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Fitch affirms Oman ratings at ‘BB-’, keeps outlook negative

19 May 2021

Global credit rating agency Fitch Ratings has affirmed Oman’s long-term foreign currency issuer default rating at ‘BB-’ with a negative outlook.

Oman’s ratings, Fitch said, balance hydrocarbon dependence, large fiscal and external deficits and debt ratios against high GDP per capita and other strong structural features relative to ‘BB’ category peers.

‘Oman’s sovereign gross external asset position has weakened, but remains a source of financing flexibility for the government,’ Fitch said in a statement on Wednesday.

The negative outlook, according to Fitch, reflects risks to sustained enactment of Oman’s fiscal consolidation plans given the challenging economic context. Nonetheless, initial implementation of the sultanate’s Medium-Term Fiscal Plan has boosted prospects for debt reduction, it said.

In 2020 Oman’s budget deficit increased to 18 per cent of GDP and government debt-to-GDP ratio spiked to 79 per cent (from 60 per cent in 2019), as oil prices declined by a third and nominal GDP by 15 per cent, Fitch said.

‘The sultanate’s real GDP contracted by an estimated 5.2 per cent in 2020 owing to coronavirus-related restrictions and lower oil production linked to the OPEC+ agreement. Government debt had already been on a steep uptrend, climbing from 6 per cent of GDP in 2014, amid oil price declines and limited fiscal reforms,’ the ratings agency said. It noted that lingering pandemic impacts together with planned fiscal consolidation createing challenges for the economic recovery.

‘We forecast 2 per cent real GDP growth in 2021, owing to base effects, following an 8 per cent non-oil contraction in 2020, and higher oil output as OPEC+ cuts taper. We expect growth to strengthen in 2022, to 3.3 per cent, with higher average oil production and greater post-pandemic normalisation, before slower growth in 2023-2024 amid ongoing fiscal austerity,’ Fitch said.

 

Budget deficit to narrow

According to Fitch’s estimates, Oman’s budget deficit will narrow to 6.1 per cent of GDP in 2021, from 18.3 per cent of GDP in 2020, owing to higher oil prices and production (5 per cent of GDP impact), the formation of Energy Development Oman or EDO (4 per cent of GDP net impact for a full year), fiscal reforms, including VAT which will add 1 per cent of GDP, and 10 per cent growth in nominal GDP.

For 2022, Fitch forecasts the deficit to moderate to 5 per cent of GDP, as higher oil production offsets a renewed fall in oil prices and reforms bring additional revenue.

The current level of oil prices, Fitch said, present upside risk to the forecasts, which assume Oman oil prices will average US$55 per barrel in 2021. Oman’s 2021 state budget is based on an average oil price of US$45 per barrel for the year.

‘A US$10 per barrel change in oil price affects the budget by roughly 4 per cent of GDP. A change in production of 100,000 barrels per day (bpd) has an impact of 2 per cent of GDP. Oman produced 953,000 bpd of crude and condensate in 2020 and targets 1.14mn bpd in 2024,’ Fitch added.

Earlier in April, S&P Global Ratings affirmed its ‘B+/B’ long and short-term foreign and local currency sovereign credit ratings on Oman and maintained its stable outlook on the sultanate’s ratings.

‘We affirmed our ratings on Oman because we consider that the authorities have outlined a more solid path to reduce the historically-high fiscal deficits, backed by stronger political will to implement the related reform measures. The Omani government has embarked on a 2021-2025 fiscal plan to improve public finances and has implemented several reforms since last year,’ S&P noted in its statement issued in April.

S&P had said it expects economic and fiscal pressure on Oman to ease from this year, as the effects of the sharp drop in oil prices in 2020 and the COVID-19 pandemic abate.

 

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