Muscat – Capital Intelligence Ratings (CI) announced on Friday that it has affirmed Oman’s long-term foreign currency rating and long-term local currency rating at ‘BB’. The sovereign’s short-term foreign currency rating and short-term local currency rating have been affirmed at ‘B’.

The outlook for the sultanate’s sovereign ratings remains ‘positive’, CI Ratings said in a statement.

‘The affirmation of the ratings and outlook reflects the significant decline in gross central government debt and CI’s expectation that fiscal and external balances will remain in surplus over the forecast period, with government and external debt returning to low levels in net terms,’ CI said.

‘The improvement in Oman’s public and external finances remains supported by still favourable oil prices and more prudent fiscal and debt management policies, including the utilisation of recent hydrocarbon windfalls to repay, prepay, and buy back expensive external debt.’

The ratings are also supported by Oman’s relatively sound banking system and CI’s expectation that financial support for the sovereign would be forthcoming from other GCC countries in the event of need, CI added.

The rating agency, however, said that Oman’s ratings are constrained by the limited diversification of the economy and significant structural budgetary weaknesses (including the vulnerability of revenues to volatile oil prices and relatively high expenditure rigidities).

The positive outlook, as per CI, indicates that the sultanate’s ratings are likely to be upgraded in the next 12 months.

‘The outlook reflects ongoing efforts to reduce central government debt to a safe threshold of 30% of GDP, as well as our assumption that the government will pursue moderate fiscal reforms to keep the budget in surplus,’ the rating agency said.

CI acknowledged that Oman’s central government budget position improved significantly in 2022, posting a surplus of 7.5% of GDP compared to a deficit of 2.8% in 2021.

It said, ‘Central government debt declined to 38.6% of GDP in the first half of 2023, from 40% at the end of 2022. This decline is due to the repayment of debt to the tune of 3.6% of GDP (of which 73.3% was external debt denominated in foreign currency).’

CI projects Oman’s central government debt to decline to 37.2% of GDP by the end of 2023. It said that the decrease in external government debt has helped to improve the debt structure and alleviate some of the pressure on the interest bill arising from tighter local and international monetary policies.

According to CI, the Omani government’s interest expense declined to 6.4% of total revenues in 2022, compared to 9.4% a year earlier, and is expected to remain at an estimated 7% over the next two years.

Moving forward, CI’s baseline scenario assumes that oil prices will remain high throughout 2023-2025, averaging $72 per barrel – exceeding Oman’s budgeted average fiscal breakeven oil price of $67 per barrel.

‘We expect the central government budget surplus to average 1.4% of GDP during this period, and central government debt to decline further to 35.9% by the end of 2024,’ CI added.

Economic growth remains ‘robust’

Oman’s economic growth remains robust, supported by high hydrocarbon production, according to CI Ratings.

The rating agency said that the sultanate’s real GDP is expected to have expanded by around 4.7% in the first quarter of 2023 and is projected to increase by an average of 3.3% in the 2023-2025 period.

‘Oman’s current growth outlook benefits from external demand for crude and condensate oil and key manufacturing goods (e.g., plastics, chemicals, base metals). Domestic demand is expected to continue to recover in 2024, in tandem with a decline in inflationary pressures and stabilizing interest rates,’ CI stated.

‘The relatively sound financial condition of the Omani banking sector benefits from good capital buffers and the current moderate stock of non-performing loans,’ the rating agency added.