Oman Downgraded To 'BB-' On Higher External Risks And Indebtedness; Outlook Negative

  • The sharp drop in oil prices in 2020 will intensify Oman's fiscal and external pressures, leading to a faster deterioration in the government's balance sheet, which has considerably weaker buffers than during the 2014-2015 oil price shock.
  • Large upcoming external debt maturities in 2021-2022, along with high fiscal deficits, could raise funding pressures and borrowing costs.
  • We are therefore lowering our long-term sovereign credit rating on Oman to 'BB-' from 'BB' and affirming our 'B' short-term rating.
  • The negative outlook reflects the risk that despite the government's medium-term fiscal consolidation plans, implementation could be insufficient to stem the rise in government debt, barring a substantial improvement in the external environment.

Rating Action

On March 26, 2020, S&P Global Ratings lowered its long-term foreign and local currency sovereign ratings on Oman to 'BB-' from 'BB'. The outlook is negative. We also affirmed our short-term ratings at 'B'.
In addition, we revised our transfer and convertibility assessment on Oman to 'BB' from 'BB+'.
As a "sovereign rating" (as defined in EU CRA Regulation 1060/2009 "EU CRA Regulation"), the ratings on Oman are subject to certain publication restrictions set out in Art 8a of the EU CRA Regulation, including publication in accordance with a pre-established calendar (see "Calendar Of 2020 EMEA Sovereign, Regional, And Local Government Rating Publication Dates," published Dec. 20, 2019, on RatingsDirect). Under the EU CRA Regulation, deviations from the announced calendar are allowed only in limited circumstances and must be accompanied by a detailed explanation of the reasons for the deviation. In this case, the reason for the deviation is the material and sudden changes in credit conditions, i.e. a sharp drop in oil prices and downward revisions to S&P Global Ratings' hydrocarbon price assumptions for 2020 and 2021. The next scheduled rating publication on the sovereign rating on Oman will be on April 17, 2020.


Downside scenario
We could lower our ratings on Oman over the next 12 months if the government were unable to moderate the continued rise in net debt levels or if contingent liabilities were to materialize. We could also consider a negative rating action if we lowered our assessment of Oman's institutional capability to manage its public finances and achieve balanced economic growth.
Upside scenario
We could revise the outlook to stable if Oman is able to sustainably reduce government debt accumulation, for example through comprehensive fiscal adjustment measures, or if growth prospects improved significantly more than expected.


