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Rating Action:

Moody's downgrades Oman's rating to Ba2, changes outlook to stable

05 Mar 2020

New York, March 05, 2020 -- Moody's Investors Service, ("Moody's") has today downgraded the long-term issuer and senior unsecured ratings of the Government of Oman to Ba2 from Ba1 and changed the outlook to stable.

The key driver for the downgrade is Oman's lower fiscal strength, evident in higher government debt and weaker debt affordability metrics than Moody's expected at the time of the previous rating action. Debt will continue to increase in the next two years, despite Moody's expectation that the government will begin in the next few months implementing a significant medium-term fiscal adjustment program to slow, and eventually arrest, the increase in the debt burden.

The stable outlook reflects Moody's assessment that Oman's credit metrics are resilient to moderately negative fiscal and oil price shocks at the Ba2 rating level. The outlook also takes into account balanced risks around the implementation of the fiscal adjustment program. The government has a limited track record of implementing similar programs, and implementation will be challenging given the government's economic and social stability objective. Moreover, a significantly slower pace of fiscal consolidation could exacerbate the sovereign's external vulnerability and raise government liquidity pressures. That notwithstanding, the commitment evident at the highest levels indicates a possibility of significantly faster economic and fiscal reforms which could ensure that government debt peaks earlier and at a lower level than currently expected.

Moody's has also downgraded the Government of Oman's senior unsecured medium-term note program rating to (P)Ba2 from (P)Ba1. Today's rating action also applies to Oman Sovereign Sukuk S.A.O.C, a special-purpose vehicle domiciled in Oman, and whose debt, in Moody's view, is ultimately the obligation of the Government of Oman. The entity's backed senior unsecured rating was downgraded to Ba2 from Ba1 and the backed senior unsecured medium-term note program rating was downgraded to (P)Ba2 from (P)Ba1.

Oman's long-term local- and foreign-currency bond ceilings and its long-term local currency deposit ceilings are unchanged at Baa3. Oman's long-term foreign currency deposit ceilings were lowered to Ba3. Its short-term foreign-currency bond and deposit ceiling are unchanged at Prime-3 and Not Prime respectively.

RATINGS RATIONALE

RATIONALE FOR THE DOWNGRADE TO Ba2

WEAKER FISCAL STRENGTH DESPITE FORTHCOMING FISCAL POLICY ADJUSTMENT

The key driver for the downgrade is Oman's weaker fiscal strength, evident in a higher debt burden and weaker debt affordability metrics than anticipated at the time of the last rating action and that are no longer consistent with a Ba1 rating level. Moody's expectation is that, over the next few years, government debt and debt affordability metrics will continue to weaken despite the implementation of some measures aimed at reducing spending and raising revenue.

Whereas last March Moody's expected Oman's government debt to peak under 60% of GDP by 2021, this level was nearly reached already in 2019 as the government used a lower proportion of non-fiscal resources (privatization receipts and surplus funds from earlier years' borrowing) to reduce its 2019 borrowing requirement and debt burden. Taking into account some, gradual, fiscal consolidation, Moody's now expects government debt to stabilize at around 67% of GDP in the next few years, contributing to a weaker fiscal strength assessment.

The 2020 budget law that was approved by late Sultan Qaboos bin Said on 1 January 2020 contains no significant new measures that would durably stop or reverse the fiscal deterioration in an environment of moderate oil prices. However, Moody's expects the government to announce and start implementing a medium-term adjustment program in the next few months.

The fiscal adjustment program was foreshadowed by the formation of the National Program for Fiscal Balance (Tawazun) in September 2019, while the 2020 budget statement confirmed development of a multi-year budget framework for 2020-24 that would be supported by a range of public finance management reforms. These reforms include accelerating the implementation of the Government Financial Management Information System to support budget preparation, execution, and financial reporting; Program and Performance Budgeting to strengthen financial management functions of line ministries; a drive to increase efficiency and effectiveness of public spending; and the activation of a Treasury Single Account to improve spending controls by consolidating all inflows and outflows of government funds, which are currently spread across the banking system.

A recent speech by Sultan Haitham bin Tariq indicated strong official support for measures that would reduce government debt and increase non-oil revenues.

Taking into account Oman's sluggish economic growth environment, a limited track record of achieving significant fiscal consolidation, and ongoing social stability and welfare objectives for the government, Moody's expects that the budget deficit will narrow to about 5% of GDP in 2022 from an estimated 7.7% in 2019, driven by a narrowing in the primary deficit. Under this scenario, interest payments will stabilize at just under 10% of revenue.

Moody's assumes that the government will implement the 5% VAT in 2021, slightly strengthen tax collection and reduce nominal non-interest spending by around 3% relative to the 2019 level. Moody's baseline scenario, which assumes that oil prices average $62-63/barrel in 2020-23, also includes the expectation that the government will sell assets worth around 1-1.5% of GDP per year while continuing to draw down its wealth fund assets by a similar amount, both of which will be used to reduce the sovereign's borrowing requirement and debt burden.

