S&P lifts Oman’s credit rating on oil windfall and fiscal reforms

IMAGO/Bernd Elmenthaler via Reuters

• The sultanate is now rated BB, with a stable outlook, by S&P
• Ratings agency pointed to Muscat’s steps to reduce sovereign debt
• Oman predicted to record “small” surplus in 2023

Oman’s efforts to reduce sovereign debt and reliance on hydrocarbons have strengthened its fiscal position, said the S&P agency as it raised the country’s long-term credit rating. 

On Monday S&P raised Oman to BB from BB- and set its outlook as “stable”. In the accompanying note, the ratings agency said Oman’s fiscal and external positions were “benefiting from government reforms and higher oil prices”.

It added: “In addition to rebuilding fiscal buffers on the back of windfall oil revenue, the Omani government has continued to reduce the budget’s reliance on oil receipts, in line with its medium-term fiscal plan to 2025. 

“We expect fiscal reforms to continue, including the possible introduction of personal income tax on high earners and measures to increase value-added tax receipts.”

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A “significant” improvement is expected in Oman’s external balance sheet this year, according to S&P, and the government is likely to return to a “small” net asset position in 2023, having grappled with a fiscal deficit in recent years. 

Oman’s economy – the second smallest of the GCC states above Bahrain – still depends significantly on the oil sector, which accounts for nearly 30 percent of gross domestic product, 60 percent of goods exports and three-quarters of government fiscal receipts. This weighs on its economic resilience and increases vulnerability to oil price shocks, according to S&P. 

However, there are indications that the government has been accelerating efforts to reduce the impact of low oil prices on its economy. Since last year, Oman has been using the windfall revenue from high oil prices to reduce debt. Earlier this year, the country engaged in several “liability management exercises”, including a voluntary buyback of $700 million in Eurobonds. 

S&P forecasts government debt will decline to $46.6 billion – 42 percent of GDP – by the end of 2022, from $54.7 billion as of year-end 2021. The International Monetary Fund has made a similar prediction, suggesting Oman’s government debt will fall to 44 percent of GDP this year. 

Oman recorded a state budget surplus of OR1.123 billion ($2.92 billion) in the nine months to the end of September, and a 43.4 percent year-on-year increase in public revenue to OR10.6 billion, the finance ministry said on November 8. 

This compared to a deficit of OR1.03 billion in the same period of 2021, with the turnaround mainly attributed to higher oil prices.

S&P classified Oman’s outlook as stable, but added that it views its government-related-entity debt stock (related to indirectly state-owned bodies) as “elevated and presenting a moderate contingent liability for the government”.

The agency added: “We could lower the rating over the next 12 months if fiscal reform implementation slows, or less favourable terms of trade result in larger fiscal deficits or a worse external position than we currently expect.

“We could raise the ratings over the next 12 months if ongoing reforms further strengthen Oman’s fiscal position, for instance, due to a continued reduction in government debt or faster-than-expected deleveraging in the state-owned enterprise sector.”

As well as moving to diversify its domestic economy, Oman is ramping up overseas investment to strengthen its position via sovereign wealth fund the Oman Investment Authority. 

Earlier this year, the OIA was divided into two units overseeing local and foreign assets, with its overseas portfolio intended to focus on “achieving the greatest returns for future generations”, the investor said in its annual review this month. Total OIA assets reached $41.5 billion in 2021.