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Rating Action:

Moody's changes the outlook on Oman's rating to stable, affirms Ba3 rating

14 Oct 2021

New York, October 14, 2021 -- Moody's Investors Service ("Moody's") has today changed the outlook on the Government of Oman's issuer rating to stable from negative and affirmed its long-term issuer and senior unsecured ratings at Ba3. Moody's also affirmed the Government of Oman's (P)Ba3 senior unsecured medium term note program rating.

The change of outlook to stable reflects the significant easing of government liquidity and external financing pressures, mainly as a result of significantly higher oil prices since the middle of 2020, and Moody's expectation that oil prices will average above $60/barrel during the next several years, increasing the likelihood that these pressures will remain contained. In Moody's baseline scenario, higher oil prices and ongoing implementation of the government's medium-term fiscal adjustment program will also underpin a steady decline in the direct government debt burden to the pre-pandemic level, restoring some of the lost fiscal space before the next shock.

The affirmation of the Ba3 ratings reflects Moody's view that, despite narrower fiscal and current account deficits in the next few years, Oman's structural vulnerability to potential future declines in oil demand and prices will remain high, exposing the sovereign to reversals of the anticipated improvements in government debt and debt affordability metrics and to a sudden re-emergence of government liquidity and external vulnerability pressures. The affirmation also takes into account Moody's assessment that narrower fiscal deficits and significantly smaller government debt accumulation in the medium term will be partly offset by a simultaneous increase in government contingent liability risk due to higher borrowing in the broader public sector, mainly as a result of the shift of government spending related to oil and gas production from the budget to a newly-formed state-owned entity, Energy Development Oman (EDO).

Today's rating action also applies to Oman Sovereign Sukuk S.A.O.C, a special-purpose vehicle domiciled in Oman, whose debt, in Moody's view, is ultimately the obligation of the Government of Oman. The entity's backed senior unsecured ratings and its backed senior unsecured medium-term note program rating were affirmed at Ba3 and (P)Ba3, respectively.

Oman's local currency (LC) and foreign currency (FC) country ceilings remain unchanged. The LC country ceiling at Ba1, two notches above the sovereign issuer rating, incorporates a track record of high external imbalances and heavy reliance on a single revenue source, mitigated by predictable institutions and moderate political risk. The FC country ceiling at Ba2, one notch below the LC ceiling, reflects relatively modest transfer and convertibility risks, notwithstanding Oman's track record of weak fiscal policy effectiveness and its high level of external indebtedness.

RATINGS RATIONALE

RATIONALE FOR THE CHANGE OF OUTLOOK TO STABLE FROM NEGATIVE

HIGHER OIL PRICES REDUCE GOVERNMENT LIQUIDITY AND EXTERNAL FINANCING PRESSURES

The sharp rebound in global oil demand and prices since the middle of 2020 has led to a significant narrowing of Oman's fiscal and current account deficits, substantially easing government liquidity and external financing pressures. These pressures increased markedly during 2020 following the coronavirus shock, which led to very large loss of Oman's fiscal revenue and a simultaneous tightening of global financing conditions.

Moody's estimates that higher oil prices will account for around half of the expected reduction in the fiscal deficit to less than 2% of GDP in 2021 from 18% of GDP in 2020. Furthermore, based on Moody's assumption that prices continue to average above $60-65/barrel in 2022-23, fiscal deficits will likely remain small in the medium term, underpinning a large and likely durable reduction in the government's gross financing needs to less than 10% of GDP per annum during 2021-23 from more than 22% of GDP in 2020.

Similarly, Moody's expects that Oman's current account deficit will decline below 4% of GDP in 2021-23 from more than 13% of GDP in 2020. These lower fiscal and current account deficits will more than offset the increase in scheduled external government debt repayments, which will more than double to around 9% of GDP on average during 2021-23 from less than 4% of GDP in 2020.

The prospect of sharply lower borrowing needs and the improved outlook for Oman's debt and debt affordability metrics have already facilitated a large decline in Oman's sovereign credit spreads, which returned to the pre-coronavirus level of around 400 basis points earlier this year after more than doubling during 2020. As a result, the government has been able to access the international capital markets several times since late October 2020, following an 18-month hiatus despite large borrowing needs.

