Oman expects a ratings rebound but oil’s grip is strong

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• Nation below investment grade
• Economic diversification slow
• Non-oil growth challenges

Oman is on course to regain its investment-grade rating but analysts say challenges remain in reducing the economy’s dependence on hydrocarbons.

Standard Chartered has forecast that Oman’s continued improvements in fiscal performance, de-leveraging (lowering debt) and commitment to reform could see the sultanate’s rating rebound “as early as 2024”.

The bank’s Global Focus 2024 report said policymaking in Oman will likely focus on pro-growth structural reforms to improve the business environment, attract foreign investment and execute more IPOs.

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Hussain Al-Yafai, CEO of Standard Chartered Oman, said he expects the sultanate to demonstrate resilience in the face of global uncertainties and project a “positive credit rating trajectory” this year.

Oman’s country ratings were raised to BB+ last year, one notch below investment grade.

It does not have the hydrocarbon reserves of its fellow GCC members to the north and is one of only two GCC states not to have an investment grade rating – the other is Bahrain. 

An investment grade rating means lower borrowing costs and puts the country on the radar of mainstream international investors.

Last week, the Oman Investment Authority launched a OMR2 billion ($5.2 billion) fund to stimulate investment in small and medium-sized local companies. 

Standard Chartered said Oman’s non-oil sector growth is expected to pick up to 2.5 percent, driven by tourism, manufacturing and trade. 

But analysts told AGBI that challenges persist in Oman, which has a population of nearly 4.7 million, primarily related to non-oil revenues which make up less than a third of the total.

The 2024 budget projects oil and gas revenues at OMR7.5 billion, representing 68 percent of total revenues, with oil alone contributing nearly OMR6 billion.

Vijay Valecha, chief investment officer at Century Financial, said hydrocarbon dependency and workforce skills gaps need to be addressed. 

“Despite ongoing endeavours to diversify income sources and economic sectors, the nation continues to grapple with a substantial reliance on oil revenue… Oman recognises the necessity to explore alternative revenue streams beyond hydrocarbons,” he added.

Valecha added that the 2024 budget for Oman is based on an average oil price of $60 per barrel – a cautious approach designed to secure financing needs in the face of potential declines in oil prices. 

Ali Metwally, director of economic intelligence at ITI consulting, said the government’s efforts to diversify the economy and promote private sector growth are set to “progress slowly”.

“The ongoing dependence on oil poses a risk to sustained expansion,” he said, adding that the government’s strategy involves delaying fiscal rationalisation until 2026 to avoid social unrest by postponing subsidy and public sector job cuts.

Metwally said that despite a projected budget surplus of 1.9 percent of GDP in 2024, Oman faces challenges, including a high external debt-to-GDP ratio compared to GCC neighbours. 

“The current account surplus is expected to decline, influenced by adjusted oil price forecasts and the impact of voluntary production cuts.”

In its latest Article IV Consultation with Oman, published on Tuesday, the International Monetary Fund projected real GDP growth of 1.4 percent this year, increasing to 2.9 percent and 3.5 percent over the next two years.

It said it welcomed the progress on the reform agenda under Oman Vision 2040 and its goals to promote private sector-led growth. 

Valecha and Metwally see long-term potential in Oman’s ambitious green hydrogen development plan in driving non-oil growth but both suggested that progress might be slow. 

Oman aims to produce at least 1 million metric tons of hydrogen annually by 2030, escalating to 7.5 million metric tons by 2050. Foreign direct investment, totalling over $38 billion, have so far been secured for this.

Tourism is also a big focus, with expected investments of around OMR20 billion, with up to 89 percent coming from the private sector.