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Rating Action:

Moody's downgrades Oman to Baa2, outlook negative

28 Jul 2017

Frankfurt am Main, July 28, 2017 -- Moody's Investors Service has today downgraded the Government of Oman's long-term issuer and senior unsecured bond ratings to Baa2 from Baa1 and changed the outlook to negative from stable.

The key driver for the rating downgrade is that in Moody's view progress towards addressing structural vulnerabilities to a weak oil price environment has been more limited than expected, reflecting institutional capacity constraints to address the large fiscal and external imbalances.

The negative outlook reflects Moody's view that despite a number of credit strengths the balance of risks to the Baa2 rating are skewed to the downside.

Moody's has today also lowered Oman's long-term foreign-currency bond ceiling to Baa1 from A3 and its long-term foreign-currency bank deposit ceiling to Baa2 from Baa1. At the same time, the short-term foreign-currency bond and deposit ceilings remain unchanged at Prime-2. Oman's long-term local-currency country risk ceilings were lowered to Baa1 from A3.

Today's rating action also applies to Oman Sovereign Sukuk S.A.O.C, for which the backed and senior unsecured ratings were downgraded to Baa2 from Baa1 and the senior unsecured medium-term note program was downgraded to (P)Baa2 from (P)Baa1.

RATINGS RATIONALE

RATIONALE FOR THE DOWNGRADE TO Baa2

The key driver for the rating downgrade is that in Moody's view progress towards addressing structural vulnerabilities has been more limited than expected, reflecting institutional capacity constraints to address the large fiscal and external imbalances. These imbalances manifest themselves in the expected continued reliance on hydrocarbons for government revenues (average share of 71% over the coming years) and exports (average share of close to 62% in total exports over the next five years).

Fiscal performance in 2016 and during the first months of 2017 has been weaker than the government's reform announcements and oil price developments would have suggested. According to Moody's estimates based on official figures the fiscal deficit reached 18.7% of GDP in 2016, sharply up from an already wide 14.8% in 2015. Despite some gradual fiscal consolidation, for the coming years until 2020 Moody's projects continued high fiscal deficits averaging close to 9% of GDP until 2020.

According to numbers published by the National Centre for Statistics & Information, the government of Oman had posted a deficit of OMR2 billion (7.5 % of GDP) in the first five months of 2017. This amount equals two-thirds of Oman's budgeted deficit of OMR3 billion for 2017 and signals that there is an increased likelihood that the sovereign will miss its budgetary targets for the second year in a row. The 19.2% revenue increase in the first five months of the year is lower than oil price developments and fiscal reforms would suggest. Particularly, non-oil revenue performance has been fairly weak, despite the introduction of measures aimed at boosting non-oil revenue this year, including changes to the corporate income tax rate regime which were delayed from 2016. While total spending increased by only 3% during the first five months of 2017 compared to the same period in 2016, this was driven by a strong 10.6% rise in current spending -- predominantly in defense and security and transfer and subsidy payments.

Therefore, while the government has started to implement fiscal consolidation measures, Moody's believes the challenges are significant and that the plan is unlikely to address structural issues -- the high dependence of Oman's government finances on oil revenues and government spending dominated by current spending.

The government has successfully met its funding requirements since 2015 through a mixture of domestic and international debt issuance, bank loans and liquidation of financial assets and secured most of its funding needs for the current year. However, the financing of its large fiscal imbalance has led to a sharp rise in the debt ratio to about 30% of GDP at end-2016 from less than 5% before the oil price shock, and Moody's expects it to rise to more than 50% of GDP by 2020. The asset side of the government's balance sheet will also weaken further and likely turn into a small net liability position by then.

The oil price shock has also led to a sharp deterioration in Oman's external current account. Following years of surpluses, the current account balance turned into a sizable deficit of 15.5% of GDP in 2015 and widened further to 17.9% in 2016. Moody's projects current account deficits of 12% of GDP on average in 2017-18, as oil export revenues recover only slowly.

RATIONALE FOR THE NEGATIVE OUTLOOK

Oman's government finances and external accounts remain highly vulnerable to oil price swings. The International Monetary Fund (IMF) estimates that Oman's fiscal breakeven oil price will remain close to $80 per barrel over 2017-18, basically unchanged from 2016, and the second-highest in the Gulf Cooperation Council (GCC) after Bahrain. According to the IMF, Oman's external breakeven price at $75 per barrel is the highest in the region. The latter means that current account deficits will remain wide and financing will rely heavily on foreign portfolio inflows.

Given the limited absorption capacity of the domestic market Moody's expects continued reliance on international debt issuance which has already increased Oman's susceptibility to international capital flow volatility. The cost of funding will likely continue to rise in light of Oman's structural challenges and in a global environment of rising interest rates, which could significantly weaken Oman's government debt affordability indicators. In addition, although not Moody's base case scenario, debt service payments would increase significantly if the authorities were to devalue the currency.

While the government's approach to seek financing from external sources has supported foreign exchange reserves at Central Bank of Oman, foreign currency debt repayments will rise until the end of the decade. Moody's expects total external debt repayment obligations to exceed the available stock of foreign exchange reserves from 2018.

WHAT COULD MOVE THE RATING UP/DOWN

Given the negative rating outlook, any upward movement in the rating in the foreseeable future is highly unlikely. However, Moody's would consider moving the outlook back to stable if a clear and comprehensive fiscal and economic policy response were to emerge, offering the prospect of sustained changes to the government's revenue and expenditure composition. A faster reduction in fiscal deficits, a stabilization of the government's net asset position and improvements to the external liquidity position would be credit-positive.

Signs of an emerging fiscal or balance-of-payments crisis would exert downward pressure on the rating. In particular, any signs of funding stress or a forced change to the current exchange rate system would most likely result in further negative rating action. A deterioration in the domestic or regional political environment would also be highly credit negative.

GDP per capita (PPP basis, US$): 46,698 (2016 Actual) (also known as Per Capita Income)

Real GDP growth (% change): 2.3% (2016 Actual) (also known as GDP Growth)

Inflation Rate (CPI, % change Dec/Dec): 1.1% (2016 Actual)

Gen. Gov. Financial Balance/GDP: -18.7% (2016 Actual) (also known as Fiscal Balance)

Current Account Balance/GDP: -17.9% (2016 Actual) (also known as External Balance)

External debt/GDP: 47.5% (2016 Estimate)

Level of economic development: High level of economic resilience

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

On 25 July 2017, a rating committee was called to discuss the rating of 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 institutional strength/framework, have materially decreased. The issuer's fiscal or financial strength, including its debt profile, has decreased. The issuer's susceptibility to event risks has not materially changed. The policy response to a protracted period of low oil prices is unlikely to sufficiently address structural issues in order for the rating to remain consistent with a Baa1 level.

The principal methodology used in these ratings was Sovereign Bond Ratings published in December 2016. 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.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt 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.

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

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.

Steffen Dyck
VP - Senior Credit Officer
Sovereign Risk Group
Moody's Deutschland GmbH
An der Welle 5
Frankfurt am Main 60322
Germany
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

Yves Lemay
MD - Sovereign Risk
Sovereign Risk Group
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

Releasing Office:
Moody's Deutschland GmbH
An der Welle 5
Frankfurt am Main 60322
Germany
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

No Related Data.
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