The key driver for the rating downgrade is the highly negative impact of the structural shift in lower oil prices, which has continued through the opening months of 2016, on Oman’s government finances, balance-of-payments position, and economic performance.
The review for further downgrade will allow Moody’s to assess the effectiveness of the government’s policy response to a multi-year period of low oil prices. During the review, Moody’s will assess the impact of the fall in oil prices on Oman’s economic and government balance sheet strength relative to similarly rated peers.
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%, 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%. Moody’s recently revised its oil price assumptions for Brent to USD33 per barrel in 2016 and to USD38 per barrel in 2017, rising only slowly thereafter to USD48 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% of GDP in 2016 and narrow only gradually to around 13% in 2018. This is a sharp departure from surpluses of more than 5% of GDP on average between 2009 and 2013.
As a result, Moody’s expects Oman’s government debt to rise to more than 35% of GDP by year-end 2018, from only 5% 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% of GDP by 2018 from an estimated 85% in 2015. Therefore, the Omani government’s net creditor position will weaken significantly to only 19% of GDP, from 73%, respectively.
Moody’s also projects a marked deterioration of Oman’s current account. Over the past five years, hydrocarbon exports accounted for 67% of total merchandise exports and 62% of total current account receipts, and Oman’s current account posted an average surplus of 8.6% of GDP between 2010 and 2014. In contrast, in 2016, the current account deficit will reach almost 25% of GDP, down from an estimated deficit of 16% of GDP, and improve only slowly to a deficit of 16% 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% 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 year until 2018, down from a previously higher growth trend of 4.5% 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.
Moody’s recognises that even factoring in the reduced government revenues and higher government debt over the next three years, Oman’s debt metrics are likely still to be broadly in line with the A-rated median. Moreover, the Omani government has buffers in the form of funds and deposits in the banking system. Total government assets grew since 2006 and according to Moody’s estimates are equivalent to almost 85% of GDP and around nine times outstanding government debt as of 2015.
In addition, wider public sector debt is fairly low, amounting to about 11% of GDP as of 2015, and the banking system’s capitalization remains strong, thereby, in Moody’s view, limiting the risks from contingent liabilities crystallizing on the government balance sheet.
RATIONALE FOR REVIEW FOR FURTHER DOWNGRADE
Moody’s decision to place the rating on review for further downgrade reflects the uncertainty over the pace and effectiveness of the government’s policy response to challenges posed by lower oil prices to Oman’s government finances, current account, and growth. In the absence of a policy response which contained government expenditure while broadening sources of revenues, domestic and external imbalances would likely worsen beyond our current expectations.
The 2016 budget is based on an oil price of USD45 per barrel and production levels remaining unchanged from 2015. Despite spending adjustments planned to amount to about 16% lower total spending than in the 2015 budget, the lower oil price environment will lead to a sharper decline in revenues, thus leaving a wider deficit.
The deterioration of Oman’s fiscal and external accounts comes against the background of a comparatively thinner reserve cushion, when compared to other more highly rated sovereigns in the region. Official international reserve assets will provide a sufficient cushion for external debt repayment obligations due in 2016 and 2017, but the challenges will become bigger if external imbalances persist or widen further.
The review will allow Moody’s to assess the credibility and sustainability of the government’s fiscal reform and funding plans. It will assess their clarity, their scope and ambition relative to the scale of the task, the time required for them to bear fruit, and the reliance that can therefore be placed on them to sustain Oman’s credit strength. In that context, Moody’s will assess the extent to which social stability considerations could put a floor on the government’s willingness and ability to adjust government current spending and introduce revenue enhancement measures.
Moody’s will carry out this assessment both through dialogue with the government of Oman, and by comparison with similarly rated peers. The review is expected to be completed within two months.
WHAT COULD MOVE THE RATING UP/DOWN
Given the review for downgrade and the challenges posed by low oil prices an upward movement in the rating is highly unlikely. However, containment of government fiscal deficits and debt and progress in diversification of the economy and government finances away from oil would be credit-positive.
Conversely, lack of clarity on how government policy will adjust to contain the negative impact will be credit negative. The rating might be downgraded further should Moody’s conclude that government policy will result in government finances deteriorating faster than in our baseline scenario, including a significant rise in the wider public sector debt; in increased risks of contingent liabilities crystallizing on the general government’s balance sheet; in greater than expected external funding pressures for the government; or in the external payments position deteriorating faster than projected.
GDP per capita (PPP basis, US$): 43,847 (2014 Actual) (also known as Per Capita Income)
Real GDP growth (% change): 2.9% (2014 Actual) (also known as GDP Growth)
Inflation Rate (CPI, % change Dec/Dec): 1% (2014 Actual)
Gen. Gov. Financial Balance/GDP: -1.5% (2014 Actual) (also known as Fiscal Balance)
Current Account Balance/GDP: 5% (2014 Actual) (also known as External Balance)
External debt/GDP: [not available]
Level of economic development: High level of economic resilience
Default history: No default events (on bonds or loans) have been recorded since 1983.
On 23 February 2016, a rating committee was called to discuss the rating of the Oman, Government of. The main points raised during the discussion were: The issuer’s economic fundamentals, including its economic strength, have materially decreased. The issuer’s institutional strength/framework, have materially decreased. The issuer’s fiscal or financial strength, including its debt profile, has materially decreased. An analysis of this issuer, relative to its peers, indicates that a repositioning of its rating would be appropriate.
The principal methodology used in these ratings was Sovereign Bond Ratings published in December 2015. Please see the Ratings Methodologies page on www.moodys.com for a copy of this methodology.
The weighting of all rating factors is described in the methodology used in this credit rating action, if applicable.