News Column

Standard & Poor's affirms Oman's credit ratings at A/A-1; outlook stable

June 8, 2014

Times News Service

Muscat:Standard & Poor's Ratings Services affirmed its 'A/A-1' long- and short-term foreign and local currency sovereign credit ratings to the Sultanate. 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 gross domestic product (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 the country'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 its 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 per capita GDP," the rating agency said.

"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 the Sultanate, growth in GDP per capita 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 per capita GDP to remain largely flat in the coming years. A sharp decline in the oil price or significant revisions to the Sultanate of 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," noted the rating agency.

"Sizeable 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.

"In our view, monetary policy is limited in Oman due to pegging of the Omani rial 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: Times of Oman

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