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Fitch lowers Oman’s rating on weak oil, virus impact

19 Aug 2020

Global ratings agency Fitch Ratings has lowered Oman’s long-term foreign-currency issuer default rating (IDR) to ‘BB-‘ from ‘BB’ and has kept its outlook on Oman rating ‘negative’.

The rating downgrade and negative outlook reflect the continued erosion of Oman’s fiscal and external balance sheets, which have accelerated amid low oil prices and the coronavirus shock, despite some progress on underlying fiscal consolidation, Fitch said in a statement.

The ratings agency now forecasts Oman’s fiscal deficit at nearly 20 per cent of the GDP in 2020 (RO4.8bn), from about 8 per cent of the GDP in 2019, as a 32 per cent drop in revenue driven by lower oil prices and production more than offsets an 8 per cent cut in spending.

According to Fitch, Oman’s oil export price is likely to average around US$45 per barrel in 2020, above its Brent price assumption of US$35 for the year but still well below Oman’s estimated fiscal break-even oil price of over US$70 per barrel. The ratings agency, however, believes that a US$10 per barrel increase in annual average oil prices could narrow the sultanate’s deficit by about 5 per cent of the GDP.

‘We expect fiscal reforms and higher oil prices to narrow the fiscal deficit to the mid-single digits by 2022 but there are considerable downside risks to this forecast. We expect that Oman’s fiscal and external balance sheets will likely continue to weaken, albeit at a slower pace, beyond 2020,’ Fitch said.

According to Fitch, the coming three years will be a critical test of the funding flexibility that Oman has displayed in the past, and a steep maturity schedule will keep Oman’s funding needs largely beyond that, even as the fiscal deficit is reined in.

Fitch noted that the sultanate’s government is making progress on its National Programme for Fiscal Balance (Tawazun), which targets the primary fiscal balance by 2024. ‘It has identified fiscal measures with a potential impact of RO3.5bn. Despite significant implementation risks, our forecasts assume that most of these measures are implemented, which would nearly close the primary deficit,’ the global ratings agency said.

Fitch also said that Oman’s hydrocarbon sector could deliver sizeable improvements to the public finances in the medium term. According to Oman’s Ministry of Oil and Gas, the sultanate has the capacity to produce crude oil and condensates of around 1.1mn barrels per day (bpd) [from 0.97mn bpd in 2019]; but under Oman’s voluntary commitment to OPEC, production of crude oil and condensate is likely to remain at about 0.91mn bpd until April 2022.

‘We estimate that raising oil production to capacity would narrow the fiscal deficit by more than 3 per cent of the GDP. Oman’s gas projects could deliver further improvements to its public finances,’ Fitch added.
 

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