RATIONALE FOR THE STABLE OUTLOOK

The stable outlook reflects some resilience of the credit profile to possible negative shocks, at the Ba2 rating level. It also takes into account balanced risks around the implementation and effectiveness of the fiscal adjustment program.

While Moody's has revised downward its assessment of fiscal strength, it also estimates that at this level, fiscal strength is resilient to possible negative shocks, from somewhat slower fiscal consolidation than currently assumed and/or somewhat lower oil and gas prices.

The downside risks to Oman's credit profile stem primarily from a limited track record of implementing similar fiscal adjustment and from a history of overspending relative to budget targets, partly the result of the government's economic and social stability objectives. Although the government has cut nominal spending between 2015 and 2019 by 4.6% (and wages and benefits by close to 8%), during the same period its spending has exceeded budgeted amounts on average by 5.5% each year, albeit the overspending declined somewhat to around 3% in 2019 (accounting for the accumulation of arrears). And while the government raised corporate income tax to 15% from 12% in 2017, the special excise taxes on alcohol, tobacco and sugary beverages and the 5% VAT were both delayed by several years from the original implementation target date agreed among the members of the Gulf Cooperation Council, with the VAT likely to be implanted only in 2021.

Should fiscal adjustment be significantly slower and less effective at slowing and eventually arresting the rise in the debt burden, liquidity and external vulnerability risks may rise. The sovereign's external and government liquidity risks are intertwined with the government's net external borrowing accounting for a large part of Oman's current account deficit financing over the past four years.

The government's debt trajectory is also sensitive to a potential sustained and marked fall in oil and gas prices, possibly in the context of a marked global slowdown exacerbated by the coronavirus outbreak. Should oil prices stabilize close to the bottom of Moody's medium-term oil price range of $50-70/barrel, in the absence of further adjustment of fiscal policy, the government's debt would increase faster and further than currently expected.

On the positive side, there is a possibility that fiscal adjustment proceeds faster than Moody's currently expects, supported by an acceleration of economic and fiscal reforms, including in an event that the external environment weakens more than currently anticipated. Larger asset sales than currently assumed could also limit the pace and extent of the increase in the debt burden. Following the sale of a 49% stake in Oman Electricity Transmission Company (Ba1 negative) in December 2019 and a 10% stake in the BP-Khazzan gas project, the government is preparing further sales in the electricity transmission and distribution sector to be completed during the next two years. However, there is a possibility that privatization will also include further significant oil and gas assets that are currently not reflected in Moody's baseline scenario.

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS

As an oil exporter, Oman's environmental risks derive from carbon transition. Oman's credit profile would face downward pressure in a scenario of rapid global transition to lower reliance on hydrocarbons that would depress global hydrocarbon demand and prices. However, in light of the measures against climate change taken so far, this is not Moody's baseline.

Social risks currently have a moderate impact on Oman's credit profile. Oman is vulnerable to social pressure that would arise from expenditure cuts and tax increases as part of fiscal consolidation efforts by the government. Prioritization of social goals has contributed to slow fiscal policy response to the structural oil price shock since 2014. Exposure is mitigated by high income levels and the government's financial buffers, although the latter are diminishing.

Governance considerations are material for Oman's credit profile. They relate to the limited scope and lack of timeliness in the publication of financial and economic data. Absence of key statistics such as quarterly real GDP typically weakens policy effectiveness and reduces timeliness of policy responses to shocks.

WHAT COULD CHANGE THE RATING UP

Prospects of greater prioritization and acceleration of measures that would durably and significantly reduce Oman's fiscal and external imbalances would likely put upward pressure on the rating. This would likely take the form of a stronger than expected implementation of the fiscal adjustment program, possibly accompanied by faster economic reforms and diversification.

WHAT COULD CHANGE THE RATING DOWN

Moody's would likely downgrade the rating should delays in implementing the fiscal adjustment program point to an increased likelihood that government debt does not peak in the medium term as currently expected. Prospects of steadily growing debt burden in the medium to long term could weaken the government's ability to finance its debt at affordable costs and long maturities, raising government liquidity and external risks.

GDP per capita (PPP basis, US$): 47,933 (2018 Actual) (also known as Per Capita Income)

Real GDP growth (% change): 1.8% (2018 Actual) (also known as GDP Growth)

Inflation Rate (CPI, % change Dec/Dec): 0.8% (2018 Actual)

Gen. Gov. Financial Balance/GDP: -7.9% (2018 Actual) (also known as Fiscal Balance)

Current Account Balance/GDP: -5.5% (2018 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 02 March 2020, 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 fiscal or financial strength, including its debt profile, has materially decreased. The issuer's susceptibility to event risk has not materially changed.

The principal methodology used in these ratings was Sovereign Ratings Methodology published in November 2019. 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 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.

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.

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: 852 3758 1350
Client Service: 852 3551 3077

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.
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