On March 19, 2020, S&P Global Ratings materially lowered its oil price assumptions for 2020. This follows an earlier significant downward revision of its price assumptions on March 9. Prices for crude oil in spot and futures markets are more than 55% lower than levels observed during the summer of 2019 when prices increased due to rising geopolitical tensions. When we most recently reviewed Oman (see "Oman Ratings Affirmed At 'BB/B'; Outlook Negative," published Oct. 18, 2019), we expected Brent oil prices to average $60 per barrel (/bbl) in 2020 and to gradually decline to $55/bbl from 2021. We now assume an average Brent oil price of $30/bbl in 2020, $50/bbl in 2021, and $55/bbl from 2022 (see "S&P Global Ratings Cuts WTI And Brent Crude Oil Price Assumptions Amid Continued Near-Term Pressure," published March 19, 2020).
Oil prices plummeted following OPEC's failure to agree on further production cuts during meetings on March 6. OPEC+ did not agree to a proposed reduction of 1.5 million barrels per day (mmbbl/d) to address an expected significant drop in global demand partly due to the spread of COVID-19. The proposed reduction was in addition to the current 2.1 mmbbl/d production decrease set to expire at the end of March. Shortly after the meetings, Saudi Arabia announced that it was immediately slashing its official selling price and would increase its production to over 12 mmbbl/d in April after the current production cut expires. These actions possibly signal that, despite a collapse in global demand and shrinking physical markets, Russia and OPEC have engaged in a price war to try and maintain market share and relevance. Oil markets are now heading into a period of a severe supply-demand imbalance in second-quarter 2020. In line with our economic outlook (see "Economic Research: COVID-19 Macroeconomic Update: The Global Recession Is Here And Now," published March 17, 2020), we anticipate a recovery in both GDP and oil demand through second-half 2020 and into 2021 as the most severe effects from the COVID-19 pandemic moderate.
Given the concentrated nature of Oman's economy--hydrocarbon products comprise about 35% of GDP, 60% of current account receipts, and 75% of fiscal receipts--the country will face a terms of trade shock from lower oil prices and has limited fiscal space to adjust gradually.
The government has traditionally taken a very cautious approach to fiscal reforms, aiming to achieve a phased reduction in deficits while maintaining socioeconomic stability. As a result, Oman has turned from a net government asset position of 60% of GDP in 2015 to a net debt position estimated at 3.9% in 2019, while accumulating external debt rapidly. Total debt of state-owned enterprises is also large at about 30% of GDP as of 2019, with more than two-thirds denominated in foreign currency (largely project finance and supported by project cash flows). We currently view Oman's contingent liabilities as limited due to the relatively strong stand-alone credit profiles of rated entities (Oman Electricity Transmission Co.) and expected privatizations.
We understand that the government under Oman's new ruler, Sultan Haitham bin Tariq, has formulated a comprehensive medium-term fiscal plan, and will implement several contingency measures this year in response to lower oil prices, including 5% cuts to spending across all departments. Taking into account planned savings from these reforms of Omani rial 1 billion and exceptional privatization proceeds, we expect a still-high change in net government debt of 11.7% of GDP in 2020. We expect the fiscal deficit will average almost 8% of GDP over 2021-2023.
The large funding needs will be predominantly met via the issuance of foreign-currency debt, with the remainder financed by asset drawdowns and domestic debt. As a result, we expect the country's external debt, adjusted for liquid external assets, will rise to 67% of current account receipts in 2023, from about 20% in 2018.
Oman's debt structure and servicing profile is vulnerable to a sharp decline in foreign investor sentiment at a time of substantial global economic uncertainty partly triggered by the COVID-19 pandemic. The share of foreign-currency-denominated debt, largely held by nonresidents, was high at above 80% of total debt. We expect funding costs will rise despite monetary easing in the U.S., since portfolio flows to emerging markets could dry up and Oman's macro fundamentals are under pressure from external developments. A weaker global financial environment could also delay the privatizations of companies such as Muscat Electricity Distribution Co. that was expected this year, and OQ Group (formerly Oman Oil Co. and ORPIC Group), which was initially slated for 2022.
Refinancing risks will rise as disproportionately large government external debt maturities loom in 2021 ($4.3 billion) and 2022 ($6.4 billion). This could add significant pressure to foreign-exchange reserves if not rolled over or refinanced. The authorities had transferred funds to the Petroleum Reserve Fund (PRF) for future debt repayment. The PRF held assets of about $2.9 billion at year-end 2019, which form part of the central bank's gross foreign-exchange reserves. If market conditions do not improve, the government could draw on these funds earlier to meet its external debt maturity of $1.2 billion in 2020.
We project that the significant terms of trade shock in Oman's key export goods will cause the current account balance to deteriorate to 13.3% of GDP in 2020, up from 7.5% at the time of our last publication. In line with our expectations for a modest rebound in oil prices, we project the current account deficit will tighten in the latter part of the forecast, but will remain elevated throughout, leaving Oman potentially exposed to any sudden stop in external financing.
The economic environment will likely remain challenging, and we expect a sharp 12% reduction in GDP per capita to $15,000 in 2020. Near-term pressure on the nonoil sector will arise from a slowdown in global tourism because of COVID-19, weaker consumer and investor sentiment, and planned delays in government capital expenditure. Higher oil production following an end to the OPEC+ agreement to curb production will be the key driver of real GDP growth, forecast at 1.2% in 2020. We expect a recovery in domestic demand and tourism from 2021 will support real growth averaging 2.1% annually over the next three years.
The 'BB-' ratings on Oman are supported by still-strong fiscal buffers, albeit on a declining trajectory, with liquid government assets estimated at 54% of GDP in 2019. The ratings also reflect our view that timely support from neighboring countries in the Gulf Cooperation Council would be forthcoming, if needed; for example, in the event of a significant deterioration in the external reserves that support the Omani rial's peg to the U.S. dollar.

