S&P Global Ratings has raised its long-term foreign and local currency sovereign credit ratings on Oman to 'BB+' from 'BB'. 

 

“We affirmed the short-term ratings at 'B'. The outlook on the long-term ratings is stable. We also revised upward our transfer and convertibility assessment to 'BBB-',” S&P said.

 

The stable outlook over the next 12 months balances the potential benefits of the government's fiscal and economic reform program against the economy's structural susceptibility to adverse oil price shocks.

 

Downside scenario

“We could lower the ratings if Oman's fiscal or external balances were to deteriorate sharply, perhaps due to government measures being insufficient to mitigate a sustained period of less favourable terms of trade,” S&P said.

 

S&P could raise the ratings if the government continues to repay external debt, resulting in further declines in external financing needs or a further material decline in government debt servicing costs. Faster-than-expected deleveraging in the state-owned enterprise sector could also support the ratings.

 

Rationale

The upgrade reflects the improved resilience of the Omani economy to external shocks on the back of continued supportive oil sector prospects along with sovereign balance sheet deleveraging and broader structural reforms.

 

Despite a slowdown in real GDP growth this year due to voluntary oil production cuts, we expect growth to average about 2% over 2023-2026. Oman achieved a fiscal surplus of 1.8% of GDP in 2022, following eight years of sometimes substantial deficits. S&P expects ongoing fiscal surpluses to be maintained and average 1.4% over the period to 2024, supported by growth in government revenues and expenditure averaging about 3% and 4% respectively. 

 

S&P Global Ratings expects Brent oil to average $83 per barrel (/bbl) in 2023 and $85/bbl in 2024 and beyond. This will underpin the government's efforts to continue utilising ongoing fiscal surpluses to repay debt. S&P estimates government debt to fall to 38% of GDP in 2023, from close to 40% in 2022.

 

It expects the government's fiscal and economic reform momentum will continue over 2023-2026.

Oman's foreign policy is likely to remain broadly neutral, with limited spillover effects on the country in the event of regional geopolitical conflicts.

 

Flexibility and performance profile 

S&P forecasts general government fiscal surpluses to average about 1% of GDP over 2023-2026. Government reform efforts and favourable oil prices should support fiscal surpluses.

 

Despite favourable terms of trade over 2023-2026, usable reserves will remain largely unchanged, partly due to government debt repayments. S&P expects Oman will maintain its currency peg, supported by its accumulated government external assets of about 35% of GDP.

 

“We forecast Oman will be in a small net general government asset position on average over 2023-2026. The average includes a reduction in gross government debt to 34% of GDP in 2026, from 39% of GDP in 2023, alongside our estimate of Omani government liquid assets being maintained at 36% of GDP on average over the period. Our estimate of liquid assets includes government deposits in the banking system and liquid assets in the OIA and the Petroleum Reserve Fund (PRF). Oman has more liquid assets than most similarly rated peers.”

 

Inflation to moderate

S&P expects inflation to moderate to 1.0% in 2023. It anticipates that the Central Bank of Oman (CBO) will follow the interest rate policy of the US Federal Reserve, given the currency peg. The pandemic had a limited effect on the asset quality of the Omani banking system. 

 

Banks restructured some of their stressed exposures as required by the CBO, which led to a modest increase in the nonperforming loan (NPL) ratio to 4.4% at the end of 2022 from 4.1% in 2021 and 2020. S&P projects NPLs will stay above 4% in 2023 and cost of risk will decrease to around 65 basis point (bps) in 2023. 

 

The real estate and construction sectors, mainly the commercial real estate sector, will likely contribute to NPL formation due to oversupply and relatively tepid demand in the Omani market.-- TradeArabia News Service