make use of its government financial assets to finance budget shortfalls. This will lower the stock of government financial assets to around 55 per cent of GDP by 2018 from an estimated 85 per cent in 2015. Therefore, the Omani government’s net creditor position will weaken significantly to only 19 per cent of GDP, from 73 per cent, respectively.
Moody’s also projects a marked deterioration of Oman’s current account. Over the past five years, hydrocarbon exports accounted for 67 per cent of total merchandise exports and 62 per cent of total current account receipts, and Oman’s current account posted an average surplus of 8.6 per cent of GDP between 2010 and 2014. In contrast, in 2016, the current account deficit will reach almost 25 per cent of GDP, down from an estimated deficit of 16 per cent of GDP, and improve only slowly to a deficit of 16 per cent by the end of 2018.
Financing of current account deficits will lead to rising external debt and declining foreign exchange reserves. Moody’s expects Oman’s external vulnerability indicator, which measures short-term external payment obligations in comparison to gross official reserves, to cross the 100 per cent critical threshold in 2017.
The oil price shock will also negatively impact Oman’s economic performance. Real GDP growth will likely remain positive, but as a result of the government’s spending adjustments Moody’s expects it will slow to an average of around 2 per cent per year until 2018, down from a previously higher growth trend of 4.5 per cent on average between 2010 and 2014. Together with the likely sharp fall in nominal GDP in 2015 and 2016 from the collapse in oil prices, this will crimp government and private sector incomes.
