Muscat – Supported by favourable oil prices and the government’s restrained spending, Oman’s debt metrics have shown further improvement this year, according to Moody’s Investor Service.

Moody’s estimates Oman’s fiscal balance to maintain a robust surplus of around 3.5% of GDP in 2023, following a surplus of 7.5% in 2022, the highest in a decade, and a deficit of 3.1% in 2021.

‘Oman’s fiscal and external sector metrics continued to benefit from supportive oil prices during 2023. While most of the fiscal improvement during 2022-23 was a result of higher hydrocarbon revenue, the government’s spending restraint and the value-added tax introduced in April 2021 contributed to maximising the fiscal windfall,’ Moody’s said in its rating action statement on Friday.

The rating agency pointed out that the increase in Oman’s non-interest expenditure, excluding spending related to oil and gas production during 2022-2023, was broadly offset by the increase in non-hydrocarbon revenue.

As in 2022, the government prioritised debt reduction. Moody’s estimates that during 2023, the nominal value of Oman’s outstanding government debt declined by at least 11% (equivalent to $5bn of mostly external debt) after falling by 15% (or $8.2bn) in 2022.

‘As a result, the debt burden likely declined below 38% of GDP by the end of 2023 from 40% of GDP at the end of 2022, the lowest debt-to-GDP ratio since 2016 and close to half its peak in 2020. This additional reduction in debt further increases Oman’s fiscal space and its fiscal resilience against potential future shocks,’ the rating agency said.

In August, the Ministry of Finance had announced that Oman’s safe debt limit has been estimated at 30% of GDP, enabling the government to meet debt obligations and sustain economic growth.

Moody’s believes that the government’s adherence to fiscal prudence and its prioritisation of debt repayments during the period of supportive oil prices in 2022-23 increases the likelihood that the improvements in debt metrics will be sustained in the medium-term even if oil prices continue to moderate in the next few years.

The rating agency assumes that oil prices will average $80-85 per barrel in 2024-25 before declining gradually to the medium-term fundamental range of $55-75 per barrel. Under these baseline assumptions, Moody’s projects Oman’s government debt burden to decline to around 35% of GDP in the next three years.

On the external side, Moody’s estimates that Oman’s current account balance remained in surplus during 2023 (around $2bn or 2% of GDP), following a surplus of 5% of GDP in 2022.

‘This has allowed the government to pay down $4bn of its external debt without causing a significant reduction in central bank foreign-currency reserves, which declined to $16.1bn at the end of September 2023 from $17.6bn at the end of 2022,’ the agency said.

Under its baseline oil price scenario, Moody’s expects Oman’s current account to remain in a small surplus during 2024-25 before returning to a small deficit in 2026 due to lower oil prices.

Oil prices that Moody’s assumes over the next couple of years afford the government additional time to advance its structural economic reform agenda initiated in 2020, increasing the likelihood that Oman’s vulnerability to potential future declines in global oil demand and prices will be reduced to a point consistent with a higher rating level.

Furthermore, Moody’s noted that the planned development of a large green hydrogen production capacity in Oman could, if successful, contribute to mitigating the sovereign’s longer-term credit risks stemming from global carbon transition.