Key Statistics

Table 1

Oman Selected Indicators
Economic indicators (%)
Nominal GDP (bil. LC)31262527303026293133
Nominal GDP (bil. $)81696571797968758185
GDP per capita (000s $)20.216.614.815.517.
Real GDP growth1.
Real GDP per capita growth(2.0)0.5(1.0)(2.9)
Real investment growth2.4(1.2)16.5(4.3)(5.1)1.2(3.5)
Real exports growth0.1(0.9)(1.9)(0.7)
Unemployment rate3.
External indicators (%)
Current account balance/GDP5.2(15.9)(19.1)(15.6)(5.5)(6.0)(13.3)(10.4)(6.7)(6.8)
Current account balance/CARs7.3(27.5)(39.2)(28.9)(9.2)(10.1)(24.2)(18.9)(11.8)(12.1)
Trade balance/GDP31.813.29.612.422.822.316.618.621.721.8
Net FDI/GDP(0.1)(3.6)
Net portfolio equity inflow/GDP(1.3)
Gross external financing needs/CARs plus usable reserves94.7128.1165.2142.9126.5121.6141.8140.2134.0131.8
Narrow net external debt/CARs(80.9)(78.2)(17.0)22.619.934.059.365.463.766.8
Narrow net external debt/CAPs(87.3)(61.3)(12.2)17.618.230.847.855.057.059.6
Net external liabilities/CARs(73.1)(74.0)(20.7)18.218.533.170.383.287.898.0
Net external liabilities/CAPs(78.8)(58.1)(14.8)14.116.930.156.670.078.587.5
Short-term external debt by remaining maturity/CARs16.825.545.339.532.732.
Usable reserves/CAPs (months)
Usable reserves (mil. $)7,7363,7306,7735,7757,9686,5095,8385,4736,5557,656
Fiscal indicators (general government; %)
Change in net debt/GDP4.622.334.616.24.96.311.
Primary balance/GDP(0.7)(17.3)(20.5)(12.5)(6.7)(6.7)(10.5)(5.7)(3.2)(2.7)
Net debt/GDP(68.6)(57.9)(26.3)(8.2)(2.4)3.916.224.229.634.9
Liquid assets/GDP73.573.459.853.053.453.961.054.550.047.0
Monetary indicators (%)
CPI growth1.
GDP deflator growth1.2(18.4)(9.6)7.410.3(1.2)(14.5)
Exchange rate, year-end (LC/$)0.380.380.380.380.380.380.380.380.380.38
Banks' claims on resident non-gov't sector growth14.812.
Banks' claims on resident non-gov't sector/GDP57.175.086.485.681.080.091.588.286.887.6
Foreign currency share of claims by banks on residents12.310.211.712.813.316.713.
Foreign currency share of residents' bank deposits11.612.411.711.115.112.315.
Real effective exchange rate growth1.310.70.80.1(2.6)1.6N/AN/AN/AN/A
Sources: National Centre for Statistics Information, Ministry of Finance, and Central Bank of Oman (economic indicators); Central Bank of Oman (external indicators); Ministry of Finance and IMF (fiscal indicators); IMF, Central Bank of Oman, and Brugel (monetary indicators).
Adjustments: Usable reserves adjusted by subtracting monetary base and foreign assets placed by nonresidents at the Central Bank of Oman from reported international reserves. General government revenue adjusted by including investment incomes from sovereign wealth funds. Liquid assets include the liquid assets of the State General Reserve Fund, Oman Investment Fund, and public pension funds.
Definitions: Savings is defined as investment plus the current account surplus (deficit). Investment is defined as expenditure on capital goods, including plant, equipment, and housing, plus the change in inventories. Banks are other depository corporations other than the central bank, whose liabilities are included in the national definition of broad money. Gross external financing needs are defined as current account payments plus short-term external debt at the end of the prior year plus nonresident deposits at the end of the prior year plus long-term external debt maturing within the year. Narrow net external debt is defined as the stock of foreign and local currency public- and private- sector borrowings from nonresidents minus official reserves minus public-sector liquid assets held by nonresidents minus financial-sector loans to, deposits with, or investments in nonresident entities. A negative number indicates net external lending. N/A--Not applicable. LC--Local currency. CARs--Current account receipts. FDI--Foreign direct investment. CAPs--Current account payments. e--Estimate. f--Forecast. The data and ratios above result from S&P Global Ratings' own calculations, drawing on national as well as international sources, reflecting S&P Global Ratings' independent view on the timeliness, coverage, accuracy, credibility, and usability of available information.

