Moody’s Investors Service has downgraded the Government of Oman’s long-term issuer ratings to Baa1 from A3 and assigned a stable outlook. The rating action concludes the rating review for downgrade which Moody’s initiated on 26 February 2016.
The key driver for the rating downgrade is Moody’s view that, despite the sizable fiscal consolidation efforts undertaken by the government, a protracted period of low oil prices will negatively affect Oman’s sovereign credit profile beyond the level Moody’s anticipated in February when it downgraded the rating to A3 from A1.
The stable outlook reflects a number of strengths, which Moody’s believes will counterbalance potential downside risks and keep the credit profile compatible with a Baa1 rating over the coming years. These include low levels of government indebtedness and fiscal buffers.
Moody’s has also lowered Oman’s long-term foreign-currency bond ceiling to A3 from A2 and its long-term foreign-currency deposit ceiling to Baa1 from A3. At the same time, Moody’s lowered the short-term foreign-currency bond ceiling to Prime-2 from Prime-1, while the short-term foreign-currency deposit ceiling remains at Prime-2. Oman’s long-term local-currency country risk ceilings were lowered to A3 from A2.
The rating action also applies to Oman Sovereign Sukuk S.A.O.C, for which the backed senior unsecured rating was downgraded to Baa1 from A3.
RATIONALE FOR THE DOWNGRADE TO Baa1
The downgrade of Oman’s rating to Baa1 reflects Moody’s assessment that, despite the government’s sizable fiscal consolidation efforts, a protracted period of low oil prices will negatively affect Oman’s sovereign credit profile beyond the level anticipated in February when the rating agency downgraded the rating to A3 from A1. Moody’s now considers the implementation risks associated with the Omani government’s policy response and the funding challenges to be greater than it had initially assessed them to be.
Moody’s peer analysis indicates that the rating for the country is now better positioned at the top of the Baa rating category than at the bottom of the A category. From among the oil-exporting sovereigns Moody’s rates, Oman is one of the most vulnerable to an oil price shock. Hydrocarbon exports accounted for an average 67% of total goods exports in 2010 to 2015, while oil and gas revenues constituted 87% of total government revenues over the same period.
Despite material adjustment, Oman’s fiscal and external break-even oil prices are forecast remain one of the highest among countries in the Gulf Cooperation Council (GCC) and Commonwealth of Independent States (CIS), according to IMF estimates as of end-April 2016. Therefore, the oil price shock and a protracted period of low oil prices has a much more pronounced negative impact on Oman’s economic performance, government finances, and balance-of-payments position than it does for most other oil exporters rated by Moody’s.
In line with further fiscal consolidation measures, Moody’s expects real GDP growth to drop to 2% in 2016 from 4% in 2015, and further to 0.8% in 2017, before picking up to around 1.5% to 2% during 2018-2020. On average, the rating agency’s growth forecasts are now lower than they were in February, when Moody’s initiated the review for downgrade.
While the government has started to implement fiscal consolidation measures, Moody’s believes the challenges are significant and that the plan is unlikely to address the underlying structural issue of the high dependence of Oman’s government finances on oil revenue, which accounts for about 60% of total revenues over the forecast period. In addition, government spending will remain dominated by current spending, predominantly owing to wages and salaries.
Moody’s expects Oman’s current account balance to deteriorate further in 2016 and to register a deficit of 24% of GDP because of the fall in oil exports. Oman’s dependence on oil and gas exports will remain high, above 50% of total exports.