RATIONALE FOR AFFIRMING THE Ba3 RATINGS

RATING BALANCES CREDIT SUPPORTS AND REFORM EFFORTS AGAINST RISING CONTINGENT LIABILITY RISKS AND STRUCTURAL VULNERABILITIES

A narrower fiscal deficit and a rebound in nominal GDP (more than a third of which is produced in the hydrocarbon sector and hence its value will rise with higher oil prices) will drive the reduction in the government's direct debt burden to around 67% of GDP in 2021 from nearly 80% of GDP in 2020. Moreover, in Moody's baseline scenario, Oman's debt burden could decline back to the pre-coronavirus level of around 60% of GDP by 2024. This is based on the expectation that the government also implements majority of the key fiscal adjustment measures as planned under the National Program for Fiscal Balance (Tawazun), most notably by restraining nominal growth in non-interest expenditure by advancing the subsidy reform, controlling the wage bill and freezing budgetary capital spending, while also expanding its non-oil revenue streams, including by introducing a personal income tax on high-income earners.

However, aside from higher oil prices and the ongoing fiscal reforms, a significant portion of the expected decline in Oman's fiscal deficit and its direct government debt burden over the medium term will result from the government's decision, implemented from the start of 2021, to shift all spending responsibilities related to oil and gas production from the budget to a newly established government-owned holding company, EDO. Government spending related to oil and gas production averaged $4.8 billion during the past 5 years, contributing 6.5-7% of GDP on average to the fiscal deficit. EDO has been mandated by the government, which appoints its Board of Directors, to cover this spending from a combination of borrowing, improvements in spending efficiency, and new growth.

Notwithstanding targeted spending efficiency gains, Moody's expects considerable EDO borrowing over the next four years. This will drive most of the increase in the other non-financial public sector debt burden to more than 60% of GDP from around 40% of GDP in 2020, increasing the government's contingent liability risks and the amount of public sector debt supported by income from the government's oil and gas assets. In Moody's view this will offset a portion of the expected improvement in the government's debt and debt affordability metrics over the medium term.

EXPOSURE TO DECLINES IN OIL PRICES AND GLOBAL CARBON TRANSITION WILL REMAIN HIGH

Oman will remain heavily exposed to declines in oil demand and prices. Moody's estimates that in 2021 the hydrocarbon sector will account for around 40% of GDP, around 73% of government revenue (equivalent to around 25% of GDP), and 64% of total exports of goods and services. This reliance is further exacerbated by Oman's high fiscal and external breakeven oil prices, which we estimate at around $71/barrel (for both) in 2021. Although lower than $92/barrel and $82/barrel, respectively, in 2018, breakeven oil prices will likely remain at the higher end of Moody's medium-term oil price projection range of $50-70/barrel. As a result, Oman's fiscal and external accounts will remain exposed to the risk of a sudden and potentially very large fiscal deterioration and re-emergence of liquidity and external financing pressures whenever global oil demand and prices decline significantly, as they did in 2020 or in 2015.

Over time, Oman's heavy reliance on the oil and gas sector and high sensitivity of its fiscal and external sector metrics to oil price fluctuations underpins the sovereign's very highly negative exposure to carbon transition. Without a transformation of Oman's economy and government revenue base, the shift towards lower reliance on hydrocarbons over the next several decades and, eventually, net zero targets for a large part of the world would put significant downward pressure on Oman's credit profile. In the near to medium term, Oman's financing conditions are likely to be increasingly shaped by prospects that such a transformation is underway and investors' assessment of Oman's capacity to respond to carbon transition.

Balancing these structural vulnerabilities, Oman's Ba3 ratings remain supported by the sovereign's high per-capita income, which is more than twice the Ba3-rated median in PPP-adjusted terms and supports the sovereign's shock absorption capacity. The ratings are also supported by the availability of liquid sovereign wealth fund assets, which could (and have been) used to relieve government liquidity pressures. The foreign-currency portion of these assets was $13.8 billion (21.4% of GDP) at the end of 2020, only slightly lower than $14.5 billion before the pandemic. These assets include $12.3 billion managed by the Oman Investment Authority (OIA) and $1.5 billion managed by the Central Bank of Oman in Petroleum Reserve Fund. Liquid foreign-currency assets were $12.3 billion in July 2021, a decline since the end of 2020, which was mainly due to the transfer of OIA dividends to the budget.