Ratings Score Snapshot

Table 2

Oman Ratings Score Snapshot
Key rating factorsScoreExplanation
Institutional assessment4Reduced predictability of future policy responses because of centralized decision-making. Succession process was succesfully tested in 2020. However, there is a moderate risk of challenges to political institutions resulting from the highly centralized decision-making process. Some shortcomings in data dissemination, in terms of public availability and timeliness.
Economic assessment5Based on GDP per capita (US$) and growth trends as per Selected Indicators in Table 1.
Below average economic growth, which is well below sovereigns in the same GDP category. Based on real GDP per capita growth as per Selected Indicators in Table 1.
Concentrated economy, with hydrocarbon activities accounting for more than 30% of nominal GDP.
External assessment5Based on narrow net external debt and gross external financing needs/ (current account receipts+ useable reserves) as per Selected Indicators in Table 1.
The country is exposed to significant volatility in terms of trade, due to its dependence on hydrocarbons.
Fiscal assessment: flexibility and performance6Based on the change in net general government debt (% of GDP) as per Selected Indicators in Table 1.
The government has large liquid financial assets. Based on liquid assets/GDP as per Selected Indicators in Table 1.
The sovereign government has a volatile revenue base, since oil and gas combined account for about 70% of revenue.
Fiscal assessment: debt burden4Based on net general government debt (% of GDP) and general government interest expenditures (% of general government revenues) as per Selected Indicators in Table 1.
About 80% of gross government debt is denominated in foreign currency.
Nonresidents hold about 80% of government commercial debt.
Monetary assessment4The exchange rate regime is a conventional pegged arrangement. Oman has limited monetary policy flexibility, given the Omani rial's peg to the U.S. dollar and the underdeveloped local currency domestic bond markets. Consumer price index as per Selected Indicators in Table 1. The central bank has the ability to act as a lender of last resort for the financial system.
Indicative ratingb+As per Table 1 of "Sovereign Rating Methodology."
Notches of supplemental adjustments and flexibility1Potential support from neighboring Gulf Cooperation Council countries is positive for creditworthiness and not fully captured in the indicative rating.
Final rating
Foreign currencyBB-
Notches of uplift0Default risks do not apply differently to foreign- and local-currency debt.
Local currencyBB-
S&P Global Ratings' analysis of sovereign creditworthiness rests on its assessment and scoring of five key rating factors: (i) institutional assessment; (ii) economic assessment; (iii) external assessment; (iv) the average of fiscal flexibility and performance, and debt burden; and (v) monetary assessment. Each of the factors is assessed on a continuum spanning from 1 (strongest) to 6 (weakest). S&P Global Ratings' "Sovereign Rating Methodology," published on Dec. 18, 2017, details how we derive and combine the scores and then derive the sovereign foreign currency rating. In accordance with S&P Global Ratings' sovereign ratings methodology, a change in score does not in all cases lead to a change in the rating, nor is a change in the rating necessarily predicated on changes in one or more of the scores. In determining the final rating the committee can make use of the flexibility afforded by §15 and §§126-128 of the rating methodology.
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