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S&P ratings on Oman affirmed at 'A/A-1' on strong fiscal, external balance sheets; outlook stable

June 8, 2014

On 6 June 2014, Standard & Poor's Ratings Services affirmed its 'A/A-1' long- and short-term foreign and local currency sovereign credit ratings on the Sultanate of Oman. The outlook is stable. The ratings are supported by Oman's strong net external and general government asset positions and prudent investment policies. They are constrained by the view of its still-nascent public institutions, the challenge of creating sufficient youth employment, and limited monetary policy flexibility.

Based on S&P's assumption that the oil price will decline to around $95 by 2017, the ratings agency expects some weakening in Oman's GDP per capita, and in its fiscal and external balances. However, S&P expects the general government's strong net asset position to be maintained at about 78 per cent of GDP in 2014-2017, while Oman's net external creditor position should also remain robust at around 77 per cent of current account receipts (CARs).

"We estimate per capita GDP at $21,000 in 2014. Although real growth has been strong--boosted by steady expansion in Oman's oil production since 2007 and large infrastructure and development investments--our estimate of Oman's weighted-average 10-year real per capita GDP growth rate is below that of peers with similar GDP per capita. This reflects the boost to population growth from both the high birth rate in Oman (2.9 births per woman in 2012) and the high inflow of foreign workers; migrant workers accounted for about 44 per cent of the total population in January 2014. Should Oman's sustainable growth rate remain weak or deteriorate further, this could lead us to reassess the level of economic risk in the country.

"In a resource-rich economy such as Oman, growth in GDP per capita (in US$) is to a considerable degree fuelled by commodity prices, particularly oil. Given our expectations of a moderately weaker oil price over the forecast horizon and continued migrant inflows, we expect GDP per capita to remain largely flat in the coming years. A sharp decline in the oil price or significant revisions to Oman's population data could result in much weaker economic income levels.

"Expansion in recurrent public spending since 2011 has contributed to a steep narrowing in the general government surplus from seven per cent of GDP in 2011 to around two per cent in 2013 (including transfers to reserve funds and investment income). We expect the surplus to continue to weaken to a broadly balanced position by 2017, assuming a lower oil price. Hydrocarbon revenues account for nearly 90 per cent of government revenues. We anticipate only marginal reductions in expenditure as close to 50 per cent of spending relates to public-sector wages and subsidies and exemptions. However, we view the government's large net asset position as providing a measure of fiscal flexibility, which the government could draw upon should it post even weaker fiscal outturns.

"Sizable oil receipts in recent years have helped to maintain Oman's strong external position. We expect current account surpluses to continue, albeit to narrow, in 2014-2017 to average about three per cent of GDP. At the same time, we estimate Oman's net external assets will average about 77 per cent of CARs in 2014-2017. External debt net of liquid external assets will likely average around 66 per cent of CARs. Similarly, the country's external liquidity position is set to remain fairly comfortable, with gross external financing needs averaging under 100 per cent of CARs and usable reserves over this period.

"In our view, the Sultan of Oman enjoys absolute powers in governance and decision-making. This can pose risks to the effectiveness and predictability of policymaking. Moreover, we consider that uncertainty regarding the succession process carries political risks. The sultan has taken some measures to expand political participation, but political institutions remain at a nascent stage of development relative to nonregional peers rated in the 'A' category.

"In our view, monetary policy is limited in Oman by the peg of the OMR to the US dollar, although we note that the peg has provided a stable nominal anchor for the economy. Furthermore, the transmission of monetary policy is constrained by an underdeveloped local capital market.


"The stable outlook balances our expectation that Oman's strong fiscal and external stock positions will be maintained, against risks from weakening economic income, fiscal, and external flows.

"We could consider lowering the ratings if we were to assess Oman's sustainable growth rate as remaining below that of peers. We could also consider lowering the ratings if we were to expect a protracted weakening in fiscal performance leading to an increase in government debt or a substantial drawdown of government assets.

"We could consider an upgrade if the underpinnings of economic growth strengthen--raising per capita income levels--or if the monetary authorities allowed greater exchange rate flexibility."

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Source: CPI Financial

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