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS

Oman's ESG Credit Impact Score is highly negative (CIS-4), reflecting very high negative exposure to environmental risks, balanced against moderately negative social risks and its moderate institutions and governance strength (which captures weaknesses in policy effectiveness) that will likely hamper the sovereign's ability to respond to negative environmental and social trends.

Oman's very high exposure to environmental risks, reflected in its E-5 issuer profile score, mainly relates to carbon transition because of its very high economic and fiscal reliance on the hydrocarbon sector, and a high degree of water stress. Oman is one of the world's most arid states, and rapid economic and population growth in recent decades has further increased challenges surrounding water sustainability. A large portion of Oman's water is produced by desalination, which is energy intensive and vulnerable to oil spills, although Oman's access to relatively cheap energy partly mitigates this risk.

Exposure to social risks is moderate (S-3 issuer profile score). The main source of pressure arises from the labor market due to the current and expected rapid population and labor force growth over the coming decades and high expectations of the native population for the provision of services and employment by the government. The effectiveness of labor market nationalization policies in controlling the unemployment rate among citizens will remain the key policy challenge and an important driver of social risks in the foreseeable future, although a relatively large share of expatriates in the overall labor force partly mitigates these risks.

Oman's moderately negative G-3 issuer profile reflects its track record of relatively weak fiscal policy effectiveness and represents the key impediment to the sovereign's ability to adjust to adverse social and environmental trends and potential future shocks arising from environmental and social risks.

GDP per capita (PPP basis, US$): 30,178 (2020 Actual) (also known as Per Capita Income)

Real GDP growth (% change): -2.8% (2020 Actual) (also known as GDP Growth)

Inflation Rate (CPI, % change Dec/Dec): -1.4% (2020 Actual)

Gen. Gov. Financial Balance/GDP: -18.1% (2020 Actual) (also known as Fiscal Balance)

Current Account Balance/GDP: -13.4% (2020 Actual) (also known as External Balance)

External debt/GDP: [not available]

Economic resiliency: baa3

Default history: No default events (on bonds or loans) have been recorded since 1983.

On 11 October 2021, a rating committee was called to discuss the rating of the Oman, Government of. The main points raised during the discussion were: The issuer's economic fundamentals, including its economic strength, have not materially changed. The issuer's institutions and governance strength, have not materially changed. The issuer's fiscal or financial strength, including its debt profile, has not materially changed. The issuer's susceptibility to event risks has not materially changed.

FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS

The government's steady and consistent implementation of its fiscal and economic reform agenda over the next few years would support an upgrade if it pointed to an improved policy effectiveness and better institutional capacity to absorb future shocks. Such implementation would likely be reflected in a declining government debt burden, stable or increasing fiscal and external buffers, and a steadily falling exposure of the sovereign's fiscal and external accounts to declines in oil demand and prices beyond what Moody's currently expects. Improving medium-term growth prospects as a result of progress in economic diversification would also support a higher rating level.

Materially slower progress on fiscal adjustment than Moody's currently expect and/or reversals of already implemented fiscal consolidation measures could prompt a downgrade. Slower fiscal adjustment would increase the likelihood that public sector debt, including debt of state-owned enterprises, rises significantly further and for longer than Moody's currently projects. A downgrade would also be prompted by the re-emergence of significant government liquidity and external vulnerability pressures, likely in the context of significantly lower oil prices and tighter global financing conditions. An acceleration in global carbon transition and/or a significant tightening of financing conditions as investors increasingly price the related risks would also exert downward pressure on the ratings.

The principal methodology used in these ratings was Sovereign Ratings Methodology published in November 2019 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1158631. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

The weighting of all rating factors is described in the methodology used in this credit rating action, if applicable.

The local market analyst for this rating is Alexander Perjessy, +971 (423) 795-48.

REGULATORY DISCLOSURES

For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.

These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at http://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1288435.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the UK and is endorsed by Moody's Investors Service Limited, One Canada Square, Canary Wharf, London E14 5FA under the law applicable to credit rating agencies in the UK. Further information on the UK endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

David Rogovic
Vice President - Senior Analyst
Sovereign Risk Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Marie Diron
MD - Sovereign Risk
Sovereign Risk Group
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

No Related Data.
© 2021 Moody’s Corporation, Moody’s Investors Service, Inc., Moody’s Analytics, Inc. and/or their licensors and affiliates (collectively, “MOODY’S”). All rights reserved.

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