Oman’s economy has outperformed expectations leading to a boost in the ratings of its future outlook from stable to positive, as per a report issued by the international rating agency Moody’s this week.

The agency has subsequently fixed the rating at Ba3 (also referred to as ‘BB-‘ by other rating agencies). As per the media agency, Investopedia, Ba3 is the bond rate given to debt instruments that are generally considered speculative in nature.

From a firm commitment to reducing public debt and implementation of measures to control financial conditions as well as the economic boost led by rising oil prices, the report validates the Sultanate’s actions in restoring some financial flexibility towards the shocks of external risks and variables such as geopolitics and dropping oil prices.

The agency also stated that despite continued fluctuations in oil prices and the expectations of Moody’s of a sharp dip in oil prices to stabilise between US$50 to US$70 per barrel in the medium term, oil prices are expected to hold a buffer in the upper limit owing to political and military tensions in Europe.

Moody’s also indicated that it hoped for public debt to decrease from 63 per cent of the GDP in 2021 to less than 45 per cent of the GDP by the end of this year, before noting that the matter will enhance the government’s flexibility in absorbing any drop in oil prices.

In such an instance, the agency believes that the Sultanate would still continue to reduce its primary fiscal deficit.

Oman’s ratings may continue to improve if the government continues on its path towards sustainably enhancing public finances in the short and long terms. This includes continuing to implement measures aimed at improving financial and economic aspects that lead to reducing the risks of Oman to economic crises driven by oil market fluctuations.

Albeit, the agency does summarise that a decline in the pace of implementation of the previously issued financial control measures and the coming of additional pressures on the state’s public finances may affect the Sultanate’s ratings, especially in the event of a drop in oil prices.

Today’s rating action also applies to Oman Sovereign Sukuk S.A.O.C, a special-purpose vehicle domiciled in Oman, whose obligations, in Moody’s view, are ultimately the obligation of the Government of Oman. The entity’s backed senior unsecured ratings and its backed senior unsecured medium-term note program rating was affirmed at Ba3 and (P)Ba3, respectively.

Oman’s local currency (LC) and foreign currency (FC) country ceilings remain unchanged. The LC country ceiling at Ba1, two notches above the sovereign issuer rating, incorporates the economy’s heavy reliance on a single revenue source and a track record of high external imbalances, partly mitigated by predictable institutions and moderate political risk.

The FC country ceiling at Ba2, one notch below the LC ceiling, reflects relatively modest transfer and convertibility risks, supported by the sovereign’s robust foreign-currency buffers, set against Oman’s track record of frail, albeit improving, fiscal policy effectiveness and its high level of external indebtedness.

A surge in oil prices since 2020 has generated a large revenue windfall for Oman, turning its fiscal deficits in the past, averaging 9.6 per cent of GDP during 2014-21, into a material surplus. Based on the assumption that oil prices average US$105 per barrel in 2022, Moody’s estimates that Oman’s full-year fiscal surplus will be close to 6 per cent of GDP this year, offering the government an opportunity to reverse some of the balance sheet deterioration it has sustained since 2015.

The government has already used some of the revenue windfalls, in addition to its financial reserves accumulated in the Petroleum Reserve Fund, to pay down outstanding debt, reducing the nominal level by US$6.5 billion (or 7.5 per cent of 2021 GDP) between December 2021 and August 2022.

This net debt reduction balances US$4.5 billion of new borrowing in the early part of the year against the repayment of US$9.3 billion of loans and bonds maturing in 2022 (US$2.2 billion of which could have been repaid in 2023 at the borrower’s discretion) and the pre-payment of US$1.7 billion of debt maturing in 2023 or later, including through a US$700 million Eurobond buy-back completed in July.

Based on the expectation of no further net borrowing later this year, consistent with the projected fiscal surplus and no significant debt maturities, Moody’s forecasts that Oman’s government debt will decline to less than 45 per cent of GDP (119 per cent of revenue) by the end of the year from 63 per cent of GDP (186 per cent of revenue) in 2021.

This reduction in the debt burden is below the level at the end of 2019 (52 per cent of GDP), more than fully reversing Oman’s loss of fiscal space sustained during 2020 and increasing the sovereign’s resilience ahead of the potential next oil price shock.