S&P downgrades outlook for Oman to ‘negative’

Ratings agency S&P has downgraded its outlook for Oman from stable to negative, it said in its latest report.

S&P expects Oman’s fiscal deficit to “significantly” widen to around 20 per cent of GDP in 2016, compared with its earlier estimate of 13 per cent of GDP.

However, the sultanate’s net fiscal and external asset positions continue to support the ratings on Oman at the current level, it added.

Hence, it affirmed the ‘BBB-/A-3’ long- and short-term foreign and local currency sovereign credit ratings.

“The outlook revision reflects that Oman’s fiscal consolidation could take longer than we expect,” the agency said.

“We meanwhile assume that government financing needs will largely be funded externally due to the sultanate’s narrow domestic capital markets.

“As a result, the economy’s external debt could exceed its liquid external assets by more than we anticipate, thereby limiting buffers to offset external pressures,” it added.

In 2015, Oman’s economy posted close to 6 per cent real GDP growth, supported by increased investment in the oil sector with new technologies that helped increase oil production to reach 1 million barrels per day.

However, continued decline in oil prices through the second half of 2015 and the first half of 2016 has resulted in lower export and fiscal receipts.

The government’s oil revenues fell by about 34 per cent in 2015 and 12 per cent in 2016.

However, government spending is relatively high and import levels have also remained at the same levels (as before the oil price drop).

“We expect the current account deficit to reach double-digit levels as a percentage of GDP for most of the period to 2019. We expect these current account deficits to be largely financed by a sharp increase in government external debt,” the report stated.

Looking ahead, S&P estimates that the government’s net asset position will average about 20 per cent of GDP in 2016-2019, reduced from 53 per cent of GDP in 2015, and falling to about 1 per cent by 2019.

“We estimate trend growth in real GDP per capita averaging close to negative 2 per cent over 2016-2019, which is well below that in most economies at similar levels of development,” the report said.

“Our GDP per capita estimate for 2016 is $15,300, which we expect will recover only slowly to about $17,000 in 2019, compared with $20,600 on average in 2011-2014, largely due to weak real and GDP deflator growth over that period.”

Oman’s economic performance remains vulnerable to energy prices while the volume of oil production is likely to stagnate at around current levels.

“We could consider lowering the ratings if Oman’s net external position deteriorated more quickly than we currently forecast, perhaps through wider fiscal deficits than we expect,” S&P said.

“We could also lower the ratings if Oman’s debt-financing risks rose significantly through a combination of substantially higher interest costs as a proportion of revenues and a sharp increase in the share of foreign currency and nonresident holdings of total government debt.

“We could also lower the ratings if we saw increasing signs of succession risks that were likely to disrupt governance standards or the functioning of institutions.”

The agency added that Oman’s outlook could be revised to stable if the foundations of economic growth strengthened or if its forecasts for the country’s fiscal and external positions improved substantially.