Oman heads back to investment grade territory

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It was not so long ago – fewer than ten years – that Oman enjoyed an A1 credit rating from Moody’s and an A rating from S&P. 

Despite downgrades, the sultanate was able to hang on to investment grade ratings until the end of 2018 or, in the case of Moody’s, early 2019, before dropping to BB-, well into sub-investment grade territory.

Over the past two years, there has been a remarkable turnaround, however. 

Oman has been upgraded twice by all three big international rating agencies to BB+, one notch below investment grade. In March, S&P changed its outlook to positive, signaling a strong possibility that it will take the country back into investment grade territory in the months ahead.

Oman has also won plaudits from the International Monetary Fund, which has praised the government’s fiscal prudence and its commitment to reorganising and restructuring large state-owned enterprises. 

The country was hardly alone in feeling the effects of the collapse in oil prices in 2015-2017, or the impact of the Covid pandemic, which hit oil prices again in 2020. Nor was Oman alone among GCC states in seeing its credit ratings cut. 

But its unusually high reliance on oil and gas revenues, even when compared to other hydrocarbon exporters in the region, and its apparent inability to take corrective measures, made the country particularly vulnerable.

About 55 percent of Oman’s government revenue derives from the sale of crude oil and another 15 percent from sales of gas. Those percentages vary a little from year to year but, until recently, there was no structural change towards higher non-oil revenues as has been seen in Saudi Arabia, for example.

So, what has been changing in Oman? 

In 2020, shortly after the accession of Sultan Haitham Al-Said, Oman launched Vision 2040.

The bold plan to restructure the domestic economy aims to increase the efficiency of government departments, and improve the skills and competitiveness of the Omani workforce. The vision’s objectives are ambitious, some might say unrealistic.

But they are leading to specific policy changes that are having a real impact on the economy. 

The new sultan issued a decree implementing longstanding plans to introduce value added tax. Collection of the new tax began in 2021.

More recently, government subsidies on electricity and water supplies have been cut. Last month Oman’s parliament approved a draft law to impose a personal income tax on its citizens and expatriates. 

Revenue from the proposed new income tax will be limited (local citizens will pay 5 percent of their net global income above $1m, while expatriates will be taxed on incomes exceeding $100,000).

But the measure sets a threshold that can be changed in the years ahead. It also sends a clear signal that the government will not shrink from taking bold decisions in its quest for a more sustainable budget profile. 

No other GCC state has moved so close to implementing personal, as opposed to corporate, income tax.

Less controversial, but just as important for government finances, has been the restructuring of the complex web of state-owned enterprises that dominate the Omani economy. 

Within six months of his accession, Sultan Haitham merged the State General Reserve Fund and the Oman Investment Fund into a new body, the Oman Investment Authority (OIA).

The Ministry of Finance transferred to the OIA all its investments in local companies, with the exception of the government’s 60 percent stake in Petroleum Development Oman and a small number of special cases. 

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Among the OIA’s stated objectives, number seven is to “restructure, regulate, merge, consolidate, integrate, liquidate, sell or dispose” of companies and properties within its portfolio. The fund will also appoint directors to the board of companies that it regulates.  

The government’s energy holdings were consolidated into Energy Development Oman, to oversee investment and development of the oil sector, and the Integrated Gas Company, to oversee the gas industry. 

The reorganisations aim to increase the efficiency with which government investments are managed and also to reduce the burden they place on the government’s finances in the form of debt. 

It will be interesting to see whether the new authorities will start raising funds in their own names, as Saudi Arabia’s Public Investment Fund has been doing.

Of course, challenges remain, most obviously in the form of oil and gas prices, which are volatile and beyond the control of the Omani government.

But the sultanate is also trying to cushion the effect of new taxes and reductions in subsidies by increasing its social protection fund. This was increased by 46 percent in the 2024 budget. There are a large number of exemptions to VAT, and the implementation of some subsidy cuts have been delayed. 

Nonetheless, the direction of economic policy in Oman has been transformed over the past few years. Surely investment grade ratings are now just a matter of time. 

Andrew Cunningham writes and consults on risk and governance in Middle East and sharia-compliant banking systems