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 per cent 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 per cent 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 $45 per barrel and production levels remaining unchanged from 2015. Despite spending adjustments planned to amount to about 16 per cent 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.

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