Muscat: Oman’s long term foreign and local currency issuer default rating (IDR) has been placed at ‘BBB’ with a stable outlook, thanks to low public and external debt and high per capital income, according to Fitch Ratings.
Fitch has also published the country ceiling of 'A-', and short-term foreign and local currency IDRs of 'F2'.
The Sultanate’s ratings reflect its low public and external debt, strong balance sheet and high per capita income, balanced against its double-digit fiscal deficit and a very hydrocarbon-dependent budget and economy.
Fitch forecasts the government's net domestic assets (mostly bank deposits minus local debt) will remain above 10 per cent of GDP. At those levels, the government would still have a stronger balance sheet than most countries in the 'BBB' rating category.
The earlier sharp fall in oil and gas prices has hit Oman hard. “We expect hydrocarbon revenues to fall by 22 per cent in 2016, after a 41 per cent drop in 2015, but they will still make up around 70 per cent of government revenue. We expect current spending to fall by 5 per cent in 2016, after a 15 per cent cut in 2015, mostly due to a drop in subsidy expenditure as a result of lower oil prices and the removal of subsidies,” said the Fitch statement.
Deficit to fall
“We expect deficits to decline as oil prices recover and fiscal measures take effect, to 14.4 per cent of GDP in 2017 and 6.4 per cent of GDP in 2018. Electricity tariffs will be hiked for large consumers in 2017, further lowering the subsidy bill. Increases to various fees and levies, removal of corporate tax exemptions and an increase in corporate tax rates could boost non-oil revenue by 1 per cent of GDP in 2017.”
In 2018, the introduction of VAT could add around 1 per cent of GDP, an increase in oil prices by $10 per barrel could add 5 per cent of GDP, and more gas production could add another 1 per cent of GDP to revenue in 2018. Risks to this fiscal adjustment are skewed to the downside, with oil prices expected to stay well below our estimates of fiscal breakeven levels for Oman
The government is using its reserve funds for deficit financing, having built them up in years of higher oil prices. In 2016, the government made a $4 billion withdrawal from the State General Reserve Fund (SGRF), the value of which peaked at $25 billion or 36 per cent of GDP in 2015 and which is mostly invested abroad. “We expect the value of the SGRF to decline to 23.3 per cent of GDP by 2018.” The government also took a $800 million loan from its Infrastructure Projects Financing Account (IPFA), following withdrawals of around $7.8 billion since 2014.
Fitch said that the government is planning to meet two-thirds of its financing need through external debt issuance, and the remainder through reserve draw-downs. “We assume a further $2.5 billion of international issuance by the government in 2017-18, accompanied by $1.5 billion of withdrawals from the SGRF. In 2016, the government issued $4.5 billion in bonds and sukuk, and received $2 billion in export financing, and Petroleum Development Oman has borrowed $4 billion to finance the government's contribution to its expenditures. The government has also built up arrears to contractors and postponed recapitalisation payments to pension funds.”
Fitch forecasts real GDP will grow 3 per cent in 2016, mainly due to strong increases in oil and gas production. “We assume hydrocarbon production will be flat in 2017 but will increase in 2018 as the Khazzan gas field comes on stream, potentially adding up to 25 per cent or $5 billion to gas production. However, we expect non-oil activity growth to slow to 2.5 per cent in 2016 and 2 per cent in 2017, with risks tilted to the downside.”
Fitch expects bank credit to the private sector to grow by nearly 11 per cent this year, well in excess of deposit growth.